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PROSPECTUS DATED MARCH 2, 1998
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(212) 392-2550 OR (800) 869-NEWS
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES (the "Fund") is an open-end
diversified investment company which is intended to provide a broad range of
investment alternatives with its thirteen separate Portfolios, each of which has
distinct investment objectives and policies.
- THE MONEY MARKET PORTFOLIO
- THE NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO
- THE DIVERSIFIED INCOME PORTFOLIO
- THE BALANCED GROWTH PORTFOLIO
- THE UTILITIES PORTFOLIO
- THE DIVIDEND GROWTH PORTFOLIO
- THE VALUE-ADDED MARKET PORTFOLIO
- THE GROWTH PORTFOLIO
- THE AMERICAN VALUE PORTFOLIO
- THE MID-CAP GROWTH PORTFOLIO
- THE GLOBAL EQUITY PORTFOLIO
- THE DEVELOPING GROWTH PORTFOLIO
- THE EMERGING MARKETS PORTFOLIO
There can be no assurance that the investment objectives of the Portfolios will
be achieved. SEE "Prospectus Summary" and "Investment Objectives and Policies."
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE EMERGING MARKETS PORTFOLIO MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN HIGH
RISK DEBT SECURITIES WHICH ARE UNRATED OR RATED BELOW INVESTMENT GRADE (SUCH
SECURITIES ARE COMMONLY KNOWN AS "JUNK BONDS"). IN ADDITION, INVESTORS IN THE
EMERGING MARKETS PORTFOLIO SHOULD BE COGNIZANT OF THE FACT THAT INVESTMENTS IN
EMERGING MARKET COUNTRIES INVOLVE CERTAIN SPECIAL RISK FACTORS AND THEREFORE MAY
NOT BE SUITABLE FOR ALL INVESTORS.
SHARES OF THE PORTFOLIOS OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
Currently, shares of the Fund will be sold only to (1) Hartford Life Insurance
Company to fund the benefits under certain flexible premium deferred variable
annuity contracts and certain flexible premium variable life insurance policies
it issues, and to (2) Hartford Life and Annuity Insurance Company to fund the
benefits under certain flexible premium deferred variable annuity contracts and
certain flexible premium variable life insurance policies it issues. The
variable annuity contracts issued by Hartford Life Insurance Company and
Hartford Life and Annuity Insurance Company (the "Companies") are sometimes
referred to as the "Variable Annuity Contracts." The variable life insurance
policies issued by the Companies are sometimes referred to as the "Variable Life
Policies," and the Variable Annuity Contracts and the Variable Life Policies are
sometimes referred to as the "Contracts." In the future, shares may be sold to
affiliated or non-affiliated entities of the Companies. The Companies will
invest in shares of the Fund in accordance with allocation instructions received
from Contract Owners, which allocation rights are further described in the
Prospectus for the Contracts. The Companies will redeem shares to the extent
necessary to provide benefits under the Contracts.
This Prospectus sets forth concisely the information you should know before
allocating your investment under your Contract to the Fund. It should be read
and retained for future reference. Additional information about the Fund is
contained in the Statement of Additional Information, dated March 2, 1998, which
has been filed with the Securities and Exchange Commission, and which is
available at no charge upon request of the Fund at the address or telephone
numbers listed on this page. The Statement of Additional Information is
incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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DEAN WITTER INTERCAPITAL INC. -- Investment Manager
This Prospectus must be accompanied by a current Prospectus for the Variable
Annuity Contracts or Variable Life Policies issued by Hartford Life Insurance
Company or Hartford Life and Annuity Insurance Company. Both Prospectuses should
be read and retained for future reference.
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TABLE OF CONTENTS
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Prospectus Summary 3
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Financial Highlights 8
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The Fund and its Management 12
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Investment Objectives and Policies 13
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The Money Market Portfolio 13
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The North American Government
Securities Portfolio 15
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The Diversified Income Portfolio 17
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The Balanced Growth Portfolio 20
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The Utilities Portfolio 21
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The Dividend Growth Portfolio 23
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The Value-Added Market Portfolio 23
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The Growth Portfolio 24
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The American Value Portfolio 25
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The Mid-Cap Growth Portfolio 26
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The Global Equity Portfolio 27
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The Developing Growth Portfolio 28
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The Emerging Markets Portfolio 29
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General Portfolio Techniques 32
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Investment Restrictions 47
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Determination of Net Asset Value 48
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Purchase of Fund Shares 49
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Redemption of Fund Shares 49
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Dividends, Distributions and Taxes 49
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Performance Information 50
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Additional Information 51
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Appendix--Ratings of Investments 53
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2 - PROSPECTUS
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PROSPECTUS SUMMARY
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THE The Fund is organized as a Massachusetts business trust and is
FUND an open-end diversified management investment company. The Fund
is comprised of thirteen separate portfolios: the MONEY MARKET
PORTFOLIO, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO,
the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the GROWTH PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING
MARKETS PORTFOLIO (see pages 13 through 32). The Trustees of the
Fund may establish additional Portfolios at any time. To the
extent that shares are sold to the Companies in order to fund
the benefits under Contracts, the structure of the Fund permits
Contract Owners, within the limitations described in the
Contracts, to allocate the investments underlying the Contracts
in response to or in anticipation of changes in market or
economic conditions. See the Prospectus for the Contracts for a
description of the relationship between increases or decreases
in the net asset value of Fund shares and any distributions on
such shares, and benefits provided under a Contract.
Each Portfolio is managed for investment purposes as if it were
a separate fund issuing a separate class of shares of beneficial
interest, with $.01 par value. The assets of each Portfolio are
segregated, so that an interest in the Fund is limited to the
assets of the Portfolio in which shares are held and
shareholders, such as the Companies, are each entitled to a pro
rata share of all dividends and distributions arising from the
net investment income and capital gains, if any, of such
Portfolio (see pages 49 and 51).
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INVESTMENT Each Portfolio has distinct investment objectives and policies,
OBJECTIVES AND and is subject to various investment restrictions, some of which
POLICIES apply to all the Portfolios. The MONEY MARKET PORTFOLIO seeks
high current income, preservation of capital and liquidity by
investing in the following money market instruments: U.S.
Government securities, obligations of U.S. regulated banks and
savings institutions having total assets of more than $1
billion, or less than $1 billion if such are fully federally
insured as to principal (the interest may not be insured), and
high grade corporate debt obligations maturing in thirteen
months or less (see pages 13-15). The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO seeks to earn a high level of current
income while maintaining relatively low volatility of principal,
by investing primarily in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or Mexican
governments (see pages 15-17). The DIVERSIFIED INCOME PORTFOLIO
seeks, as a primary objective, to earn a high level of current
income and, as a secondary objective, to maximize total return,
but only to the extent consistent with its primary objective, by
equally allocating its assets among three separate groupings of
fixed-income securities. Up to one-third of the securities in
which the DIVERSIFIED INCOME PORTFOLIO may invest will include
securities rated Baa/BBB or lower (such securities are commonly
known as "junk bonds") (see pages 17-20). The BALANCED GROWTH
PORTFOLIO seeks to provide capital growth with reasonable
current income by investing, under normal market conditions, at
least 60% of its total assets in a diversified portfolio of
common stocks of companies which have a record of paying
dividends and, in the opinion of the Investment Manager, have
the potential for increasing dividends and in securities
convertible into common stock, and at least 25% of its total
assets in investment grade fixed-income (fixed-rate and
adjustable-rate) securities such as corporate notes and bonds
and obligations issued or guaranteed by the U.S. Government, its
agencies and its instrumentalities (see pages 20-21). The
UTILITIES PORTFOLIO seeks to provide current income and
long-term growth of income and capital by investing in equity
and fixed-income securities of companies in the public utilities
industry (see pages 21-23). The DIVIDEND GROWTH PORTFOLIO seeks
to provide reasonable current income and long-term growth of
income and capital by investing primarily in common stock of
companies with a record of paying dividends and the potential
for increasing dividends (see page 23). The VALUE-ADDED MARKET
PORTFOLIO seeks to achieve a high level of total return on its
assets through a
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3 - PROSPECTUS
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combination of capital appreciation and current income, by
investing, on an equally-weighted basis, in a diversified
portfolio of common stocks of the companies which are
represented in the Standard & Poor's 500 Composite Stock Price
Index (see pages 23-24). The GROWTH PORTFOLIO seeks long-term
growth of capital by investing primarily in common stocks and
securities convertible into common stocks issued by domestic and
foreign companies (see pages 24-25). The AMERICAN VALUE
PORTFOLIO seeks long-term capital growth consistent with an
effort to reduce volatility, by investing principally in common
stock of companies in industries which, at the time of the
investment, are believed to be attractively valued given their
above average relative earnings growth potential at that time
(see pages 25-26). The MID-CAP GROWTH PORTFOLIO seeks long-term
capital growth by investing primarily in equity securities of
"mid-cap" companies (that is, companies whose equity market
capitalization falls within the range of $250 million to $5
billion) (see pages 26-27). The GLOBAL EQUITY PORTFOLIO seeks a
high level of total return on its assets primarily through
long-term capital growth and, to a lesser extent, from income,
through investments in all types of common stocks and
equivalents (such as convertible securities and warrants),
preferred stocks and bonds and other debt obligations of
domestic and foreign companies and governments and international
organizations (see pages 27-28). The DEVELOPING GROWTH PORTFOLIO
seeks long-term capital growth by investing primarily in common
stocks of smaller and medium-sized companies that, in the
opinion of the Investment Manager, have the potential for
growing more rapidly than the economy and which may benefit from
new products or services, technological developments or changes
in management (see pages 28-29). The EMERGING MARKETS PORTFOLIO
seeks long-term capital appreciation by investing primarily in
equity securities of companies in emerging market countries. The
EMERGING MARKETS PORTFOLIO may invest up to 35% of its total
assets in high risk fixed-income securities that are rated below
investment grade or are unrated (commonly referred to as "junk
bonds") (see pages 29-32).
Contract Owners should review the investment objectives and
policies of the Portfolios carefully to consider their ability
to assume the risks involved in allocating the investments
underlying the Contracts (see pages 13-47 and "Special Risk
Considerations" below).
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SPECIAL The MONEY MARKET PORTFOLIO invests solely in U.S. Government
RISK securities, high quality corporate debt obligations and
CONSIDERATIONS obligations of banks and savings and loan associations having
assets of $1 billion or more and certificates of deposit which
are fully insured as to principal; consequently, the portfolio
securities of the Portfolio are subject to minimal risk of loss
of income and principal. The Portfolio may enter into repurchase
agreements and reverse repurchase agreements. Although the MONEY
MARKET PORTFOLIO will attempt to maintain a constant net asset
value per share of $1.00, there can be no assurance that the
$1.00 net asset value can be maintained.
The net asset value of the shares of each Portfolio other than
the MONEY MARKET PORTFOLIO will fluctuate with changes in the
market value of its portfolio holdings. The market value of the
Portfolios' securities will increase or decrease due to a
variety of economic, market and political factors which cannot
be predicted. A decline in prevailing interest rates generally
increases the value of fixed-income securities, while an
increase in rates generally reduces the value of those
securities. Dividends payable by each Portfolio will vary in
relation to the amounts of dividends and/or interest paid by its
securities holdings. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
GROWTH PORTFOLIO may invest in mortgage-backed and asset-backed
securities. Mortgage-backed securities are subject to
prepayments or refinancings of the mortgage pools underlying
such securities which may have an impact upon the yield and the
net asset value of the Portfolio's shares. Certain derivative
mortgage-backed securities in which these Portfolios invest are
extremely sensitive to changes in interest rates and in
prepayment rates on the underlying mortgage assets, and as a
result may be highly volatile. Asset-backed securities involve
risks resulting from the fact that such securities do not
usually contain the complete benefit of a security interest in
the related collateral. Each Portfolio other than the MONEY
MARKET PORTFOLIO may invest, to a different extent, in foreign
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4 - PROSPECTUS
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securities. The foreign securities markets in which the
Portfolios may invest pose different and generally greater risks
than those risks customarily associated with domestic securities
and markets including fluctuations in foreign currency exchange
rates, foreign tax rates and foreign securities exchange
controls. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may
invest a significant portion of its assets in securities issued
and guaranteed by the governments of Canada and Mexico. The
Canadian mortgage-backed securities market is of recent origin
and is less well developed and less liquid than the U.S. market.
It should be recognized that the Canadian and Mexican debt
securities in which the Portfolio will invest pose different and
greater risks than those customarily associated with U.S. debt
securities, including (i) the risks associated with
international investments generally, such as fluctuations in
foreign currency exchange rates, (ii) the risks of investing in
Canada and Mexico, which have smaller, less liquid debt markets,
such as limited liquidity, price volatility, custodial and
settlement issues, and (iii) specific risks associated with the
Mexican economy, including high levels of inflation, large
amounts of debt and political and social uncertainties. The
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may employ the
use of inverse floater classes of collateralized mortgage
obligations. These securities exhibit greater price volatility,
and may be less liquid, than the majority of mortgage
pass-through securities or CMOs. Each Portfolio may enter into
repurchase agreements. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED
GROWTH PORTFOLIO may utilize the speculative technique known as
leverage through the use of reverse repurchase agreements and
dollar rolls, which entail additional risks; the DEVELOPING
GROWTH PORTFOLIO may seek to enhance its capital appreciation by
leveraging its investments through purchasing securities with
borrowed funds. Certain of the high yield, high risk
fixed-income securities in which the DIVERSIFIED INCOME
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest are
subject to greater risk of loss of income and principal than
higher-rated lower yielding fixed-income securities; investors
in these Portfolios should carefully consider the relative risks
of investing in high yield securities (commonly referred to as
"junk bonds") and should be cognizant of the fact that such
securities are not generally meant for short-term investing. The
UTILITIES PORTFOLIO will concentrate its investments in
utilities securities. The public utilities industry has certain
characteristics and risks, and developments within that industry
will have an impact on the UTILITIES PORTFOLIO. The value of
public utility debt securities (and, to a lesser extent, equity
securities) tends to have an inverse relationship to the
movement of interest rates. The AMERICAN VALUE PORTFOLIO's
emphasis on attractive industries may run contrary to general
market assessments and may involve risks associated with
departure from typical S&P 500 industry weightings. It should be
recognized that the AMERICAN VALUE PORTFOLIO's investments in
small and medium-capitalization companies, and the MID-CAP
GROWTH PORTFOLIO's investments in medium-capitalization
companies, involves greater risk than is customarily associated
with investing in larger, more established companies. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may enter into forward foreign currency exchange
contracts. The investment by the EMERGING MARKETS PORTFOLIO in
emerging market country securities involves certain risks not
typically associated with investing in securities of United
States issuers, including (i) potential price volatility and
reduced liquidity of securities traded on emerging market
country securities markets, (ii) in some cases, lack of
satisfactory custodial arrangements and delays in settlement of
securities transactions in emerging market countries, (iii)
generally higher brokerage commissions and other transaction
costs on securities exchanges in emerging market countries, (iv)
political and economic risks, including the risk of
nationalization or expropriation of assets, higher rates of
inflation and the risk of war, (v) currency fluctuations and
devaluations in the value of the foreign currency in which the
Portfolio's investments are denominated, (vi) the cost of
converting foreign currency into U.S. dollars and (vii)
restrictions on foreign investment and on repatriation of
capital invested in emerging market countries. In addition,
accounting, auditing, financial and other reporting standards in
emerging market countries are not equivalent to U.S. standards
and, therefore, disclosure of certain material information may
not be made and less information may be
5 - PROSPECTUS
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available to investors investing in emerging market countries
than in the United States. There is also generally less
governmental regulation of the securities industry in emerging
market countries than in the United States. Moreover, it may be
more difficult to obtain a judgment in a court outside the
United States. Many of the emerging market countries in which
the EMERGING MARKETS PORTFOLIO may invest may be subject to a
greater degree of economic, political and social instability
than is the case in the United States and Western European
countries. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO,
the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may enter into various options and
futures transactions; each of these Portfolios (other than the
BALANCED GROWTH PORTFOLIO) and the VALUE-ADDED MARKET PORTFOLIO
may write call options on securities held in its portfolio
without limit (the BALANCED GROWTH PORTFOLIO may not write
covered options on portfolio securites exceeding in the
aggregate 5% of the value of its total assets). Certain of the
Portfolios of the Fund may experience high portfolio turnover
rates with corresponding higher transaction expenses.
Contract Owners are directed to the discussion of repurchase
agreements (page 40), reverse repurchase agreements and dollar
rolls (page 40), mortgage-backed securities (page 32), asset-
backed securities (page 35), foreign securities (page 36),
Canadian government securities (page 16), Mexican government
securities (page 16 ), leveraging (page 29), lower-rated
securities (page 39), "mid-cap" stocks (page 27), public
utilities securities (page 22), forward foreign currency
exchange contracts (page 37), emerging market country securities
(page 31), portfolio trading (page 45), options and futures
transactions (page 42), warrants (page 42), zero coupon
securities (page 41), when-issued and delayed delivery
securities and forward commitments (page 41) and "when, as and
if issued" securities (page 41 ), concerning risks associated
with such securities and management techniques. The Fund is a
single diversified investment company, consisting of thirteen
Portfolios, and each Portfolio itself is diversified.
Diversification does not eliminate investment risk.
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INVESTMENT Dean Witter InterCapital Inc., the Investment Manager of the
MANAGER Fund, and its wholly-owned subsidiary, Dean Witter Services
Company Inc., serve in various investment management, advisory,
management and administrative capacities to 101 investment
companies and other portfolios with assets of approximately $105
billion at January 31, 1998 (see page 12).
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MANAGEMENT The Investment Manager receives monthly fees at the following
FEE annual rates of the daily net assets of the respective
Portfolios of the Fund: MONEY MARKET PORTFOLIO -- 0.50%; NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO -- 0.65%; DIVERSIFIED
INCOME PORTFOLIO -- 0.40%; BALANCED GROWTH PORTFOLIO -- 0.60%;
UTILITIES PORTFOLIO -- 0.65%; DIVIDEND GROWTH PORTFOLIO --
0.625%; VALUE-ADDED MARKET PORTFOLIO -- 0.50%; GROWTH PORTFOLIO
-- 0.80%; AMERICAN VALUE PORTFOLIO -- 0.625%; MID-CAP GROWTH
PORTFOLIO -- 0.75%; GLOBAL EQUITY PORTFOLIO -- 1.0%; DEVELOPING
GROWTH PORTFOLIO -- 0.50%; and EMERGING MARKETS PORTFOLIO --
1.25%. The management fees for the BALANCED GROWTH PORTFOLIO,
the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
GROWTH PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO are higher than those paid by most investment
companies (see page 12).
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SUB-ADVISERS TCW Funds Management, Inc. ("TCW") has been retained by the
Investment Manager to provide investment advice and manage the
portfolios of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the EMERGING MARKETS PORTFOLIO, subject to the overall
supervision of the Investment Manager. TCW also serves as
adviser to eleven investment companies for which Dean Witter
Services Company Inc. serves as manager, and, at January 31,
1998, had approximately $50 billion under management or
committed to management in various fiduciary or advisory
capacities, primarily from institutional investors (see page
12).
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6 - PROSPECTUS
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Morgan Stanley Asset Management Inc. ("MSAM"), an affiliate of
the Investment Manager, has been retained by the Investment
Manager to provide investment advice and manage the portfolio of
the GROWTH PORTFOLIO, subject to the overall supervision of the
Investment Manager. MSAM conducts a worldwide investment
advisory business. As of January 31, 1998, MSAM, together with
its institutional investment management affiliates, had
approximately $148.7 billion in assets under management as an
investment manager or as a fiduciary adviser (see page 12).
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SUB-ADVISORY TCW receives monthly fees from the Investment Manager equal to
FEE 40% of the Investment Manager's monthly fee in respect of each
of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
EMERGING MARKETS PORTFOLIO. MSAM receives monthly fees from the
Investment Manager equal to 40% of the Investment Manager's
monthly fee in respect of the GROWTH PORTFOLIO (see page 12).
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SHAREHOLDERS Currently, shares are sold only to (1) Hartford Life Insurance
Company for allocation to certain of its separate accounts to
fund the benefits under certain flexible premium deferred
variable annuity contracts and certain flexible premium variable
life insurance policies it issues, and to (2) Hartford Life and
Annuity Insurance Company for allocation to certain of its
separate accounts to fund the benefits under certain flexible
premium deferred variable annuity contracts and certain flexible
premium variable life insurance policies it issues. Such
separate accounts are sometimes referred to individually as an
"Account" and collectively as the "Accounts." The variable
annuity contracts issued by Hartford Life Insurance Company and
Hartford Life and Annuity Insurance Company (the "Companies")
are somtimes referred to as the "Variable Annuity Contracts."
The variable life insurance policies issued by the Companies are
sometimes referred to as the "Variable Life Policies," and the
Variable Annuity Contracts and the Variable Life Policies are
sometimes referred to as the "Contracts." Accordingly, the
interest of the Contract Owner with respect to the Fund is
subject to the terms of the Contract and is described in the
Prospectus for the Contracts, which should be reviewed carefully
by a person considering the purchase of a Contract. The
Prospectus for the Contracts describes the relationship between
increases or decreases in the net asset value of Fund shares and
any distributions on such shares, and the benefits provided
under a Contract. The rights of the Companies as shareholders of
the Fund should be distinguished from the rights of a Contract
Owner which are described in the Contract. In the future, shares
may be allocated to certain other separate accounts or sold to
affiliated or non-affiliated entities of the Companies. Hartford
Life and Annuity Insurance Company is a wholly-owned indirect
subsidiary of Hartford Life Insurance Company. As long as shares
of the Fund are sold only to the Companies, the term
"shareholder" or "shareholders" in this Prospectus shall refer
to the Companies. It is conceivable that in the future it may
become disadvantageous for both variable life and variable
annuity separate accounts to invest in the same underlying fund
(see pages 49 and 51).
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PURCHASES AND Shares of the Fund are sold and redeemed at net asset value,
REDEMPTIONS I.E., without sales charge (see page 49).
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THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION, AND THE
PROSPECTUS FOR THE VARIABLE ANNUITY CONTRACTS OR THE VARIABLE LIFE POLICIES.
7 - PROSPECTUS
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period for each of the MONEY MARKET PORTFOLIO, the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO (then named the BALANCED PORTFOLIO),
the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the VALUE-ADDED MARKET
PORTFOLIO, the GROWTH PORTFOLIO (then named the CORE EQUITY PORTFOLIO), the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO
have been audited by Price Waterhouse LLP, independent accountants. The
financial highlights should be read in conjunction with the financial
statements, notes thereto and the unqualified report of
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NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
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MONEY MARKET
1994 (a) $ 1.00 $ 0.01 -- $ 0.01 $(0.01) -- $(0.01)
1995 1.00 0.06 -- 0.06 (0.06) -- (0.06)
1996 1.00 0.05 -- 0.05 (0.05) -- (0.05)
1997 1.00 0.05 -- 0.05 (0.05) -- (0.05)
NORTH AMERICAN GOVERNMENT SECURITIES
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.53 $ 0.11 0.64 (0.50) -- (0.50)
1996 10.18 0.52 (0.09) 0.43 (0.52) -- (0.52)
1997 10.09 0.48 0.09 0.57 (0.49) -- (0.49)
DIVERSIFIED INCOME
1994 (a) 10.00 0.08 -- 0.08 (0.03) -- (0.03)
1995 10.05 0.57 0.11 0.68 (0.51) -- (0.51)
1996 10.22 0.80 0.13 0.93 (0.82) $(0.01) (0.83)
1997 10.32 0.80 0.02 0.82 (0.83) (0.02) (0.85)
BALANCED
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) -- (0.02)
1995 10.04 0.40 1.85 2.25 (0.40) -- (0.40)
1996 11.89 0.33 1.25 1.58 (0.33) (0.07) (0.40)
1997 13.07 0.29 2.01 2.30 (0.30) (0.04) (0.34)
UTILITIES
1994 (a) 10.00 0.07 -- 0.07 (0.03) -- (0.03)
1995 10.04 0.45 2.30 2.75 (0.44) -- (0.44)
1996 12.35 0.43 0.60 1.03 (0.43) (0.01) (0.44)
1997 12.94 0.39 2.96 3.35 (0.40) (0.05) (0.45)
DIVIDEND GROWTH
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) -- (0.02)
1995 9.97 0.36 3.57 3.93 (0.36) -- (0.36)
1996 13.54 0.34 2.94 3.28 (0.35) (0.02) (0.37)
1997 16.45 0.38 3.80 4.18 (0.38) (0.68) (1.06)
VALUE-ADDED MARKET
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) -- (0.02)
1995 9.90 0.31 2.34 2.65 (0.31) -- (0.31)
1996 12.24 0.23 1.93 2.16 (0.23) (0.01) (0.24)
1997 14.16 0.23 3.43 3.66 (0.23) (0.03) (0.26)
CORE EQUITY
1994 (a) 10.00 0.07 -- 0.07 (0.02) -- (0.02)
1995 10.05 0.26 1.05 1.31 (0.29) -- (0.29)
1996 11.07 0.08 2.52 2.60 (0.08) (0.04) (0.12)
1997 13.55 0.09 3.09 3.18 (0.10) (0.07) (0.17)
</TABLE>
8 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
independent accountants which are contained in the Statement of Additional
Information. Further information about the performance of the Portfolios of the
Fund is contained in the Fund's Annual Report to Shareholders, which may be
obtained without charge upon request to the Fund. See the discussion under the
caption "Charges Under the Contract" in the prospectus for the Contracts for a
description of charges which may be imposed on the Contracts by the applicable
Account. Any such charges are not reflected in the financial highlights below.
Inclusion of any such charges would reduce the total return figures for all
periods shown.
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
1994 (a) $ 1.00 0.76%(1) $ 1,234 2.50%*(2) 3.33%*(2) -- 5.83%(2) N/A N/A
1995 1.00 6.10 42,089 0.81 5.11 -- 5.92 N/A N/A
1996 1.00 5.07 87,002 0.59 4.94 0.57% 4.96 N/A N/A
1997 1.00 5.21 84,045 0.55 5.08 0.55 5.08 N/A N/A
NORTH AMERICAN
GOVERNMENT
SECURITIES
1994 (a) 10.04 0.61(1) 122 2.50*(2) 1.78*(2) -- 4.28(2) -- N/A
1995 10.18 6.40 1,288 2.50* 3.24* -- 5.74 18% N/A
1996 10.09 4.35 4,172 1.45 4.55 0.50 5.50 48 N/A
1997 10.17 5.91 5,091 1.26 4.75 1.26 4.75 27 N/A
DIVERSIFIED
INCOME
1994 (a) 10.05 0.76(1) 402 2.50*(2) 3.08*(2) -- 5.58(2) -- N/A
1995 10.22 6.96 8,972 1.33 5.95 -- 7.28 33 N/A
1996 10.32 9.54 32,119 0.71 8.26 0.50 8.47 69 N/A
1997 10.29 8.32 62,287 0.55 8.09 0.55 8.09 110 N/A
BALANCED
1994 (a) 10.04 0.60(1) 796 2.50*(2) 2.90*(2) -- 5.40(2) -- --
1995 11.89 22.86 16,311 1.39 2.45 -- 3.84 99 --
1996 13.07 13.54 38,893 0.90 2.35 0.50 2.75 88 $ 0.0580
1997 15.03 17.87 71,323 0.86 2.13 0.86 2.13 64 0.0581
UTILITIES
1994 (a) 10.04 0.65(1) 498 2.50*(2) 2.79*(2) -- 5.29(2) -- --
1995 12.35 28.05 17,959 1.43 3.01 -- 4.44 3 --
1996 12.94 8.48 35,686 0.80 3.16 0.50 3.46 15 0.0500
1997 15.84 26.45 50,766 0.76 2.83 0.76 2.83 34 0.0520
DIVIDEND GROWTH
1994 (a) 9.97 (0.05) (1) 1,378 2.50*(2) 3.28*(2) -- 5.78(2) -- --
1995 13.54 40.13 78,694 0.83 2.80 -- 3.63 4 --
1996 16.45 24.49 258,101 0.67 2.44 0.67 2.44 39 0.0518
1997 19.57 26.12 518,419 0.65 2.11 0.65 2.11 26 0.0545
VALUE-ADDED
MARKET
1994 (a) 9.90 (0.76) (1) 349 2.50*(2) 1.25*(2) -- 3.75(2) -- --
1995 12.24 27.14 23,970 1.46 1.64 -- 3.10 4 --
1996 14.16 17.78 73,516 0.64 1.69 0.56 1.77 4 0.0300
1997 17.56 26.12 141,316 0.58 1.49 0.58 1.49 8 0.0300
CORE EQUITY
1994 (a) 10.05 0.67(1) 316 2.50*(2) 2.32*(2) -- 4.82(2) -- --
1995 11.07 13.29 3,956 2.50* (0.64) * -- 1.86 39 --
1996 13.55 23.56 18,215 1.22 (0.03) 0.50 0.69 47 0.0573
1997 16.56 23.07 40,311 1.01 0.13 1.01 0.13 55 0.0585
</TABLE>
<TABLE>
<C> <S>
- ---------------------
</TABLE>
EMPTY FOOTNOTE
9 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.00 $ 0.06 $ 0.01 $ 0.07 $(0.02) -- $(0.02)
1995 10.05 0.21 3.66 3.87 (0.21) -- (0.21)
1996 13.71 0.08 1.68 1.76 (0.10) $(0.07) (0.17)
1997 15.30 0.07 4.73 4.80 (0.06) (0.35) (0.41)
MID-CAP GROWTH
1997 (b) 10.00 0.18 1.39 1.57 (0.17) -- (0.17)
GLOBAL EQUITY
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) -- (0.03)
1995 9.94 0.29 1.05 1.34 (0.29) -- (0.29)
1996 10.99 0.15 1.10 1.25 (0.17) (0.01) (0.18)
1997 12.06 0.12 0.92 1.04 (0.11) (0.02) (0.13)
DEVELOPING GROWTH
1994 (a) 10.00 0.08 0.08 0.16 (0.03) -- (0.03)
1995 10.13 0.24 4.88 5.12 (0.25) -- (0.25)
1996 15.00 0.02 1.92 1.94 (0.04)++ (0.02) (0.06)
1997 16.88 0.05 2.27 2.32 (0.04) -- (0.04)
EMERGING MARKETS
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.29 (0.33) (0.04) (0.31) -- (0.31)
1996 9.69 0.16 1.51 1.67 (0.16) -- (0.16)
1997 11.20 0.06 0.11 0.17 (0.06) -- (0.06)
</TABLE>
<TABLE>
<C> <S>
- ---------------------
(a) For the period November 9, 1994 (commencement of operations) through December 31, 1994.
(b) For the period January 21, 1997 (commencement of operations) through December 31, 1997.
+ Calculated based on the net asset value as of the last business day of the period.
++ Includes distributions from paid-in-capital of $0.01.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
</TABLE>
10 - PROSPECTUS
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.05 0.69%(1) $ 823 2.50*%(2) 1.60*%(2) -- 4.10%(2) 10%(1) --
1995 13.71 38.95 38,235 0.96 1.11 -- 2.07 174 --
1996 15.30 12.95 120,904 0.71 0.52 0.69% 0.54 232 $ 0.0557
1997 19.69 31.93 230,014 0.68 0.42 0.68 0.42 262 0.0566
MID-CAP GROWTH
1997 (b) 11.40 15.84(1) 19,236 1.12(2) 0.65(2) -- 1.77(2) 104(1) 0.0546
GLOBAL EQUITY
1994 (a) 9.94 (0.30) (1) 1,194 2.50* (2) 2.20* (2) -- 4.70(2) -- --
1995 10.99 13.76 17,074 1.69 1.09 -- 2.78 74 --
1996 12.06 11.43 59,246 1.25 0.69 0.72 1.22 62 0.0451
1997 12.97 8.66 102,229 1.13 0.91 1.13 0.91 87 0.0283
DEVELOPING
GROWTH
1994 (a) 10.13 1.58(1) 380 2.50* (2) 2.31* (2) -- 4.81(2) 3(1) --
1995 15.00 51.26 17,412 1.24 0.86 -- 2.10 80 --
1996 16.88 12.95 61,120 0.68 (0.04) 0.58 0.06 146 0.0537
1997 19.16 13.77 82,690 0.60 0.26 0.60 0.26 149 0.0555
EMERGING
MARKETS
1994 (a) 10.04 0.57(1) 448 2.50* (2) 2.22* (2) -- 4.72(2) -- --
1995 9.69 (0.57) 4,092 2.50* 0.18* -- 2.68 36 --
1996 11.20 17.69 17,240 2.02 (0.10) 0.50 1.42 46 0.0022
1997 11.31 1.27 23,815 1.71 0.49 1.71 0.49 91 0.0007
</TABLE>
<TABLE>
<C> <S>
- ---------------------
</TABLE>
EMPTY FOOTNOTE
11 - PROSPECTUS
<PAGE>
THE FUND AND ITS MANAGEMENT
--------------------------------------------------------------------
Dean Witter Select Dimensions Investment Series (the "Fund") is an open-end
diversified management investment company. The Fund is a trust of the type
commonly known as a "Massachusetts business trust" and was organized under the
laws of The Commonwealth of Massachusetts on June 2, 1994.
Dean Witter InterCapital Inc. ("InterCapital" or the "Investment Manager"),
whose address is Two World Trade Center, New York, New York 10048, is the Fund's
Investment Manager. The Investment Manager, which was incorporated in July,
1992, is a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. ("MSDWD"), a preeminent global financial services firm that maintains
leading market positions in each of its three primary businesses -- securities,
asset management and credit services.
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company Inc.,
serve in various investment management, advisory, management and administrative
capacities to 101 investment companies, 29 of which are listed on the New York
Stock Exchange, with combined total assets of $101 billion at January 31, 1998.
The Investment Manager also manages portfolios of pension plans, other
institutions and individuals which aggregated approximately $4 billion at such
date.
The Fund has retained the Investment Manager to provide administrative services,
manage its business affairs and manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. InterCapital has retained Dean Witter Services Company Inc. to
perform the aforementioned administrative services for the Fund.
With regard to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, under a Sub-Advisory Agreement between TCW Funds
Management, Inc. ("TCW") and the Investment Manager, TCW provides these
Portfolios with investment advice and portfolio management, in each case subject
to the overall supervision of the Investment Manager. TCW, whose address is 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017, also serves as
investment adviser to eleven investment companies for which Dean Witter Services
Company Inc. serves as manager. TCW, which was organized in 1987, is a
wholly-owned subsidiary of The TCW Group, Inc. ("TCW Group"), whose subsidiaries
provide a variety of trust, investment management and investment advisory
services. Robert A. Day, who is Chairman of the Board of Directors of TCW Group,
may be deemed to be a control person of TCW by virtue of the aggregate ownership
by Mr. Day and his family of more than 25% of the outstanding voting stock of
TCW Group. TCW in turn has entered into further sub-advisory agreements with two
other wholly-owned subsidiaries of TCW Group, TCW Asia Limited and TCW London
International, Limited, to assist it in performing its sub-advisory functions in
respect of the EMERGING MARKETS PORTFOLIO. The address of TCW Asia Limited is
One Pacific Place, 88 Queensway, Hong Kong, and the address of TCW London
International, Limited is 16 Charles II Street, London SWIY4QU. As of January
31, 1998, TCW and its affiliates had approximately $50 billion under management
or committed to management, primarily from institutional investors.
With regard to the GROWTH PORTFOLIO, under a Sub-Advisory Agreement between
Morgan Stanley Asset Management Inc. ("MSAM") and the Investment Manager, MSAM
provides that Portfolio with investment advice and portfolio management, subject
to the overall supervision of the Investment Manager. MSAM, whose address is
1221 Avenue of the Americas, New York, New York 10020, together with its
institutional investment management affiliates had, as of January 31, 1998,
approximately $148.7 billion in assets under management as an investment manager
or as a fiduciary adviser, primarily for U.S. corporate and public employee
benefit plans, investment companies, endowments, foundations and wealthy
individuals. MSAM, like InterCapital, is a wholly-owned subsidiary of MSDWD.
TCW and MSAM are sometimes collectively referred to as the "Sub-Advisers" and
individually as a "Sub-Adviser."
The Fund's Board of Trustees reviews the various services provided by or under
the direction of the Investment Manager (and, for the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO,
by the applicable Sub-Adviser) to ensure that the Fund's general investment
policies and programs are being properly carried out and that administrative
services are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund and
expenses of the Fund assumed by the Investment Manager, the Fund currently pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.50% to the net assets of the MONEY MARKET PORTFOLIO; 0.65% to
the net assets of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO; 0.40% to
the net assets of the DIVERSIFIED INCOME PORTFOLIO; 0.60% to the net assets of
the BALANCED GROWTH PORTFOLIO; 0.65% to the net assets of the UTILITIES
PORTFOLIO; 0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO; 0.50% to
the net assets of the VALUE-ADDED MARKET PORTFOLIO; 0.80% to the net assets of
the GROWTH PORTFOLIO; 0.625% to the net assets of the AMERICAN VALUE PORTFOLIO;
0.75% to the net assets of the MID-CAP GROWTH PORTFOLIO; 1.0% to the net assets
of the GLOBAL EQUITY PORTFOLIO; 0.50% to the net assets of the DEVELOPING GROWTH
PORTFOLIO; and 1.25% to the net assets of the EMERGING MARKETS PORTFOLIO, in
each case determined as of the close of each business day. As compensation for
its services provided to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and
the EMERGING MARKETS PORTFOLIO pursuant to its Sub-Advisory
12 - PROSPECTUS
<PAGE>
Agreement in respect of those Portfolios, the Investment Manager pays TCW
monthly compensation equal to 40% of its monthly compensation in respect of each
of those Portfolios, and as compensation for its services provided to the GROWTH
PORTFOLIO pursuant to its Sub-Advisory Agreement in respect of this Portfolio,
the Investment Manager pays MSAM 40% of its monthly compensation in respect of
this Portfolio.
The Fund's expenses include: the fee of the Investment Manager; taxes; certain
legal, transfer agent, custodian and auditing fees; and printing and other
expenses relating to the Fund's operations which are not expressly assumed by
the Investment Manager under its Investment Management Agreement with the Fund.
For the year ended December 31, 1997, the Fund accrued total compensation to the
Investment Manager amounting to 0.50% of the average daily net assets of the
MONEY MARKET PORTFOLIO, 0.65% of the average daily net assets of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, 0.40% of the average daily net assets
of the DIVERSIFIED INCOME PORTFOLIO, 0.75% of the average daily net assets of
the BALANCED GROWTH PORTFOLIO, 0.65% of the average daily net assets of the
UTILITIES PORTFOLIO, 0.625% of the average daily net assets of the DIVIDEND
GROWTH PORTFOLIO, 0.50% of the average daily net assets of the VALUE-ADDED
MARKET PORTFOLIO, 0.85% of the average daily net assets of the GROWTH PORTFOLIO,
0.625% of the average daily net assets of the AMERICAN VALUE PORTFOLIO, 1.0% of
the average daily net assets of the GLOBAL EQUITY PORTFOLIO, 0.50% of the
average daily net assets of the DEVELOPING GROWTH PORTFOLIO and 1.25% of the
average daily nets assets of the EMERGING MARKETS PORTFOLIO. The total expenses
of the MONEY MARKET PORTFOLIO amounted to 0.55% of its average daily net assets,
the total expenses of the NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO amounted to
1.26% of its average daily net assets, the total expenses of the DIVERSIFIED
INCOME PORTFOLIO amounted to 0.55% of its average daily net assets, the total
expenses of the BALANCED GROWTH PORTFOLIO amounted to 0.86% of its average daily
net assets, the total expenses of the UTILITIES PORTFOLIO amounted to 0.76% of
its average daily net assets, the total expenses of the DIVIDEND GROWTH
PORTFOLIO amounted to 0.65% of its average daily net assets, the total expenses
of the VALUE-ADDED MARKET PORTFOLIO amounted to 0.58% of its average daily net
assets, the total expenses of the GROWTH PORTFOLIO amounted to 1.01% of its
average daily net assets, the total expenses of the AMERICAN VALUE PORTFOLIO
amounted to 0.68% of its average daily net assets, the total expenses of the
GLOBAL EQUITY PORTFOLIO amounted to 1.13% of its average daily net assets, the
total expenses of the DEVELOPING GROWTH PORTFOLIO amounted to 0.60% of its
average daily net assets, and the total expenses of the EMERGING MARKETS
PORTFOLIO amounted to 1.71% of its average daily net assets.
The MID-CAP GROWTH PORTFOLIO commenced operations on January 21, 1997. The
Investment Manager has undertaken to assume all expenses of the MID-CAP GROWTH
PORTFOLIO (except for any brokerage fees) and waive the compensation provided
for that Portfolio in its Management Agreement with the Fund until such time as
the Portfolio has $50 million of net assets or until July 31, 1998, whichever
occurs first.
Prior to March, 1998, the BALANCED GROWTH PORTFOLIO (then named the BALANCED
PORTFOLIO) and the GROWTH PORTFOLIO (then named the CORE EQUITY PORTFOLIO) were
sub-advised by TCW. In October, 1997, TCW indicated its intention to resign as
Sub-Adviser to these Portfolios and, on November 6, 1997, the Board of Trustees
recommended that InterCapital assume the investment management advice and
portfolio management function then being performed by TCW for the BALANCED
GROWTH PORTFOLIO and that a new Sub-Advisory Agreement with MSAM be submitted to
shareholders of the GROWTH PORTFOLIO (then named the CORE EQUITY PORTFOLIO) for
approval. The shareholders of the GROWTH PORTFOLIO approved the new Sub-Advisory
Agreement with MSAM on February 26, 1998 and the new Sub-Advisory Agreement
became effective on March 2, 1998, at which time TCW also resigned as
Sub-Adviser of the GROWTH PORTFOLIO and the BALANCED GROWTH PORTFOLIO. Effective
March 2, 1998, the Investment Manager and the Fund amended the Investment
Management Agreement to reduce the fee paid by the Fund to the Investment
Manager under the Agreement in respect of the BALANCED GROWTH PORTFOLIO from
0.75% to 0.60% of the Portfolio's average daily net assets and to reduce the fee
paid by the Fund to the Investment Manager under the Agreement in respect of the
GROWTH PORTFOLIO from 0.85% to 0.80% of the Portfolio's average daily net
assets.
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------
THE MONEY MARKET PORTFOLIO
The investment objectives of the MONEY MARKET PORTFOLIO are high current income,
preservation of capital and liquidity. The investment objectives may not be
changed without approval of the shareholders of the MONEY MARKET PORTFOLIO. The
Portfolio seeks to achieve its objectives by investing in the following money
market instruments:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to principal and
interest by the United States or its agencies (such as the Export-Import Bank of
the United States, Federal Housing Administration, and Government National
Mortgage Association) or its instrumentalities (such as the Federal Home Loan
Bank, Federal Intermediate Credit Banks and Federal Land Bank), including
Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, bank notes and
bankers' acceptances) of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more, and instruments secured by such
obligations, not including obligations of foreign branches of domestic banks;
13 - PROSPECTUS
<PAGE>
OBLIGATIONS OF SAVINGS INSTITUTIONS. Certificates of deposit of savings banks
and savings and loan associations, having total assets of $1 billion or more;
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 10% or less of the Portfolio's total assets in all such
obligations and in all illiquid assets, in the aggregate;
COMMERCIAL PAPER AND CORPORATE OBLIGATIONS. Commercial paper and corporate debt
obligations maturing in thirteen months or less which are rated in one of the
two highest rating categories for short-term debt obligations, or, if not rated,
have been issued by issuers which have another short-term debt obligation that
is comparable in priority and security to such non-rated securities and is so
rated, by at least two nationally recognized statistical rating organizations
("NRSROs") (or one NRSRO if the instrument was rated by only one such
organization) or which, if unrated, are of comparable quality as determined in
accordance with procedures established by the Trustees. The NRSROs currently
rating instruments of the type the Portfolio may purchase are Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff and
Phelps, Inc., Fitch Investors Service, Inc., IBCA Limited and IBCA Inc., and
Thomson BankWatch, Inc. Their rating criteria are described in the Appendix to
the Fund's Statement of Additional Information. See the Appendix to this
Prospectus for an explanation of Moody's and S&P ratings.
The foregoing rating limitations apply at the time of acquisition of a security.
Any subsequent change in any rating by a rating service will not require
elimination of any security from the portfolio. However, in accordance with
procedures adopted by the Fund's Trustees pursuant to federal securities
regulations governing money market funds, if the Investment Manager becomes
aware that a portfolio security has received a new rating from an NRSRO that is
below the second highest rating, then, unless the security is disposed of within
five days, the Investment Manager will perform a creditworthiness analysis of
any such downgraded securities, which analysis will be reported to the Trustees
who will, in turn, determine whether the securities continue to present minimal
credit risks to the MONEY MARKET PORTFOLIO.
The ratings assigned by the NRSROs represent their opinions as to the quality of
the securities they undertake to rate. It should be emphasized, however, that
the ratings are general and not absolute standards of quality.
Subject to the foregoing requirements, the MONEY MARKET PORTFOLIO may invest in
commercial paper which has been issued pursuant to the "private placement"
exemption afforded by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") and which may be sold to institutional investors pursuant to
Rule 144A under the Securities Act. Management considers such legally
restricted, but readily marketable, commercial paper to be liquid. However,
pursuant to procedures approved by the Trustees of the Fund, if a particular
investment in such commercial paper is determined to be illiquid, that
investment will be included within the 10% limitation on illiquid investments.
If at any time the MONEY MARKET PORTFOLIO's investments in illiquid securities
exceed 10% of the Portfolio's total assets, the Portfolio will dispose of
illiquid securities in an orderly fashion to reduce the Portfolio's holdings in
such securities to less than 10% of its total assets.
VARIABLE RATE AND FLOATING RATE OBLIGATIONS. Certain of the types of investments
described above may be variable rate or floating rate obligations. The interest
rates payable on variable rate or floating rate obligations are not fixed and
may fluctuate based upon changes in market rates. The interest rate payable on a
variable rate obligation may be adjusted at predesignated periodic intervals and
on a floating rate obligation whenever there is a change in the market rate of
interest on which the interest rate payable is based.
Although the MONEY MARKET PORTFOLIO will generally not seek profits through
short-term trading, it may dispose of any portfolio security prior to its
maturity if, on the basis of a revised credit evaluation of the issuer or other
circumstances or considerations, it believes such disposition advisable.
The MONEY MARKET PORTFOLIO may enter into repurchase agreements and reverse
repurchase agreements, and may lend its portfolio securities, in accordance with
the description of those investments (and subject to the risks) set forth under
"General Portfolio Techniques" below and in the Statement of Additional
Information.
The MONEY MARKET PORTFOLIO will attempt to balance its objectives of high
income, capital preservation and liquidity by investing in securities of varying
maturities and risks. The MONEY MARKET PORTFOLIO will not, however, invest in
securities that mature in more than thirteen months from the date of purchase.
The amounts invested in obligations of various maturities of thirteen months or
less will depend on management's evaluation of the risks involved. Longer-term
issues, while generally paying higher interest rates, are subject, as a result
of general changes in interest rates, to greater fluctuations in value than
shorter-term issues. Thus, when rates on new debt securities increase, the value
of outstanding securities may decline, and vice versa. Such changes may also
occur, but to a lesser degree, with short-term issues. These changes, if
realized, may cause fluctuations in the amount of daily dividends and, in
extreme cases, could cause the net asset value per share to decline (see
"Determination of Net Asset Value"). Longer-term issues also increase the risk
that the issuer may be unable to pay an installment of interest or principal at
maturity. Also, in the event of unusually large redemption demands, such
securities may have to be sold at a loss prior to maturity, or the MONEY MARKET
PORTFOLIO might have to borrow money and incur interest expense. Either
occurrence would adversely impact the amount of daily dividend and could result
in a decline in the daily net asset value per share.
14 - PROSPECTUS
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The MONEY MARKET PORTFOLIO will attempt to minimize these risks by investing in
longer-term securities when it appears to management that interest rates on such
securities are not likely to increase substantially during the period of
expected holding, and then only in securities of high quality which are readily
marketable. However, there can be no assurance that the Portfolio will be
successful in achieving this or its other objectives.
The foregoing investment policies are not fundamental and may be changed by the
Trustees without shareholder vote.
THE NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
is to earn a high level of current income while maintaining relatively low
volatility of principal. This objective may not be changed without the approval
of the shareholders of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO. There
is no assurance that the objective will be achieved. The following investment
policies may be changed by the Trustees of the Fund without shareholder
approval:
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO seeks to achieve its
investment objective by investing under normal circumstances at least 65% of its
total assets in investment grade fixed-income securities issued or guaranteed by
the U.S., Canadian or Mexican governments or their subdivisions, or the agencies
or instrumentalities of any of the foregoing ("Government Securities"). Such
securities may include U.S. Treasury securities, U.S. Mortgage-Backed
Securities, the sovereign debt of Canada or any of its Provinces, Canadian
Mortgage-Backed Securities, and the sovereign debt of Mexico or any of its
government agencies. See the discussion of sovereign debt obligations in the
Statement of Additional Information. In the case of the United States and
Canada, a substantial portion of such investments will be fixed rate and
adjustable rate mortgage-backed securities, including collateralized mortgage
obligations ("Mortgage-Backed Securities"). The term investment grade consists
of fixed-income securities rated Baa or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation ("S&P") or,
if not rated, determined to be of comparable quality by the Sub-Adviser, TCW
(see "General Portfolio Techniques" below for a discussion of the
characteristics and risks of investments in fixed-income securities rated Baa or
BBB).
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 35% of its
total assets in securities which are not Government Securities, including
corporate debt securities and securities backed by other assets, such as
automobile or credit card receivables and home equity loans ("Asset-Backed
Securities") (see "General Portfolio Techniques" below and in the Statement of
Additional Information for a discussion of the characteristics and risks of
investments in Asset-Backed Securities) and money market instruments, which are
short-term (maturities of up to thirteen months) fixed-income securities, issued
by private institutions. Such securities (except for Eurodollar certificates of
deposit) must be issued by U.S., Canadian or Mexican issuers and (except for
money market instruments) must be rated at least Aa by Moody's or AA by S&P or,
if not rated, determined to be of comparable quality by the Sub-Adviser. Money
market instruments in which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
may invest are set forth under "General Portfolio Techniques" below.
A portion of the fixed-income securities purchased by the Portfolio may be zero
coupon securities. The Portfolio intends to limit its use of zero coupon
securities (other than Treasury bills with one year or less to maturity) to 10%
of its total assets (see "General Portfolio Techniques" below for a discussion
of the characteristics and risks of investments in zero coupon securities). The
Portfolio will invest in zero coupon securities only when the Sub-Adviser
believes that there will be cash in the portfolio representing return of
principal on portfolio securities of the Portfolio at least equal to the imputed
income on the zero coupon securities.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO expects that under normal
circumstances the market value dollar weighted average life (or period until the
next reset date) of the Portfolio's portfolio securities will be no greater than
three years. In addition, the Portfolio will purchase only Mexican Government
Securities with remaining maturities of one year or less. The Portfolio seeks to
achieve relatively low volatility by investing in a portfolio of securities
which the Sub-Adviser believes will, in the aggregate, be resistant to
significant fluctuations in market value. Although the values of fixed-income
securities generally increase during periods of declining interest rates and
decrease during periods of increasing interest rates, the extent of these
fluctuations has historically generally been smaller for short term securities
than for securities with longer maturities. Conversely, the yield available on
shorter term securities has also historically been lower on average than those
available from longer term securities.
Under normal circumstances the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
will invest at least 50% of its total assets in U.S. Government Securities. The
Portfolio will invest no more than 25% of its total assets in Canadian
Government Securities and no more than 25% of its total assets in Mexican
Government Securities. Subject to the foregoing guidelines, the Sub-Adviser will
invest the Portfolio's assets, and allocate its investments from time to time
among U.S., Canadian and Mexican Government Securities, based on its analysis of
market conditions and changes in general economic conditions in the United
States, Canada and Mexico. In such analysis, the Sub-Adviser will consider
various factors, including its expectations regarding interest rate changes and
changes in currency exchange rates among the U.S. dollar, the Canadian dollar
and the Mexican peso, as well as general market, economic and political factors,
to attempt to take advantage of favorable investment opportunities in each
country.
There may be periods during which, in the opinion of the Sub-Adviser, market
conditions warrant reduction of some or all of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO's securities holdings. During such periods, the Portfolio
may adopt a temporary "defensive" posture in which greater than 35% of its total
assets are invested in U.S. money market instruments or cash.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may enter into repurchase
agreements, reverse repurchase agreements, dollar rolls and forward foreign
currency exchange contracts,
15 - PROSPECTUS
<PAGE>
engage in futures contracts and options transactions, purchase securities which
are issued in private placements or are otherwise not readily marketable, lend
its portfolio securities, purchase securities on a when-issued or delayed
delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of these investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information. Investors should carefully consider the risks of
investing in securities of foreign issuers and securities denominated in
non-U.S. currencies (see "Canadian Government Securities," "Mexican Government
Securities," "Canadian Mortgage-Backed Securities" and "Risks of Investing in
Canadian and Mexican Securities" below and see "General Portfolio Techniques"
below for a discussion of the characteristics and risks of investments in
foreign securities).
UNITED STATES GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities include: (i) U.S. Treasury
obligations, all of which are backed by the full faith and credit of the United
States and which differ only in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years); and (ii) obligations issued or guaranteed
by U.S. Government agencies or instrumentalities, including government
guaranteed Mortgage-Backed Securities, some of which are backed by the full
faith and credit of the U.S. Treasury (e.g., Government National Mortgage
Association direct pass-through certificates), some of which are supported by
the right of the issuer to borrow from the U.S. Government (e.g., obligations of
Federal Home Loan Banks), and some of which are backed only by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association). The
U.S. Government may also guarantee other debt obligations of special purpose
borrowers.
CANADIAN GOVERNMENT SECURITIES. Canadian Government Securities include
securities issued or guaranteed by the Government of Canada, the Government of a
Province of Canada or their agencies and Crown corporations. These securities
may be denominated or payable in U.S. dollars or Canadian dollars.
The Bank of Canada, acting on behalf of the federal government, is responsible
for the distribution of Government of Canada Treasury bills and federal bond
issues. The Bank of Canada holds weekly auctions of Treasury bills (maturities
of one year or less) and offers new issues of federal bonds through investment
dealers and banks. An offering of Government of Canada bonds frequently consists
of several different issues with various maturity dates, representing different
segments of the yield curve and generally having maturities ranging from three
to 25 years. The Bank of Canada usually purchases a previously announced amount
of each offering of bonds. Mortgage-Backed Securities issued pursuant to the
program established under the National Housing Act of Canada are also Canadian
Government Securities because they benefit from a guarantee by the Canada
Mortgage and Housing Corporation, but are not distributed by the Bank of Canada.
All Canadian Provinces have outstanding bond issues and several Provinces also
guarantee bond issues of Provincial authorities, agencies and provincial Crown
corporations. Spreads in the marketplace are determined by various factors,
including the relative supply and the rating assigned by the rating agencies.
Most Provinces also issue treasury bills.
Many municipalities and municipal financial authorities in Canada raise funds
through the bond market in order to finance capital expenditures. Unlike U.S.
municipal securities, which have special tax status, Canadian municipal
securities have the same tax status as other Canadian Government Securities and
trade similarly to such securities. The Canadian municipal market may be less
liquid than the Provincial bond market.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO will only invest in Canadian
Government Securities which are rated at least A by Moody's or S&P or, if not
rated, are determined to be of comparable quality by the Sub-Adviser.
MEXICAN GOVERNMENT SECURITIES. Mexican Government Securities include those
securities which are issued or guaranteed by the Mexican Treasury or by Mexican
government agencies or instrumentalities. These securities may be denominated
and payable in Mexican pesos or U.S. dollars.
The debt market in Mexico began to develop rapidly after the promulgation of the
Securities Market Law in 1975. Since 1975, the government has authorized a range
of Mexican government issued debt securities, all of which are traded on the
Mexican Stock Exchange: (i) CETES -- peso-denominated discount debt securities
having maturities of two years or less sold through auctions regulated by Banco
de Mexico; (ii) BONDES -- peso-denominated long-term development bonds sold
through auctions regulated by Banco de Mexico; (iii) AJUSTABONOS -- peso-
denominated bonds with a fixed coupon rate on a variable face amount which is
adjusted in proportion to fluctuations in the Mexican consumer price index; and
(iv) NAFINSA PAGARES -- peso-denominated promissory notes, with maturities
approximating those of Cetes, issued by the Nacional Financiera (Nafinsa), an
agency of the Mexican government.
In addition, a variety of other special purpose bonds are issued by the Mexican
federal government or its agencies, such as development bonds, bank indemnity
bonds and urban renovation bonds, as well as bank development bonds and
industrial development bonds.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO will only invest in Mexican
Government Securities which are rated at least Baa by Moody's or BBB by S&P or,
if not rated, are determined to be of comparable quality by the Sub-Adviser.
MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. The term Mortgage-Backed
Securities as used herein includes adjustable rate mortgage securities and
derivative mortgage products such as collateralized mortgage obligations,
stripped Mortgage-Backed Securities and other products described below.
16 - PROSPECTUS
<PAGE>
U.S. MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO's investments in U.S. Mortgage-Backed Securities are subject to
certain risks (see the description of U.S. Mortgage-Backed Securities and the
risks associated with investments in such securities set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information).
CANADIAN MORTGAGE-BACKED SECURITIES. Canadian Mortgage-Backed Securities may be
issued in several ways, the most common of which is a modified pass-through
vehicle issued pursuant to the program established under the National Housing
Act of Canada. Certificates issued pursuant to this program have some structural
similarities to GNMA securities and benefit from the guarantee of the Canada
Mortgage and Housing Corporation, a federal Crown corporation that is (except
for certain limited purposes) an agent of the Government of Canada.
Canadian private issuers such as banks and trust companies also issue
Mortgage-Backed Securities backed by private insurance or other forms of credit
support. Such Mortgage-Backed Securities are not considered Government
Securities for purposes of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO.
While most Canadian Mortgage-Backed Securities are subject to voluntary
prepayments, some pools are not subject to such prepayments and thus have yield
characteristics similar to bonds.
RISKS OF INVESTING IN CANADIAN AND MEXICAN SECURITIES. The Canadian debt
securities market is significantly smaller than the U.S. debt securities market.
In particular, the Canadian Mortgage-Backed Securities market is of recent
origin, and, although continued growth is anticipated, is less well developed
and less liquid than its U.S. counterpart.
Because the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO intends to invest in
Mexican debt instruments, investors in the Portfolio should be aware of certain
special considerations associated with investing in debt obligations of the
Mexican government.
The Mexican government has exercised and continues to exercise a significant
influence over many aspects of the private sector in Mexico. Mexican government
actions concerning the economy could have a significant effect on market
conditions and prices and yields of Mexican debt obligations, including those in
which the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO invests. Mexico is
currently a major debtor nation (among developing countries) to commercial banks
and foreign governments.
The value of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's investments
may be affected by changes in oil prices, interest rates, taxation and other
political or economic developments in Mexico, including recent rates of
inflation which have exceeded the rates of inflation in the U.S. and Canada. The
Fund can provide no assurance that future developments in the Mexican economy
will not impair the North American Government Income Portfolio's investment
flexibility, operations or ability to achieve its investment objective.
In September, 1982, Mexico imposed foreign exchange controls and maintained a
dual foreign exchange rate system, with a "controlled" rate and a "free market"
rate. Under economic policy initiatives implemented since December, 1987, the
Mexican government introduced a schedule of gradual devaluation of the
controlled rate which initially amounted to an average depreciation of the
Mexican peso against the U.S. dollar of one Mexican peso per day. The extended
initiatives include an adjustment in the scheduled devaluation rate of the
Mexican peso against the U.S. dollar. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO's net asset value and its computation and distribution of income to
its shareholders will be adversely affected by continued reductions in the value
of the Mexican peso relative to the U.S. dollar because all Portfolio assets
must be converted to U.S. dollars prior to any distributions to shareholders. On
December 22, 1994, the Mexican government determined to allow the Mexican peso
to trade freely against the U.S. dollar rather than within a controlled band,
which action resulted in a significant devaluation of the Mexican peso against
the U.S. dollar.
Risks of investing in foreign securities are discussed further under "General
Portfolio Techniques" below.
THE DIVERSIFIED INCOME PORTFOLIO
The primary investment objective of the DIVERSIFIED INCOME PORTFOLIO is to
provide a high level of current income. As a secondary objective the DIVERSIFIED
INCOME PORTFOLIO seeks to maximize total return but only to the extent
consistent with its primary objective. The investment objectives of the
DIVERSIFIED INCOME PORTFOLIO may not be changed without the approval of the
shareholders of the Portfolio. There is no assurance that the objectives will be
achieved. The following investment policies may be changed by the Trustees of
the Fund without shareholder approval:
The DIVERSIFIED INCOME PORTFOLIO will seek to achieve its investment objectives
by investing at least 65% of its total assets in fixed-income securities and by
equally allocating, under normal circumstances (including the attainment by the
Portfolio of sufficient asset size), an approximately one-third portion of its
total assets among three separate groupings of various types of fixed-income
securities. The Investment Manager will adjust the DIVERSIFIED INCOME
PORTFOLIO's assets not less than quarterly to reflect any changes in the
relative values of the securities in each grouping so that following the
adjustment the value of the Portfolio's investments in each grouping will be
equal to the extent practicable.
The three groupings in which the DIVERSIFIED INCOME PORTFOLIO will invest its
total assets are as follows:
GROUPING (1). High quality fixed-income securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or high quality fixed income
securities issued or guaranteed by a foreign government or supranational
organization or
17 - PROSPECTUS
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any of their political subdivisions, authorities, agencies or instrumentalities
or fixed-income securities issued by a corporation, all of which are rated AAA
or AA by Standard & Poor's Corporation ("S&P") or Aaa or Aa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are determined by the Investment
Manager to be of equivalent quality; in certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks
(including foreign branches of U.S. banks or U.S. or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the
Investment Manager to be of high creditworthiness; commercial paper rated A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's or Duff 1 or Duff 2 by Duff & Phelps
Inc. or, if unrated, issued by U.S. or foreign companies having outstanding debt
securities rated A or higher by S&P or Moody's; and in loan participation
interests having a remaining term not exceeding one year in loans extended by
banks to such companies. Certain foreign securities purchased by the Portfolio
will not have received ratings by a recognized U.S. rating agency. In such cases
the Investment Manager will review the issuers of such securities with respect
to the quality of their management, balance sheet and financial ratios, cash
flows and earnings to establish that the securities purchased by the Portfolio
are of a comparable quality to issuers receiving high quality ratings by a
recognized U.S. rating agency. All of the securities described above will have
remaining maturities, at the time of purchase, of not more than three years.
The Investment Manager will actively manage the assets of the DIVERSIFIED INCOME
PORTFOLIO in this grouping in accordance with a global market strategy (see
"Portfolio Trading" below). Consistent with such a strategy, the Investment
Manager intends to allocate the Portfolio's investments among securities
denominated in the currencies of a number of foreign countries and, within each
such country, among different types of debt securities. The Investment Manager
will adjust the Portfolio's exposure to different currencies based on its
perception of the most favorable markets and issuers. In allocating the
DIVERSIFIED INCOME PORTFOLIO's assets among various markets, the Investment
Manager will assess the relative yield and anticipated direction of interest
rates in particular markets, the level of inflation, liquidity and financial
soundness of each market, and the general market and economic conditions
existing in each market as well as the relationship of currencies of various
countries to the U.S. dollar and to each other. In its evaluations, the
Investment Manager will utilize its internal financial, economic and credit
analysis resources as well as information obtained from other sources.
A portion of the DIVERSIFIED INCOME PORTFOLIO's investments in securities of
U.S. issuers is likely to be in commercial paper, bankers' acceptances and other
short-term debt instruments issued by U.S. corporations. However, at times
during which there exists large-scale political or economic uncertainty, the
Portfolio is likely to increase its investments in U.S. Government securities.
In such cases, the securities which the Portfolio is most likely to purchase are
U.S. Treasury bills and U.S. Treasury notes with remaining maturities of under
three years, both of which are direct obligations of the U.S. Government. The
DIVERSIFIED INCOME PORTFOLIO may also purchase securities issued by various
agencies and instrumentalities of the U.S. Government. These will include
obligations backed by the full faith and credit of the United States (such as
those issued by the Government National Mortgage Association); obligations whose
issuing agency or instrumentality has the right to borrow, to meet its
obligations, from an existing line of credit with the U.S. Treasury (such as
those issued by the Federal National Mortgage Association); and obligations
backed by the credit of the issuing agency or instrumentality (such as those
issued by the Federal Farm Credit System).
The securities in which the DIVERSIFIED INCOME PORTFOLIO will be investing may
be denominated in any currency or multinational currency, including the U.S.
dollar. In addition to the U.S. dollar, such currencies will include, among
others; the Australian dollar; Deutsche mark; Japanese yen; French franc;
British pound; Canadian dollar; Swiss franc; Dutch guilder; Austrian schilling;
Spanish peseta; Swedish krona; and European Currency Unit ("ECU").
The DIVERSIFIED INCOME PORTFOLIO may invest, without limitation in this
grouping, in notes and commercial paper, the principal amount of which is
indexed to certain specific foreign currency exchange rates. Indexed notes and
commercial paper typically provide that their principal amount is adjusted
upwards or downwards (but not below zero) at maturity to reflect fluctuations in
the exchange rate between two currencies during the period the obligation is
outstanding, depending on the terms of the specific security. In selecting the
two currencies, the Investment Manager will consider the correlation and
relative yields of various currencies.The Portfolio will purchase an indexed
obligation using the currency in which it is denominated and, at maturity, will
receive interest and principal payments thereon in that currency. The amount of
principal payable by the issuer at maturity, however, will vary (i.e., increase
or decrease) in response to the change (if any) in the exchange rates between
the two specified currencies during the period from the date the instrument is
issued to its maturity date. The potential for realizing gains as a result of
changes in foreign currency exchange rates may enable the DIVERSIFIED INCOME
PORTFOLIO to hedge the currency in which the obligation is denominated (or to
effect cross-hedges against other currencies) against a decline in the U.S.
dollar value of investments denominated in foreign currencies, while providing
an attractive money market rate of return. The Portfolio will purchase such
indexed obligations to generate current income or for hedging purposes and will
not speculate in such obligations.
As indicated above, the DIVERSIFIED INCOME PORTFOLIO may invest in securities
denominated in a multi-national currency unit. An illustration of a
multi-national currency unit is the ECU, which is a "basket" consisting of
specified amounts of the currencies of the member states of the European
Community, a Western European economic cooperative organization that includes,
among other countries, France, West Germany, The Netherlands
18 - PROSPECTUS
<PAGE>
and the United Kingdom. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Manager
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities, in particular, issue ECU-denominated obligations. The
Portfolio may invest in securities denominated in the currency of one nation
although issued by a governmental entity, corporation or financial institution
of another nation. For example, the Portfolio may invest in a British
pound-denominated obligation issued by a United States corporation. Such
investments involve credit risks associated with the issuer and currency risks
associated with the currency in which the obligation is denominated.
GROUPING (2). (i) Fixed-rate and adjustable rate mortgage-backed securities
("Mortgage-Backed Securities") which are issued or guaranteed by the United
States Government, its agencies or instrumentalities or by private issuers which
are rated Aaa by Moody's or AAA by S&P or, if not rated, are determined to be of
comparable quality by the Investment Manager; (ii) securities backed by other
assets such as automobile or credit card receivables and home equity loans
("Asset-Backed Securities") which are rated Aaa by Moody's or AAA by S&P or, if
not rated, are determined to be of comparable quality by the Investment Manager;
(iii) U.S. Treasury securities (bills, notes, bonds and zero coupon securities)
(without restrictions as to remaining maturity at time of purchase) and (iv)
U.S. Government agency securities (discount notes, medium-term notes, debentures
and zero coupon securities) (without restrictions as to remaining maturity at
time of purchase). See "General Portfolio Techniques" below and in the Statement
of Additional Information for a discussion of Mortgage-Backed Securities and
Asset-Backed Securities and the risks of investments in such securities. The
term Mortgage-Backed Securities as used herein includes adjustable rate mortgage
securities and derivative mortgage products such as collateralized mortgage
obligations and stripped mortgage-backed securities, all as described under
"General Portfolio Techniques" below and in the Statement of Additional
Information.
GROUPING (3). High yield, high risk fixed-income securities rated Baa or lower
by Moody's or BBB or lower by S&P or, if not rated, are determined by the
Investment Manager to be of comparable quality. The high yield, high risk
fixed-income securities in this grouping may include both convertible and
nonconvertible debt securities and preferred stock. Fixed-income securities
rated Baa by Moody's or BBB by S&P have speculative characteristics greater than
those of more highly rated bonds, while fixed-income securities rated Ba or BB
or lower by Moody's and S&P, respectively, are considered to be speculative
investments. Furthermore, the DIVERSIFIED INCOME PORTFOLIO does not have any
minimum quality rating standard for its investments. As such, the Portfolio may
invest in securities rated as low as Caa, Ca or C by Moody's or CCC, CC, C or C1
by S&P. Fixed-income securities rated Caa or Ca by Moody's may already be in
default on payment of interest or principal, while bonds rated C by Moody's,
their lowest bond rating, can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Bonds rated C1 by S&P are no longer
making interest payments. See "Special Investment Considerations" and "General
Portfolio Techniques" below.
During temporary defensive periods when market conditions warrant reduction of
some or all of the Portfolio's securities holdings or when temporarily holding
cash pending investment, this portion of the DIVERSIFIED INCOME PORTFOLIO may
invest in U.S. Treasury securities or other money market instruments. Under such
circumstances the money market instruments in which this portion of the
Portfolio may invest, in addition to U.S. Treasury securities (bills, notes,
bonds and zero coupons securities), are American bank obligations, such as
certificates of deposit; Eurodollar certificates of deposit; obligations of
American savings institutions; and commercial paper of American issuers rated
within the two highest grades by Moody's or S&P or, if not rated, are issued by
a company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's.
A description of Moody's and S&P ratings is contained in the Appendix. Non-rated
securities will also be considered for investment by the DIVERSIFIED INCOME
PORTFOLIO when the terms of the securities themselves makes them appropriate
investments for the Portfolio.
The ratings of fixed-income securities by Moody's and S&P are a generally
accepted barometer of credit risk. However, as the creditworthiness of issuers
of lower-rated fixed-income securities is more problematical than that of
issuers of higher-rated fixed-income securities, the achievement of the
investment objectives of the DIVERSIFIED INCOME PORTFOLIO will be more dependent
upon the Investment Manager's own credit analysis than would be the case with a
mutual fund investing primarily in higher quality bonds. The Investment Manager
will utilize a security's credit rating as simply one indication of an issuer's
creditworthiness and will principally rely upon its own analysis of any security
currently held by the DIVERSIFIED INCOME PORTFOLIO or potentially purchasable by
the Portfolio. See "General Portfolio Techniques" below for a discussion of
credit risk and interest rate risk, to which risks all fixed-income securities
are subject, and a discussion of the actions to be taken if a security held by
grouping (1) or (2) of the Portfolio is downgraded by a rating agency to a
rating of below Baa or BBB, as well as a discussion of the characteristics and
risks of investments in fixed-income securities rated Baa or BBB.
A portion of the fixed-income securities purchased by the Portfolio may be zero
coupon securities (see "General Portfolio Techniques" below).
The DIVERSIFIED INCOME PORTFOLIO may enter into repurchase agreements, reverse
repurchase agreements, dollar rolls and forward foreign currency exchange
contracts, engage in futures contracts and options transactions, lend its
portfolio securities, purchase securities which are issued in private placements
or are otherwise not readily marketable, purchase securities on a
19 - PROSPECTUS
<PAGE>
when-issued or delayed delivery basis or a "when, as and if issued" basis, and
purchase or sell securities on a forward commitment basis, in each case in
accordance with the description of these investments and techniques (and subject
to the risks) set forth under "General Portfolio Techniques" below and in the
Statement of Additional Information. Investors should carefully consider the
risks of investing in securities of foreign issuers and securities denominated
in non-U.S. currencies (see "General Portfolio Techniques" below for a
discussion of the characteristics and risks of investments in foreign
securities).
COMMON STOCKS. The DIVERSIFIED INCOME PORTFOLIO may invest in common stocks in
an amount up to 20% of its total assets in the circumstances described below
when consistent with the Portfolio's investment objectives.
The DIVERSIFIED INCOME PORTFOLIO may acquire common stocks when attached to or
included in a unit with fixed-income securities, or when acquired upon
conversion of fixed-income securities or upon exercise of warrants attached to
fixed-income securities and may purchase common stocks directly when such
acquisitions are determined by the Investment Manager to further the Portfolio's
investment objectives (see the discussions of warrants and convertible
securities under "General Portfolio Techniques" below).
For example, the DIVERSIFIED INCOME PORTFOLIO may purchase the common stock of
companies involved in takeovers or recapitalizations where the issuer, or a
controlling stockholder, has offered, or pursuant to a "going private"
transaction is effecting, an exchange of its common stock for newly-issued
fixed-income securities. By purchasing the common stock of the company issuing
the fixed-income securities prior to the consummation of the transaction or
exchange offer, the DIVERSIFIED INCOME PORTFOLIO will be able to obtain the
fixed-income securities directly from the issuer at their face value,
eliminating the payment of a dealer's mark-up otherwise payable when
fixed-income securities are acquired from third parties, thereby increasing the
net yield to the shareholders of the Portfolio. While the Portfolio will incur
brokerage commissions in connection with its purchase of common stocks, it is
anticipated that the amount of such commissions will be significantly less than
the amount of such mark-up.
Fixed-income securities acquired by the DIVERSIFIED INCOME PORTFOLIO through the
purchase of common stocks under the circumstances described in the preceding
paragraph are subject to the general credit risks and interest rate risks to
which all fixed-income securities purchased by the Portfolio are subject. Such
securities generally will be rated Baa/BBB or lower as are the other high yield,
high risk fixed-income securities in which the Portfolio may invest. In
addition, since corporations involved in take-over situations are often highly
leveraged, that factor will be evaluated by the Investment Manager as part of
its credit risk determination with respect to the purchase of particular common
stocks for the Portfolio's investment portfolio. In the event the Portfolio
purchases common stock of a corporation in anticipation of a transaction
(pursuant to which the common stock is to be exchanged for fixed-income
securities) which fails to take place, the Investment Manager will continue to
hold such common stock for the Portfolio only if it determines that continuing
to hold such common stock under those circumstances is consistent with the
Portfolio's investment objectives.
SPECIAL INVESTMENT CONSIDERATIONS. Because of the special nature of the
DIVERSIFIED INCOME PORTFOLIO's investment in high yield securities, commonly
known as "junk bonds," the Investment Manager must take account of certain
special considerations in assessing the risks associated with such investments.
Investors should carefully consider the risks of investing in high yield
securities (see "General Portfolio Techniques" below and in the Statement of
Additional Information for a discussion of the risks of investments in high
yield securities).
During the fiscal year ended December 31, 1997, the monthly dollar weighted
average ratings of the debt obligations held by the DIVERSIFIED INCOME
PORTFOLIO, expressed as a percentage of the Portfolio's total investments, were
as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- -------------------------------------------- -----------------
<S> <C>
AAA/Aaa..................................... 57.5%
AA/Aa....................................... 2.5
A/A......................................... 1.0
BBB/Baa..................................... 0.2
BB/Ba....................................... 3.3
B/B......................................... 17.2
CCC/Caa..................................... 1.2
CC/Ca....................................... 0.0
C/C......................................... 0.0
D........................................... 0.0
Unrated..................................... 17.1
-----
100.0%
</TABLE>
THE BALANCED GROWTH PORTFOLIO
The investment objective of the BALANCED GROWTH PORTFOLIO is to provide capital
growth with a reasonable current income. This objective may not be changed
without the approval of the shareholders of the BALANCED GROWTH PORTFOLIO. There
is no assurance that the objective will be achieved. The following investment
policies may be changed by the Trustees of the Fund without shareholder
approval:
The BALANCED GROWTH PORTFOLIO seeks to obtain its objective by investing, under
normal market conditions, at least 60% of its total assets in common stock of
companies which have a record of paying dividends and, in the opinion of the
Investment Manager, have the potential for increasing dividends and in
securities convertible into common stock (see "General Portfolio Techniques"
below for a discussion of convertible securities), and at least 25% of its total
assets in investment grade fixed-income (fixed-rate and adjustable-rate)
securities such as corporate notes and bonds and obligations issued or
guaranteed by the U.S. Government, its agencies and its instrumentalities ("U.S.
Government securities"). A portion of the fixed-income securities purchased by
the BALANCED GROWTH PORTFOLIO may be
20 - PROSPECTUS
<PAGE>
zero coupon securities (see "General Portfolio Techniques" below).
Subject to the above percentage limitations, the BALANCED GROWTH PORTFOLIO may
hold equity securities, fixed-income securities, cash and money market
instruments in whatever proportion deemed desirable at any given time depending
upon the Investment Manager's assessment of business, economic and investment
conditions. Money market instruments in which the BALANCED GROWTH PORTFOLIO may
invest include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities (Treasury bills, notes and bonds), bank
obligations, Eurodollar certificates of deposit, obligations of savings
institutions, fully insured certificates of deposit, and commercial paper rated
within the four highest grades by Moody's Investors Service Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or, if not rated, issued by a company
having an outstanding debt issue rated at least Aa by Moody's or AA by S&P. Such
securities may be used to invest uncommitted cash balances. When market
conditions dictate a "defensive" investment strategy, the BALANCED GROWTH
PORTFOLIO may invest without limit in money market instruments.
The BALANCED GROWTH PORTFOLIO may enter into futures contracts provided that not
more than 5% of its total assets are required as a futures contract deposit. In
addition, the BALANCED GROWTH PORTFOLIO may enter into futures contracts and
options transactions only to the extent that obligations under such contracts or
transactions represent not more than 30% of the Portfolio's total assets (see
"General Portfolio Techniques" below for a description of options and futures
transactions).
The non-governmental debt securities in which the BALANCED GROWTH PORTFOLIO will
invest will include: (a) corporate debt securities, including bonds, notes and
commercial paper, rated in the four highest categories (i.e., investment grade)
by a nationally recognized statistical rating organization ("NRSRO"), including
Moody's, S&P, Duff and Phelps, Inc. and Fitch Investors Service, Inc.; (b) bank
obligations, including CDs, bankers' acceptances and time deposits, issued by
banks with a long-term CD rating in one of the four highest categories by a
NRSRO; and (c) investment grade fixed-rate and adjustable rate mortgage-backed
and asset-backed securities of corporate issuers (see "General Portfolio
Techniques" below for a description of the characteristics and risks of
investments in mortgage-backed and asset-backed securities and securities rated
within the fourth highest rating by an NRSRO (i.e., securities rated Baa by
Moody's or BBB by S&P), and for a discussion of credit risk and interest rate
risk, to which risks all fixed-income securities are subject.)
The U.S. Government securities in which the BALANCED GROWTH PORTFOLIO may invest
include securities which are direct obligations of the United States Government,
such as United States treasury bills, notes and bonds, and which are backed by
the full faith and credit of the United States; securities which are backed by
the full faith and credit of the United States but which are obligations of a
United States agency or instrumentality (e.g., obligations of the Government
National Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (e.g., obligations of
the Federal National Mortgage Association); securities issued by a United States
agency or instrumentality which is backed by the credit of the issuing agency or
instrumentality (e.g., obligations of the Federal Farm Credit System); and
governmentally issued mortgage-backed securities.
The BALANCED GROWTH PORTFOLIO may invest in warrants, invest in securities of
foreign issuers in the form of American Depository Receipts, invest in real
estate investment trusts, lend its portfolio securities, enter into repurchase
agreements, purchase securities which are issued in private placements or are
otherwise not readily marketable, purchase securities on a when-issued or
delayed delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of these investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
THE UTILITIES PORTFOLIO
The investment objective of the UTILITIES PORTFOLIO is to provide current income
and long-term growth of income and capital, by investing primarily in equity and
fixed-income securities of companies engaged in the public utilities industry.
The investment objective of the UTILITIES PORTFOLIO may not be changed without
the approval of the shareholders of the Portfolio. There can be no assurance
that the objective will be achieved. The term "public utilities industry"
consists of companies engaged in the manufacture, production, generation,
transmission, sale and distribution of gas and electric energy, as well as
companies engaged in the communications field, including telephone, telegraph,
satellite, microwave and other companies providing communication facilities for
the public, but excluding public broadcasting companies. For purposes of the
UTILITIES PORTFOLIO, a company will be considered to be in the public utilities
industry if, during the most recent twelve month period, at least 50% of the
company's gross revenues, on a consolidated basis, is derived from the public
utilities industry. The following investment policies may be changed by the
Trustees of the Fund without shareholder approval:
In seeking to achieve its objective, the UTILITIES PORTFOLIO will normally
invest at least 65% of its total assets in securities of companies in the public
utilities industry. The Investment Manager believes the UTILITIES PORTFOLIO's
investment policies are suited to benefit from certain characteristics and
historical performance of the securities of public utility companies. Many of
these companies have historically set a pattern of paying regular dividends and
increasing their common stock dividends over time, and the average common stock
dividend yield of utilities historically has substantially exceeded that of
industrial stocks. The Investment Manager believes that these factors may not
only provide current income but also generally tend to moderate risk
21 - PROSPECTUS
<PAGE>
and thus may enhance the opportunity for appreciation of securities owned by the
UTILITIES PORTFOLIO, although the potential for capital appreciation has
historically been lower for many utility stocks compared with most industrial
stocks. There can be no assurance that the historical investment performance of
the public utilities industry will be indicative of future events and
performance.
The UTILITIES PORTFOLIO will invest in both equity securities (common stocks and
securities convertible into common stock) (see "General Portfolio Techniques"
below) and fixed-income securities (bonds and preferred stock) in the public
utilities industry. The UTILITIES PORTFOLIO does not have any set policies to
concentrate within any particular segment of the utilities industry. The
UTILITIES PORTFOLIO will shift its asset allocation without restriction between
types of utilities and between equity and fixed-income securities based upon the
Investment Manager's determination of how to achieve the UTILITIES PORTFOLIO's
investment objective in light of prevailing market, economic and financial
conditions. For example, at a particular time the Investment Manager may choose
to allocate up to 100% of the UTILITIES PORTFOLIO's assets in a particular type
of security (for example, equity securities) or in a specific utility industry
segment (for example, electric utilities).
Criteria to be utilized by the Investment Manager in the selection of equity
securities include the following screens: earnings and dividend growth; book
value; dividend discount; and price/ earnings relationships. In addition, the
Investment Manager makes continuing assessments of management, the prevailing
regulatory framework and industry trends such as an increasing emphasis on
competition. The Investment Manager may also utilize computer-based equity
selection models in connection with stock allocation in the equity portion of
the portfolio. In keeping with the UTILITIES PORTFOLIO's objective, if in the
opinion of the Investment Manager favorable conditions for capital growth of
equity securities are not prevalent at a particular time, the UTILITIES
PORTFOLIO may allocate its assets predominantly or exclusively in debt
securities with the aim of obtaining current income as well as preserving
capital and thus benefiting long term growth of capital.
The UTILITIES PORTFOLIO may purchase equity securities sold on the New York,
American and other stock exchanges and in the over-the-counter market.
Fixed-income securities in which the UTILITIES PORTFOLIO may invest are debt
securities and preferred stocks which are rated at the time of purchase Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard & Poor's Corporation ("S&P") or which, if unrated, are deemed to be of
comparable quality by the Investment Manager (see "General Portfolio Techniques"
below for a discussion of the characteristics and risks of investments in
fixed-income securities rated Baa or BBB and a discussion of credit risk and
interest rate risk, to which risks all fixed-income securities are subject).
Under normal circumstances the average weighted maturity of the debt portion of
the portfolio is expected to be in excess of seven years. A description of
Moody's and S&P ratings is contained in the Appendix.
While the UTILITIES PORTFOLIO will invest primarily in the securities of public
utility companies, under ordinary circumstances it may invest up to 35% of its
total assets in U.S. Government securities (securities issued or guaranteed as
to principal and interest by the United States or its agencies and
instrumentalities), money market instruments, repurchase agreements, options and
futures (see "General Portfolio Techniques" below and in the Statement of
Additional Information). The UTILITIES PORTFOLIO may acquire warrants attached
to other securities purchased by the Portfolio (see "General Portfolio
Techniques" below).
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the UTILITIES PORTFOLIO's
securities holdings. During such periods, the UTILITIES PORTFOLIO may adopt a
temporary "defensive" posture in which greater than 35% of its total assets are
invested in cash or money market instruments.
The UTILITIES PORTFOLIO may enter into repurchase agreements, invest in foreign
securities (including American Depository Receipts, European Depository Receipts
or other similar securities convertible into securities of foreign issuers),
invest in zero coupon securities, invest in real estate investment trusts, lend
its portfolio securities, purchase securities which are issued in private
placements or are otherwise not readily marketable, purchase securities on a
when-issued or delayed delivery basis or a "when, as and if issued" basis, and
purchase or sell securities on a forward commitment basis, in each case in
accordance with the description of those investments and techniques (and subject
to the risks) set forth under "General Portfolio Techniques" below and in the
Statement of Additional Information.
PUBLIC UTILITIES INDUSTRY. The public utilities industry as a whole has certain
characteristics and risks particular to that industry. Unlike industrial
companies, the rates which utility companies may charge their customers
generally are subject to review and limitation by governmental regulatory
commissions. Although rate changes of a utility usually fluctuate in approximate
correlation with financing costs, due to political and regulatory factors rate
changes ordinarily occur only following a delay after the changes in financing
costs. This factor will tend to favorably affect a utility company's earnings
and dividends in times of decreasing costs, but conversely will tend to
adversely affect earnings and dividends when costs are rising. In addition, the
value of public utility debt securities (and, to a lesser extent, equity
securities) tends to have an inverse relationship to the movement of interest
rates.
22 - PROSPECTUS
<PAGE>
Among the risks affecting the utilities industry are the following: risks of
increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and the effects of
regulatory changes, such as the possible adverse effects of profits on recent
increased competition within the telecommunications, electric and natural gas
industries and the uncertainties resulting from companies within these
industries diversifying into new domestic and international businesses, as well
as from agreements by many such companies linking future rate increases to
inflation or other factors not directly related to the actual operating profits
of the enterprise.
THE DIVIDEND GROWTH PORTFOLIO
The investment objective of the DIVIDEND GROWTH PORTFOLIO is to provide
reasonable current income and long-term growth of income and capital. There is
no assurance that the objective will be achieved. The DIVIDEND GROWTH PORTFOLIO
seeks to achieve its investment objective primarily through investments in
common stock of companies with a record of paying dividends and the potential
for increasing dividends. The net asset value of the DIVIDEND GROWTH PORTFOLIO'S
shares will fluctuate with changes in market values of portfolio securities. The
DIVIDEND GROWTH PORTFOLIO will attempt to avoid speculative securities or those
with speculative characteristics.
The investment objective of the DIVIDEND GROWTH PORTFOLIO may not be changed
without the approval of the shareholders of the DIVIDEND GROWTH PORTFOLIO. The
following policies may be changed by the Trustees of the Fund without
shareholder approval:
(1) Up to 30% of the value of the DIVIDEND GROWTH PORTFOLIO's total assets may
be invested in: (a) convertible debt securities (see "General Portfolio
Techniques" below), convertible preferred securities, warrants (see "General
Portfolio Techniques" below), U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities), corporate debt securities which are rated at the time of
purchase Baa or better by Moody's Investors Service, Inc. or BBB or better by
Standard & Poor's Corporation or which, if unrated, are deemed to be of
comparable quality by the Investment Manager (see "General Portfolio Techniques"
below for a discussion of the characteristics and risks of investments in zero
coupon securities and fixed-income securities rated Baa or BBB and a discussion
of credit risk and interest rate risk, to which risks all fixed-income
securities are subject) and/or money market instruments (see "General Portfolio
Techniques" below) when, in the opinion of the Investment Manager, the projected
total return on such securities is equal to or greater than the expected total
return on equity securities or when such holdings might be expected to reduce
the volatility of the portfolio (for purposes of this provision, the term "total
return" means the difference between the cost of a security and the aggregate of
its market value and dividends received); or (b) in money market instruments
under any one or more of the following circumstances: (i) pending investment of
proceeds of sale of the DIVIDEND GROWTH PORTFOLIO'S shares or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; or
(iii) to maintain liquidity for the purpose of meeting anticipated redemptions.
(2) Notwithstanding any of the foregoing limitations, the DIVIDEND GROWTH
PORTFOLIO may invest more than 30% of the value of its total assets in money
market instruments to maintain, temporarily, a "defensive" posture when, in the
opinion of the Investment Manager, it is advisable to do so because of economic
or market conditions.
The DIVIDEND GROWTH PORTFOLIO may enter into repurchase agreements, invest in
American Depository Receipts, invest in zero coupon securities, invest in real
estate investment trusts, lend its portfolio securities, purchase securities
which are issued in private placements or are otherwise not readily marketable,
purchase securities on a when-issued or delayed delivery basis or a "when, as
and if issued" basis, and purchase or sell securities on a forward commitment
basis, in each case in accordance with the description of those investments and
techniques (and subject to the risks) set forth under "General Portfolio
Techniques" below and in the Statement of Additional Information.
The DIVIDEND GROWTH PORTFOLIO is authorized to engage in transactions involving
options and futures contracts which would be eligible for use by the UTILITIES
PORTFOLIO, as described under "Options and Futures Transactions" under "General
Portfolio Techniques" below and in the Statement of Additional Information. The
DIVIDEND GROWTH PORTFOLIO does not, however, presently intend to engage in such
options and futures transactions and will not do so unless and until the Fund's
prospectus has been revised to reflect this.
THE VALUE-ADDED MARKET PORTFOLIO
The investment objective of the VALUE-ADDED MARKET PORTFOLIO is to achieve a
high level of total return on its assets through a combination of capital
appreciation and current income. The investment objective of the VALUE-ADDED
MARKET PORTFOLIO may not be changed without the approval of the shareholders of
the Portfolio. There can be no assurance that the objective will be achieved.
The investment policies discussed below may be changed by the Trustees of the
Fund without shareholder approval:
The VALUE-ADDED MARKET PORTFOLIO will seek to attain its investment objective by
investing, on an equally-weighted basis, in a diversified portfolio of common
stocks of the companies which are included in the Standard & Poor's 500
Composite Stock Price Index (the "S&P Index"). Standard & Poor's 500 is a
trademark of Standard & Poor's Corporation ("S&P") and has been licensed for use
by the Fund. The VALUE-ADDED MARKET
23 - PROSPECTUS
<PAGE>
PORTFOLIO is not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the VALUE-ADDED MARKET
PORTFOLIO. The S&P Index consists of 500 common stocks selected by S&P, most of
which are listed on the New York Stock Exchange. Inclusion of a stock in the S&P
Index implies no opinion by S&P as to the quality of the stock as an investment.
The S&P Index is determined, composed and calculated by S&P without regard to
the VALUE-ADDED MARKET PORTFOLIO. S&P is neither a sponsor of, nor in any way
affiliated with, the VALUE-ADDED MARKET PORTFOLIO, and S&P makes no
representation or warranty, express or implied, on the advisability of investing
in the VALUE-ADDED MARKET PORTFOLIO or as to the ability of the S&P Index to
track general stock market performance, and S&P disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
S&P Index or any data included therein. S&P has no connection with the
VALUE-ADDED MARKET PORTFOLIO other than the licensing to the Investment Manager
of the use of the S&P Index in connection with the VALUE-ADDED MARKET PORTFOLIO.
The VALUE-ADDED MARKET PORTFOLIO invests in the stocks included in the S&P Index
on an equally-weighted basis; that is, to the extent practicable and subject to
the specific investment policies and restrictions described below, an equal
portion of the VALUE-ADDED MARKET PORTFOLIO's assets is invested in each of the
500 securities in the S&P Index. This differs from the S&P Index and nearly all
other major indexes, which generally are weighted on a market-capitalization
basis. For example, the 50 largest capitalization issuers in the S&P Index
represent approximately 45% of the S&P Index. However, in accordance with its
investment policies, the VALUE-ADDED MARKET PORTFOLIO will strive to maintain
each stock holding equally, so that, subject to the specific investment policies
and investment restrictions described below, approximately 0.20 of 1% of the
VALUE-ADDED MARKET PORTFOLIO's total invested assets will be invested in each of
the 500 companies included in the S&P Index. The equal weighting technique is
based on the Investment Manager's statistical analysis that most portfolio
performance is usually generated by only one-quarter to one-third of the
portfolio. Since there is no certainty that any specific company or industry
selection, even within a broad-based index such as the S&P Index, will achieve
superior performance, the Investment Manager believes equal-weighting may
benefit the VALUE-ADDED MARKET PORTFOLIO in seeking to attain its investment
objective.
The holdings of the VALUE-ADDED MARKET PORTFOLIO will be adjusted by the
Investment Manager not less than quarterly to reflect changes in the VALUE-ADDED
MARKET PORTFOLIO's asset levels and in the relative values of the common stocks
held by the VALUE-ADDED MARKET PORTFOLIO so that following each adjustment the
value of the VALUE-ADDED MARKET PORTFOLIO's investment in each security will be
equal to the extent practicable. In addition, whenever a company is eliminated
from or added to the S&P Index, the VALUE-ADDED MARKET PORTFOLIO will sell or
purchase the stock of such company, as the case may be, as soon as practicable.
Accordingly, securities may be purchased and sold by the VALUE-ADDED MARKET
PORTFOLIO when such purchases and sales would not be made under traditional
investment criteria.
In addition, while the Investment Manager will not actively manage the portfolio
other than to follow the guidelines set forth above for following an
equally-weighted S&P Index, it may eliminate one or more securities (or elect
not to increase the VALUE-ADDED MARKET PORTFOLIO's position in such securities),
notwithstanding the continued listing of such securities in the S&P Index, in
the following circumstances: (a) the stock is no longer publicly traded, such as
in the case of a leveraged buyout or merger; (b) an unexpected adverse
development with respect to a company, such as bankruptcy or insolvency; (c) in
the view of the Investment Manager, there is a high degree of risk with respect
to a company that bankruptcy or insolvency will occur; or (d) in the view of the
Investment Manager, based on its consideration of the price of a company's
securities, the depth of the market in those securities and the amount of those
securities held or to be held by the VALUE-ADDED MARKET PORTFOLIO, retaining
shares of a company or making any additional purchases would be inadvisable
because of liquidity risks. The Investment Manager will monitor on an ongoing
basis all companies falling within any of the circumstances described in this
paragraph, and will return such company's shares to the VALUE-ADDED MARKET
PORTFOLIO's holdings, or recommence purchases, when and if those conditions
cease to exist.
The VALUE-ADDED MARKET PORTFOLIO may purchase futures contracts on stock indexes
at a time when it is not fully invested on account of additional cash invested
in the Portfolio or income received by the Portfolio. Purchase of a futures
contract in those circumstances serves as a temporary substitute for the
purchase of individual stocks which may then be purchased in orderly fashion.
The VALUE-ADDED MARKET PORTFOLIO may enter into repurchase agreements, may lend
its portfolio securities and may purchase common stock, including American
Depository Receipts ("ADRs"), of foreign corporations represented in the S&P
Index (such common stock and ADRs are listed on the New York Stock Exchange, the
American Stock Exchange or the NASDAQ Market System) (see "General Portfolio
Techniques" below and in the Statement of Additional Information).
A portion of the VALUE-ADDED MARKET PORTFOLIO's assets, not exceeding 25% of its
total assets, may be invested temporarily in money market instruments (see
"General Portfolio Techniques" below) under any one or more of the following
circumstances: (a) pending investment of proceeds of sale of shares of the
VALUE-ADDED MARKET PORTFOLIO; (b) pending settlement of purchases of portfolio
securities; or (c) to maintain liquidity for the purposes of meeting anticipated
redemptions.
THE GROWTH PORTFOLIO
The investment objective of the GROWTH PORTFOLIO is long-term growth of capital.
This objective may not be changed without the approval of the shareholders of
the GROWTH PORTFOLIO. There is no assurance that the objective will be achieved.
The following investment policies may be changed by the Trustees of the Fund
without shareholder approval:
24 - PROSPECTUS
<PAGE>
The GROWTH PORTFOLIO invests primarily in common stocks and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings. The Portfolio seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its total assets in common
stocks and convertible securities, including warrants (see "General Portfolio
Techniques" below). There are no minimum rating or quality requirements with
respect to convertible securities in which the Portfolio may invest and, thus,
all or some of such securities may be below investment grade (see "General
Portfolio Techniques" below). See the Appendix for a discussion of ratings of
fixed-income securities.
The Sub-Adviser, MSAM, invests the assets of the GROWTH PORTFOLIO by pursuing
its "equity growth" philosophy. That strategy involves a two-step process to
achieve value for the Portfolio's shareholders by taking advantage of
unrecognized appreciation potential created by changes in the economic, social
and political environments. Pursuant to its approach, the Sub-Adviser emphasizes
individual security selection. Individual companies are chosen for investment by
the GROWTH PORTFOLIO, based on factors including but not limited to: potential
growth in earnings and dividends; quality of management; new products and/or new
markets; research and development capabilities; historical rate of return on
equity and invested capital; cash flow and balance sheet strength; and forcing
value through company initiatives such as cost reduction or share repurchase. As
a second step, the Sub-Adviser determines the weightings that the selected
companies and industries will have in the portfolio.
The GROWTH PORTFOLIO intends to invest primarily, but not exclusively, in
companies having stock market capitalizations (calculated by multiplying the
number of outstanding shares of a company by the current market price) of at
least $1 billion. The Sub-Adviser anticipates that the GROWTH PORTFOLIO will
focus its investments in a relatively limited number of companies, although the
Sub-Adviser continuously monitors up to 250 companies for possible investment by
the Portfolio. The Portfolio's holdings are changed by the Sub-Adviser as
warranted based on changes in the overall market or economic environment, as
well as factors specific to particular companies.
While the GROWTH PORTFOLIO invests primarily in common stocks and securities
convertible into common stock, under ordinary circumstances it may invest up to
35% of its total assets in money market instruments, which are short-term
(maturities of up to thirteen months) fixed-income securities issued by private
and governmental institutions. Money market instruments in which the GROWTH
PORTFOLIO may invest are set forth under "General Portfolio Techniques" below.
There may be periods during which, in the opinion of the Sub-Adviser, market
conditions warrant reduction of some or all of the GROWTH PORTFOLIO's securities
holdings. During such periods, the Portfolio may adopt a temporary "defensive"
posture in which greater than 35% of its total assets is invested in money
market instruments or cash.
The GROWTH PORTFOLIO may enter into repurchase agreements, invest in foreign
securities (including American Depository Receipts, European Depository Receipts
or other similar securities convertible into securities of foreign issuers),
invest in real estate investment trusts, lend its portfolio securities, purchase
securities which are issued in private placements or are otherwise not readily
marketable, purchase securities on a when-issued or delayed delivery basis or a
"when, as and if issued" basis, and purchase or sell securities on a forward
commitment basis, in each case in accordance with the description of these
investments and techniques (and subject to the risks) set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information.
The GROWTH PORTFOLIO is authorized to engage in transactions involving options
and futures contracts that would be eligible for use by the UTILITIES PORTFOLIO,
as described under "Options and Futures Transactions" under "General Portfolio
Techniques" below and in the Statement of Additional Information. The GROWTH
PORTFOLIO does not, however, presently intend to engage in such options and
futures transactions and will not do so unless and until the Fund's prospectus
has been revised to reflect this.
THE AMERICAN VALUE PORTFOLIO
The investment objective of the AMERICAN VALUE PORTFOLIO is long-term capital
growth consistent with an effort to reduce volatility. This objective may not be
changed without the approval of the shareholders of the AMERICAN VALUE
PORTFOLIO. There is no assurance that the objective will be achieved. The
investment policies discussed below may be changed by the Trustees of the Fund
without shareholder approval:
The AMERICAN VALUE PORTFOLIO seeks to achieve its investment objective by
investing in a diversified portfolio of securities consisting principally of
common stocks. The AMERICAN VALUE PORTFOLIO utilizes an investment process that
places primary emphasis on seeking to identify industries, rather than
individual companies, as prospects for capital appreciation. The Investment
Manager seeks to invest the assets of the Portfolio in those industries that, at
the time of investment, are attractively valued given their above average
relative earnings growth potential at that time. Therefore, the Portfolio is
typically overweighted in those sectors deemed to be attractive given their
potential for above average relative earnings growth.
The Investment Manager seeks to identify what stage of the business cycle the
economy is in and which industry groups have historically outperformed the
overall market during that stage of the cycle, i.e., typically, groups that tend
to have the highest relative earnings growth at that point in the cycle. The
Investment Manager also analyzes secular trends such as demographics,
international trade, etc., that could cause the current cycle to differ from
prior cycles and attempts to weight the portfolio appropriately, given those
factors.
Following selection of the AMERICAN VALUE PORTFOLIO'S specific investments, the
Investment Manager will attempt to allocate the
25 - PROSPECTUS
<PAGE>
assets of the AMERICAN VALUE PORTFOLIO so as to reduce the volatility of its
portfolio. In doing so, the AMERICAN VALUE PORTFOLIO may hold a portion of its
portfolio in fixed-income securities in an effort to moderate extremes of price
fluctuations. The AMERICAN VALUE PORTFOLIO may invest up to 35% of its total
assets in common stocks of non-U.S. companies including American Depository
Receipts (see "General Portfolio Techniques" below), in companies in industries
which have not been determined to be attractively valued or moderately
attractively valued by the Investment Manager, and in convertible debt
securities and warrants (see "General Portfolio Techniques" below), convertible
preferred securities, U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities) (see "General Portfolio Techniques" below) and investment
grade corporate debt securities when, in the opinion of the Investment Manager,
the projected total return on such securities is equal to or greater than the
expected total return on common stocks, or when such holdings might be expected
to reduce the volatility of the portfolio, and in money market instruments (see
"General Portfolio Techniques" below) under any one or more of the following
circumstances: (i) pending investment of proceeds of sale of shares of the
AMERICAN VALUE PORTFOLIO or of portfolio securities; (ii) pending settlement of
purchases of portfolio securities; or (iii) to maintain liquidity for the
purpose of meeting anticipated redemptions. Greater than 35% of the AMERICAN
VALUE PORTFOLIO'S total assets may be invested in money market instruments to
maintain, temporarily, a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of economic or market
conditions. The term investment grade consists of fixed-income securities rated
Baa or higher by Moody's Investors Service Inc. or BBB or higher by Standard &
Poor's Corporation or, if not rated, determined to be of comparable quality by
the Investment Manager (see "General Portfolio Techniques" below for a
discussion of the characteristics and risks of investments in fixed-income
securities rated Baa or BBB and a discussion of credit risk and interest rate
risk, to which risks all fixed-income securities are subject).
Because prices of stocks fluctuate from day to day, the value of an investment
in the AMERICAN VALUE PORTFOLIO will vary based upon the Portfolio's investment
performance. The AMERICAN VALUE PORTFOLIO is intended for long-term investors
who can accept the risks involved in seeking long-term growth of capital through
investment in the securities of large, medium and small-capitalization
companies. Emphasis on attractive industries may run contrary to general market
assessments and may involve risks associated with departure from typical S&P 500
industry weightings. It should be recognized that investing in small and
medium-capitalization companies involves greater risk than is customarily
associated with investing in more established companies.
Under normal circumstances, at least 65% of the AMERICAN VALUE PORTFOLIO'S total
assets will be invested in common stocks of U.S. companies in industries which,
at the time of purchase, were determined to be attractively valued or moderately
attractively valued given their above average relative earnings growth potential
at that time.
The foregoing limitations apply at the time of acquisition based on the last
determined market value of the assets of the AMERICAN VALUE PORTFOLIO, and any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total assets will not require elimination of
any security from the portfolio.
Since the investment strategy of the AMERICAN VALUE PORTFOLIO involves an
ongoing process of determination by the Investment Manager of industries that
have the most promising potential for relative earnings growth, it is
anticipated that the Portfolio will have more frequent purchase and sale
transactions than most other Portfolios. Therefore, as noted below under
"General Portfolio Techniques -- Portfolio Trading," the annual portfolio
turnover rate of the AMERICAN VALUE PORTFOLIO may exceed 400%.
The AMERICAN VALUE PORTFOLIO may enter into repurchase agreements, invest in
zero coupon securities, invest in real estate investment trusts, lend its
portfolio securities, engage in futures contracts and options transactions,
purchase securities which are issued in private placements or are otherwise not
readily marketable, and purchase securities on a when-issued or delayed delivery
basis or a "when, as and if issued" basis, and purchase or sell securities on a
forward commitment basis, in each case in accordance with the description of
these investments and techniques (and subject to the risks) set forth under
"General Portfolio Techniques" below and in the Statement of Additional
Information.
THE MID-CAP GROWTH PORTFOLIO
The investment objective of the MID-CAP GROWTH PORTFOLIO is long-term capital
growth. The objective cannot be changed without the approval of the shareholders
of the MID-CAP GROWTH PORTFOLIO. There is no assurance that the objective will
be achieved. The investment policies discussed below may be changed by the
Trustees without shareholder approval:
The MID-CAP GROWTH PORTFOLIO seeks to achieve its investment objective by
investing, under normal circumstances, at least 65% of its total assets in a
diversified portfolio of domestic and foreign equity securities of "mid-cap"
companies. A mid-cap company is a company whose market capitalization falls
within the range of $250 million to $5 billion. The MID-CAP GROWTH PORTFOLIO may
invest up to 35% of its total assets in (i) U.S. Government Securities and
investment grade corporate debt securities (see "General Portfolio Techniques"
below); or (ii) equity securities of companies with market capitalizations which
fall outside of the range of $250 million to $5 billion at the time of purchase
as long as such investments are consistent with the Portfolio's investment
objective. The MID-CAP GROWTH PORTFOLIO may invest up to 35% of its total assets
in the equity securities of non-U.S. companies, including American or other
Depository Receipts, rights, warrants, and the direct purchase of foreign
securities (see "General Portfolio Techniques" below).
26 - PROSPECTUS
<PAGE>
Equity securities in which the MID-CAP GROWTH PORTFOLIO may invest include
common stocks and securities convertible into common stocks (see "General
Portfolio Techniques" below). The MID-CAP GROWTH PORTFOLIO utilizes an
investment process that places primary emphasis on seeking to identify
industries, rather than individual companies, as prospects for capital
appreciation and whereby the Investment Manager seeks to invest assets of the
Portfolio in industries it considers to be attractive at the time of purchase
and to sell those it considers overvalued. The Investment Manager will invest
principally in those mid-cap companies that in the opinion of the Investment
Manager have above-average relative growth potential. Mid-cap companies
typically have a better growth potential than their large-cap counterparts
because they are still in the early and more dynamic period of their corporate
existences. Often mid-size companies and the industries in which they are
focused are still evolving as opposed to the more mature industries served by
large-cap companies. Moreover, mid-cap companies are not considered "emerging"
stocks, nor are they as volatile as small-cap firms. This is due to the fact
that mid-cap companies have increased liquidity, attributable to their larger
market capitalization as well as longer and more established track records, and
a stronger market presence and dominance than small-cap firms. Consequently,
because of the better growth inherent in these companies and their industries,
mid-cap companies offer superior return potential to large-cap companies; yet,
owing to their relatively larger size and better recognition in the investment
community, they have a reduced risk profile compared to smaller, emerging or
micro-cap companies.
In selecting stocks within the mid-cap universe, the Investment Manager will use
an industry approach that seeks to diversify the assets of the MID-CAP GROWTH
PORTFOLIO in approximately 18 to 35 industries. The Portfolio will hold less
than 5% of its net assets in any one security and will hold less than 10% of its
net assets in any one industry. Companies will be selected based on at least
three-year track records, and purchases will be primarily focused on companies
that: (1) have the potential for above-average relative earnings growth; (2) are
focused in industries that are rapidly expanding or have the potential to see
increasing sales or earnings; (3) historically have had well-defined and
recurring revenues; or (4) are attractive based on an assessment of private
market or franchise values.
After selection of the MID-CAP GROWTH PORTFOLIO's target industries, specific
company investments are selected. In this process, the Investment Manager seeks
to identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals. From the
total of all companies included in the industry valuation process, the
Investment Manager selects a limited number from each industry as representative
of that industry. Such selections are made on the basis of various criteria,
including size and quality of a company, the visibility of its earnings and
various valuation parameters. Valuation screens may include dividend discount
model values, price-to-book ratios, price-to-cash flow values, relative and
absolute price-to-earnings ratios and ratios of price-earnings multiples to
earnings growth. Price and earnings momentum ratings derived from external
sources are also factored into the stock selection decision. Those companies
which the Investment Manager believes to be attractive investments are finally
selected for inclusion in the Portfolio. See below for a discussion of the risks
of mid-cap stocks.
ASSET ALLOCATION. Common stocks, particularly those sought for possible capital
appreciation, have historically experienced a great amount of price fluctuation.
The Investment Manager believes it is desirable to attempt to reduce the risks
of extreme price fluctuations even if such an attempt results, as it likely will
at times, in reducing the probabilities of obtaining greater capital
appreciation. Accordingly, the Investment Manager's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The MID-CAP GROWTH PORTFOLIO may hold a portion of
its portfolio in investment grade fixed-income securities, including convertible
securities, in an effort to moderate extremes of price fluctuation. The
determination of the appropriate asset allocation as between equity and
fixed-income investments will be made by the Investment Manager in its
discretion, based upon its evaluation of economic and market conditions. The
MID-CAP GROWTH PORTFOLIO may, for defensive purposes, invest without limitation
in money market instruments (see "General Portfolio Techniques" below).
MID-CAP STOCKS. Investing in medium-sized market capitalization companies
involves greater risk than is customarily associated with investing in larger,
more established companies. Often mid-size companies and the industries in which
they are focused are still evolving and while this may offer better growth
potential than larger, established companies, it also may make them more
sensitive to changing market conditions. Because prices of stocks, including
mid-cap stocks, fluctuate from day to day, the value of an investment in the
MID-CAP GROWTH PORTFOLIO will vary based upon the Portfolio's investment
performance.
The MID-CAP GROWTH PORTFOLIO may enter into repurchase agreements, invest in
zero coupon securities, invest in real estate investment trusts, engage in
futures contracts and options transactions, lend its portfolio securities,
purchase securities which are issued in private placements or are otherwise not
readily marketable, and purchase securities on a when-issued or delayed delivery
basis or a "when, as and if issued" basis, and purchase or sell securities on a
forward commitment basis, in each case in accordance with the description of
these investments and techniques (and subject to the risks) set forth under
"General Portfolio Techniques" below and in the Statement of Additional
Information.
THE GLOBAL EQUITY PORTFOLIO
The investment objective of the GLOBAL EQUITY PORTFOLIO is to seek to obtain
total return on its assets primarily through long-term capital growth and to a
lesser extent from income. There can be no assurance that the GLOBAL EQUITY
PORTFOLIO will achieve its objective. The investment objective cannot be changed
without the approval of the shareholders of the GLOBAL EQUITY PORTFOLIO.
27 - PROSPECTUS
<PAGE>
The investment policies discussed below may be changed by the Trustees of the
Fund without shareholder approval:
The GLOBAL EQUITY PORTFOLIO will invest at least 65% of its total assets in
equity securities issued by issuers located in various countries, around the
world. The Portfolio's investment portfolio will normally be invested in at
least three separate countries.
The GLOBAL EQUITY PORTFOLIO will seek to achieve its investment objective
through investments in all types of common stocks and equivalents (such as
convertible debt securities and warrants) (see "General Portfolio Techniques"
below), preferred stocks and bonds and other investment grade debt obligations
of domestic and foreign companies and governments and international
organizations, including zero coupon securities. There is no limitation on the
percentage or amount of the GLOBAL EQUITY PORTFOLIO's assets which may be
invested for growth or income. The term investment grade consists of
fixed-income securities rated Baa or higher by Moody's Investors Service Inc. or
BBB or higher by Standard & Poor's Corporation or, if not rated, determined to
be of comparable quality by the Investment Manager (see "General Portfolio
Techniques" below for a discussion of the characteristics and risks of
investments in fixed-income securities rated Baa or BBB and investments in zero
coupon securities, and a discussion of credit risk and interest rate risk, to
which risks all fixed-income securities are subject).
The GLOBAL EQUITY PORTFOLIO will maintain a flexible investment policy and,
based on a worldwide investment strategy, will invest in a diversified portfolio
of securities of companies and governments located throughout the world. Such
securities will generally be those with a record of paying dividends and the
potential for increasing dividends. The percentage of the GLOBAL EQUITY
PORTFOLIO's assets invested in particular geographic sectors will shift from
time to time in accordance with the judgment of the Investment Manager.
The GLOBAL EQUITY PORTFOLIO may also invest in securities of foreign issuers in
the form of American Depository Receipts, European Depository Receipts or other
similar securities convertible into securities of foreign issuers, and invest up
to 10% of its total assets in securities issued by other investment companies
(see the discussion of these securities under "General Portfolio Techniques"
below).
Notwithstanding the GLOBAL EQUITY PORTFOLIO's investment objective of seeking
total return, the GLOBAL EQUITY PORTFOLIO may, for defensive purposes, without
limitation, invest in: obligations of the United States Government, its agencies
or instrumentalities) (see "General Portfolio Techniques" below); cash and cash
equivalents in major currencies; repurchase agreements (see "General Portfolio
Techniques" below) and money market instruments. Money market instruments in
which the GLOBAL EQUITY PORTFOLIO may invest are set forth under "General
Portfolio Techniques" below.
Investors should carefully consider the risks of investing in securities of
foreign issuers and securities denominated in non-U.S. currencies (see "General
Portfolio Techniques" below for a discussion of the characteristics and risks of
investments in foreign securities).
The GLOBAL EQUITY PORTFOLIO may enter into forward foreign currency exchange
contracts, engage in futures contracts and options transactions, purchase
securities which are issued in private placements or are otherwise not readily
marketable, invest in real estate investment trusts, lend its portfolio
securities, purchase securities on a when-issued or delayed delivery basis or a
"when, as and if issued" basis, and purchase or sell securities on a forward
commitment basis, in each case in accordance with the description of those
investments and techniques (and subject to the risks) set forth under "General
Portfolio Techniques" below and in the Statement of Additional Information.
THE DEVELOPING GROWTH PORTFOLIO
The investment objective of the DEVELOPING GROWTH PORTFOLIO is long-term capital
growth. This objective may not be changed without the approval of the
shareholders of the DEVELOPING GROWTH PORTFOLIO. There is no assurance that the
objective will be achieved. The following policies may be changed by the
Trustees of the Fund without shareholder approval:
The DEVELOPING GROWTH PORTFOLIO seeks to achieve capital growth which
significantly exceeds the historical total return of common stocks as measured
by the Standard & Poor's 500 index. The primary emphasis is on the securities of
smaller and medium-sized companies that, in the opinion of the Investment
Manager, have the potential to grow much more rapidly than the economy; at
times, investments may also be made in the securities of larger, established
companies which also have such growth potential. The DEVELOPING GROWTH PORTFOLIO
will normally invest at least 65% of its total assets in the securities of such
companies. In addition to common stock, this portion of the portfolio may also
include convertible securities (see "General Portfolio Techniques" below),
preferred stocks and warrants (see "General Portfolio Techniques" below).
The Investment Manager attempts to identify companies whose earnings growth will
be significantly higher than the average. Dividend income is not generally a
consideration in the selection of stocks for purchase.
The Investment Manager focuses its stock selection for the DEVELOPING GROWTH
PORTFOLIO upon a diversified group of emerging growth companies which have moved
beyond the difficult and extremely risky "start-up" phase and which at the time
of selection show positive earnings with the prospects of achieving significant
further profit gains in at least the next two-to-three years after acquisition.
New technologies, techniques, products or services, cost-reducing measures,
changes in management, capitalization or asset deployment, changes in government
regulations or favorable shifts in other external circumstances may all
contribute to the anticipated phase of growth.
28 - PROSPECTUS
<PAGE>
The application of the DEVELOPING GROWTH PORTFOLIO's investment policies is
basically dependent upon the judgment of the Investment Manager. The proportions
of the Portfolio's assets invested in particular industries will shift from time
to time in accordance with the judgment of the Investment Manager.
The DEVELOPING GROWTH PORTFOLIO may invest up to 35% of its total assets in
fixed-income securities issued or guaranteed by the United States Government,
its agencies or instrumentalities, corporate debt securities which are rated at
the time of purchase Baa or better by Moody's Investors Service Inc. or BBB or
better by Standard & Poor's Corporation or which, if unrated, are deemed to be
of comparable quality by the Investment Manager, including zero coupon
securities (see "General Portfolio Techniques" below for a discussion of the
characteristics and risks of investments in fixed-income securities rated Baa or
BBB and investments in zero coupon securities, and a discussion of credit risk
and interest rate risk, to which risks all fixed-income securities are subject)
and money market instruments. Money market instruments in which the Portfolio
may invest are set forth under "General Portfolio Techniques" below. There may
be periods during which, in the opinion of the Investment Manager, general
market conditions warrant reduction of some or all of the DEVELOPING GROWTH
PORTFOLIO's securities holdings. During such periods, the Portfolio may adopt a
temporary "defensive" posture in which greater than 35% of its total assets are
invested in cash or money market instruments.
The securities in which the DEVELOPING GROWTH PORTFOLIO invests may or may not
be listed on a national stock exchange, but if they are not so listed, will
generally have an established over-the-counter market.
Since the investment strategy of the DEVELOPING GROWTH PORTFOLIO involves an
ongoing process of determination by the Investment Manager of emerging growth
companies that meet the stock selection process discussed above, it is
anticipated that the Portfolio will have more frequent purchase and sale
transactions than most other Portfolios. Therefore, as noted below under
"General Portfolio Techniques -- Portfolio Trading," the annual portfolio
turnover rate of the DEVELOPING GROWTH PORTFOLIO may exceed 300%.
The DEVELOPING GROWTH PORTFOLIO may also enter into repurchase agreements,
invest in foreign securities, including American Depository Receipts, European
Depository Receipts or similar securities convertible into securities of foreign
issuers, invest in real estate investment trusts, lend its portfolio securities,
purchase securities which are issued in private placements or which are not
otherwise readily marketable, purchase securities on a when-issued or delayed
delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of those investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
The DEVELOPING GROWTH PORTFOLIO is authorized to engage in transactions
involving options and futures contracts that would be eligible for use by the
UTILITIES PORTFOLIO, as described under "Options and Futures Transactions" under
"General Portfolio Techniques" below and in the Statement of Additional
Information. The DEVELOPING GROWTH PORTFOLIO does not, however, presently intend
to engage in such options and futures transactions and will not do so unless and
until the Fund's prospectus has been revised to reflect this.
LEVERAGING. The DEVELOPING GROWTH PORTFOLIO may borrow money, but only from a
bank and in an amount up to 25% of the value of the Portfolio's total assets,
taken at the lower of market value or cost, not including the amount borrowed.
When the Portfolio borrows it will be because it seeks to enhance capital
appreciation by leveraging its investments through purchasing securities with
the borrowed funds. Any investment gains (and/ or investment income) made with
the additional monies in excess of interest paid will cause the net asset value
of the Portfolio's shares (and/or the Portfolio's net income per share) to rise
to a greater extent than would otherwise be the case. Conversely, if the
investment performance of the additional monies fails to cover their cost to the
Portfolio, net asset value (and/or net income per share) will decrease to a
greater extent than would otherwise be the case. This is the speculative factor
involved in leverage. The Portfolio will be required to maintain an asset
coverage (including the proceeds of borrowings) of at least 300% of such
borrowings in accordance with the provisions of the Investment Company Act of
1940, as amended (the "Act"). The investment policy also provides that the
Portfolio may not purchase or sell a security on margin.
THE EMERGING MARKETS PORTFOLIO
The investment objective of the EMERGING MARKETS PORTFOLIO is long-term capital
appreciation. This objective may not be changed without the approval of the
shareholders of the EMERGING MARKETS PORTFOLIO. There can be no assurance that
the objective will be achieved. The following policies may be changed by the
Trustees of the Fund without shareholder approval:
The EMERGING MARKETS PORTFOLIO will seek to achieve its investment objective by
investing at least 65% of its total assets at all times, except for temporary
and defensive purposes, in equity securities of companies in emerging market
countries. For the purposes of this Portfolio, an "emerging market country" is
any country that is considered an emerging or developing country by the
International Bank of Reconstruction and Development (the "World Bank"), as well
as Hong Kong and Singapore. Presently, there are approximately 158 countries
considered to be emerging market countries. These countries generally include
every nation in the world except the United States, Canada, Japan, Australia,
New Zealand, most nations located in Western Europe and certain other nations
located in Asia. A list of the countries not falling within the World Bank
definition of an emerging market country is set forth in the Statement of
Additional Information.
29 - PROSPECTUS
<PAGE>
The EMERGING MARKETS PORTFOLIO will invest primarily in equity securities of
companies that (i) are organized under the laws of emerging market countries;
(ii) regardless of where organized, derive at least 50% of their revenues from
goods produced or sold, investments made, or services performed in emerging
market countries; (iii) maintain at least 50% of their assets in emerging market
countries; or (iv) have securities which are traded principally on a stock
exchange in an emerging market country. Under normal circumstances, the
Portfolio will invest in at least five emerging market countries. Substantially
all of the Portfolio's investments may be denominated in currencies other than
the U.S. dollar. See "Risks of Investing in Emerging Market Countries" below.
The EMERGING MARKETS PORTFOLIO may invest up to 35% of its total assets in (i)
convertible and non-convertible fixed-income securities of government or
corporate issuers located in emerging market countries; (ii) equity and
fixed-income securities of issuers in developed countries; and (iii) cash and
money market instruments. See "General Portfolio Techniques" below for a
discussion of investments in convertible securities and money market
instruments.
There may be periods during which, in the opinion of the Sub-Adviser, TCW,
market conditions warrant reduction of some or all of the EMERGING MARKETS
PORTFOLIO's securities holdings. During such periods, the Portfolio may adopt a
temporary "defensive" posture in which any amount of its total assets may be
invested in obligations of the United States government, its agencies or
instrumentalities, including zero coupon securities (see "General Portfolio
Techniques" below), money market instruments and cash.
The equity securities in which the EMERGING MARKETS PORTFOLIO may invest include
common and preferred stock (including convertible preferred stock), stock
purchase warrants and rights, equity interests in trusts and partnerships and
American, Global or other types of Depository Receipts. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized market. See "General Portfolio Techniques" below for a
discussion of investments in warrants, other investment companies and American,
Global or other types of Depository Receipts.
The fixed-income securities (including convertible securities) of government or
corporate issuers located in emerging market countries, the United States or
other developed countries in which the EMERGING MARKETS PORTFOLIO may invest may
consist of fixed-income securities that are unrated or rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Corporation ("S&P"), including zero coupon securities. There is no limit on the
percentage of the Portfolio's total assets which may be invested in fixed-income
securities which are unrated or rated below investment grade. Since the EMERGING
MARKETS PORTFOLIO does not have any minimum quality rating standard for such
investments, the Portfolio may invest in fixed-income securities rated as low as
C by Moody's or D by S&P. See "General Portfolio Techniques" below for a
discussion of the special investment considerations involved in investment in
lower-rated securities, commonly known as "junk bonds," a discussion of zero
coupon securities, and a discussion of credit risk and interest rate risk, to
which risks all fixed-income securities are subject. The Portfolio is not
subject to any restrictions on the maturities of the fixed-income securities it
holds. A description of Moody's and S&P ratings is set forth in the Appendix.
The EMERGING MARKETS PORTFOLIO's investments in debt obligations of government
issuers in emerging market countries will consist of: (i) debt securities or
obligations issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in emerging market
countries (including participations in loans between governments and financial
institutions), (ii) debt securities or obligations issued by government owned,
controlled or sponsored entities located in emerging market countries, and (iii)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the entities
described above ("Sovereign Debt"). The Sovereign Debt held by the Portfolio
will take the form of bonds (including Brady Bonds), notes, bills, debentures,
warrants, short-term paper, loan participations, loan assignments and securities
or interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of such Sovereign Debt. Certain
Sovereign Debt held by the Portfolio will not be traded on any securities
exchange. See the discussion of Sovereign Debt and Brady Bonds below and in the
Statement of Additional Information.
U.S. and non-U.S. corporate fixed-income securities in which the EMERGING
MARKETS PORTFOLIO may invest include debt securities, convertible securities and
preferred stocks of corporate issuers.
The EMERGING MARKETS PORTFOLIO may also enter into repurchase agreements and
forward foreign currency exchange contracts, engage in various futures and
options transactions, purchase securities which are issued in private placements
or are otherwise not readily marketable, invest in real estate investment
trusts, lend its portfolio securities, purchase securities on a when-issued or
delayed delivery basis or a "when, as and if issued" basis, and purchase or sell
securities on a forward commitment basis, in each case in accordance with the
description of these investments and techniques (and subject to the risks) set
forth under "General Portfolio Techniques" below and in the Statement of
Additional Information.
In its investment strategy, the Sub-Adviser utilizes a top-down/ bottom-up
approach, beginning with an evaluation of the country in which the proposed
investment is to be made, including relevant external developments and their
implications. Following the country level of review, investments in specific
securities will be made after completion of a fundamental analysis of
securities, industries and companies by the Sub-Adviser, including consideration
of liquidity, market capitalization, a company's existing and expected future
financial position, relative
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competitive position in the domestic and export markets, technology, recent
developments and profitability, together with overall growth prospects. Other
considerations include management expertise, government regulation and costs of
labor and raw materials. The EMERGING MARKETS PORTFOLIO's investments will be
allocated among emerging market countries in accordance with the Sub-Adviser's
judgment as to where the best investment opportunities exist.
RISKS OF INVESTING IN EMERGING MARKET COUNTRIES. Investors should carefully
consider the risks of investing in securities of foreign issuers and securities
denominated in non-U.S. currencies. See "General Portfolio Techniques" below for
a discussion of the characteristics and risks of investments in foreign
securities. Investors should recognize that investing in securities of emerging
market countries involves certain risks, and special considerations, including
those set forth below, which are not typically associated with investing in
securities of U.S. companies or issuers located in foreign developed countries.
The securities markets of emerging market countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the United States. The limited size of many emerging securities markets and
limited trading volume in issuers compared to volume of trading in U.S.
securities could cause prices to be erratic for reasons apart from factors that
affect the quality of the securities. For example, limited market size may cause
prices to be unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities,
especially in these markets.
In addition, emerging market countries' exchanges and broker-dealers are
generally subject to less government and exchange scrutiny and regulation than
their American counterparts. Brokerage commissions, dealer concessions,
custodial expenses and other transaction costs may be higher on foreign markets
than in the U.S. Thus, the EMERGING MARKETS PORTFOLIO's operating expenses are
expected to be higher than those of investment companies investing primarily in
domestic or other more established market regions. Also, differences in
clearance and settlement procedures on foreign markets may occasion delays in
settlements of Portfolio trades effected in such markets. Inability to dispose
of portfolio securities due to settlement delays could result in losses to the
Portfolio due to subsequent declines in value of such securities and the
inability of the Portfolio to make intended security purchases due to settlement
problems could result in a failure of the Portfolio to make potentially
advantageous investments.
Many of the emerging market countries may be subject to a greater degree of
economic, political and social instability than is the case in the United States
and Western European countries. Such instability may result from, among other
things, the following: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. Such social, political and economic instability could
significantly disrupt the principal financial markets in which the EMERGING
MARKETS PORTFOLIO invests and adversely affect the value of the Portfolio's
assets.
The economies of most of the emerging market countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners, principally, the
United States, Japan, China and the European Economic Community. The enactment
by the United States or other principal trading partners of protectionist trade
legislation, reduction of foreign investment in the local economies and general
declines in the international securities markets could have a significant
adverse effect upon the securities markets of emerging market countries. In
addition, the economies of some of the emerging market countries such as
Indonesia, Malaysia, Mexico and Venezuela, for example, are vulnerable to
weakness in world prices for their commodity exports, including crude oil. There
may be the possibility of expropriations, confiscatory taxation, political,
economic or social instability or diplomatic developments which would adversely
affect assets of the Portfolio held in foreign countries.
Governments in certain emerging market countries participate to a significant
degree, through ownership interests or regulation, in their respective
economies. Action by these governments could have a significant adverse effect
on market prices of securities and payment of dividends.
Certain emerging market countries are among the largest debtors to commercial
banks and foreign governments. Trading in Sovereign Debt involves a high degree
of risk, since the governmental entity that controls the repayment of Sovereign
Debt may not be willing or able to repay the principal and/or interest of such
debt obligations when they become due, due to factors such as debt service
burden, political constraints, cash flow situation and other national economic
factors. As a result, governments of emerging market countries may default on
their Sovereign Debt, which may require holders of such Sovereign Debt to
participate in debt rescheduling or additional lending to defaulting
governments. There is no bankruptcy proceeding by which defaulted Sovereign Debt
may be collected in whole or in part. Currently, Brazil is the largest debtor
among developing countries, Mexico is the second largest and Argentina the
third. At times certain emerging market countries have declared moratoria on the
payment of principal and/or interest on external debt.
"Brady Bonds," which were issued under the "Brady Plan" in exchange for loans
and cash in connection with restructurings in various emerging market countries'
external debt markets in 1990, have been issued in various currencies, primarily
the U.S. dollar, and are actively traded in the over-the-counter secondary
market for the debt of emerging market countries. In the case of U.S. dollar
denominated collateralized Brady Bonds, the bonds
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are collateralized in full as to principal by U.S. Treasury zero coupon bonds of
the same maturity. In addition, at least one year of rolling interest payments
are collateralized by cash or other investments.
The governments of some emerging market countries, to varying degrees, have been
engaged in programs of selling part or all of their stakes in government-owned
or government-controlled enterprises ("privatizations"). The Sub-Adviser
believes that privatizations may offer investors opportunities for significant
capital appreciation and intends to invest assets of the EMERGING MARKETS
PORTFOLIO in privatizations in appropriate circumstances. In certain emerging
market countries, the ability of foreign persons, such as the Portfolio, to
participate in privatizations may be limited by local law, or the terms on which
the Portfolio may be permitted to participate may be less advantageous than
those for local investors. There can be no assurance that privatization programs
will continue or be successful.
Most emerging market countries 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 very negative
effects on the economies and securities markets of certain emerging market
countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Act limits the Portfolio's investments in
any equity security of an issuer which, in its most recent fiscal year, derived
more than 15% of its revenues from "securities related activities," as defined
by the rules thereunder.
Many of the currencies of emerging market countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Any devaluations in the currencies
in which portfolio securities are denominated may have a detrimental impact on
the EMERGING MARKETS PORTFOLIO.
Some emerging market countries also may have managed currencies which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in most emerging markets or to securities of issuers
domiciled or principally engaged in business in emerging markets. This may limit
the Portfolio's ability to effectively hedge its investments in emerging
markets. Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currencies should rise. In addition, it may
not be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
As a result of the absence of established securities markets and publicly-owned
corporations in certain emerging market countries, as well as restrictions on
direct investment by foreign entities, the Portfolio may be able to invest in
such countries solely or primarily through American Depository Receipts
("ADRs"), Global Depository Receipts ("GDRs") (see "General Portfolio
Techniques" below) or similar securities and government approved investment
vehicles. For example, due to Chile's current investment restrictions (in most
cases capital invested directly in Chile cannot be repatriated for at least one
year), the Portfolio's investments in Chile primarily will be through investment
in ADRs, GDRs and established Chilean investment companies not subject to
repatriation restrictions.
The EMERGING MARKETS PORTFOLIO may not invest more than 15% of its net assets in
illiquid securities. The Portfolio will treat any emerging market country's
securities that are subject to restrictions on repatriation for more than seven
days, as well as any securities issued in connection with an emerging market
country's debt conversion programs that are restricted as to remittance of
invested capital or profits, as illiquid securities for purposes of this
limitation.
Certain emerging market countries may impose unusually high withholding taxes on
dividends payable to the EMERGING MARKETS PORTFOLIO, thereby effectively
reducing the Portfolio's investment income.
GENERAL PORTFOLIO TECHNIQUES
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH PORTFOLIO may invest in
fixed-rate and adjustable rate United States mortgage-backed securities
("Mortgage-Backed Securities"). There are currently three basic types of U.S.
Mortgage-Backed Securities: (i) those issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
(securities issued by GNMA, but not those issued by FNMA or FHLMC, are backed by
the "full faith and credit" of the United States); (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
Securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. (Mortgage-
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Backed Securities of the latter category are not considered Government
Securities for purposes of the investment policies of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO. Canadian Mortgage-Backed Securities, in which
that Portfolio may also invest, are described above under "The North American
Government Securities Portfolio.")
The Portfolios will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders such as banks, broker-dealers and
financing corporations and guaranteed, to the extent provided in such
securities, by the United States Government or one of its agencies or
instrumentalities. Such securities, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semi-annually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Portfolios may
invest include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA
certificates are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. FNMA is a federally
chartered, privately owned corporation and FHLMC is a corporate instrumentality
of the United States. FNMA and FHLMC certificates are not backed by the full
faith and credit of the United States, but the issuing agency or instrumentality
has the right to borrow, to meet its obligations, from an existing line of
credit with the U.S. Treasury. The U.S. Treasury has no legal obligation to
provide such line of credit and may choose not to do so. Each of GNMA, FNMA and
FHLMC guarantee timely distribution of interest to certificate holders. GNMA and
FNMA also guarantee timely distribution of scheduled principal payments. FHLMC
generally guarantees only the ultimate collection of principal of the underlying
mortgage loans.
Certificates for Mortgage-Backed Securities evidence an interest in a specific
pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
ADJUSTABLE RATE MORTGAGE SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH PORTFOLIO
may also invest in adjustable rate mortgage securities ("ARMs"), which are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve or thirteen scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH
PORTFOLIO may invest in private mortgage pass-through securities, which are
structured similarly to the GNMA, FNMA and FHLMC mortgage pass-through
securities and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. The
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may invest in collateralized mortgage obligations or "CMOs," which are
debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are equity interests in a
trust composed of Mortgage Assets. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States 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 issuer of a series of CMOs may elect to be treated
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as a Real Estate Mortgage Investment Conduit ("REMIC"). REMICs include
governmental and/or private entities that issue a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities, but unlike CMOs, which are required to be
structured as debt securities, REMICs may be structured as indirect ownership
interests in the underlying assets of the REMICs themselves. However, there are
no effects on the Portfolio from investing in CMOs issued by entities that have
elected to be treated as REMICs, and all future references to CMOs shall also be
deemed to include REMICs. In addition, in reliance upon an interpretation by the
staff of the Securities and Exchange Commission, the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO may invest without
limitation in CMOs and other Mortgage-Backed Securities which are not by
definition excluded from the provisions of the Act, and which have obtained
exemptive orders from such provisions from the Securities and Exchange
Commission.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of a CMO, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. Certain CMOs may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
Mortgage-Backed Securities. As part of the process of creating more predictable
cash flows on most of the tranches in a series of CMOs, one or more tranches
generally must be created that absorb most of the volatility in the cash flows
on the underlying mortgage loans. The yields on these tranches, which may
include, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
inverse floaters and, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO, Stripped Mortgage-Backed
Securities, as described below, are generally higher than prevailing market
yields on Mortgage-Backed Securities with similar maturities. As a result of the
uncertainty of the cash flows of these tranches, the market prices of and yield
on these tranches generally are more volatile.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 10% of its
total assets in inverse floaters. Inverse floaters constitute a class of CMOs
with a coupon rate that moves inversely to a designated index, such as the LIBOR
(London Inter-Bank Offered Rate) Index. Inverse floaters have coupon rates that
typically change at a multiple of the changes of the relevant index rate. Any
rise in the index rate (as a consequence of an increase in interest rates)
causes a drop in the coupon rate of an inverse floater while any drop in the
index rate causes an increase in the coupon of an inverse floater. In addition,
like most other fixed-income securities, the value of inverse floaters will
decrease as interest rates increase. Inverse floaters exhibit greater price
volatility than the majority of mortgage pass-through securities or CMOs. In
addition, some inverse floaters exhibit sensitivity to changes in prepayments.
As a result, the yield to maturity of an inverse floater is sensitive not only
to changes in interest rates but also to changes in prepayment rates on the
related underlying Mortgage Assets. The Sub-Adviser believes that,
notwithstanding the fact that inverse floaters exhibit price volatility, the use
of inverse floaters as a component of the Portfolio's overall portfolio, in
light of the Portfolio's anticipated portfolio composition in the aggregate, is
compatible with the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO's objective
to earn a high level of current income while maintaining relatively low
volatility of principal.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO also may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO may invest in Stripped
Mortgage-Backed Securities, which are derivative multiclass mortgage securities.
Stripped Mortgage-Backed Securities may be issued by agencies or
instrumentalities of the United States 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.
Stripped Mortgage-Backed Securities usually are structured with two classes that
receive different proportions of the interest and principal distribution on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving some of the interest and most of the principal
from the Mortgage Assets, while the other class will receive most of the
interest and the remainder of the principal. In the most
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extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). PO classes generate income through the accretion
of the deep discount at which such securities are purchased, and, while PO
classes do not receive periodic payments of interest, they receive monthly
payments associated with scheduled amortization and principal prepayment from
the Mortgage Assets underlying the PO class. The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets, and a rapid rate of
principal repayments may have a material adverse effect on the Portfolio's yield
to maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the securities are rated Aaa by
Moody's or AAA by S&P.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may purchase Stripped Mortgage-Backed Securities for income, or for
hedging purposes to protect the Portfolio against interest rate fluctuations.
For example, since an IO class will tend to increase in value as interest rates
rise, it may be utilized to hedge against a decrease in value of other
fixed-income securities in a rising interest rate environment. The Fund's
management understands that the staff of the Securities and Exchange Commission
considers privately issued Stripped Mortgage-Backed Securities representing
interest only or principal only components of U.S. Government or other debt
securities to be illiquid securities. The Fund will treat such securities as
illiquid so long as the staff maintains such a position. Stripped
Mortgage-Backed Securities issued by the U.S. Government or its agencies, and
which are backed by fixed-rate mortgages, will be treated as liquid provided
they are so determined by, or under procedures approved by, the Trustees of the
Fund. Each Portfolio may not invest more than 15% of its total assets in
illiquid securities.
TYPES OF CREDIT ENHANCEMENT. Mortgage-Backed Securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
those securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in a security. In addition, any circumstance adversely affecting the
ability of third parties, such as insurance companies, to satisfy any of their
obligations with respect to any Mortgage-Backed Securities, such as a
diminishment of their creditworthiness, could affect the rating, and thus the
value, of the securities. The Portfolios will not pay any fees for credit
support, although the existence of credit support may increase the price of a
security.
ASSET-BACKED SECURITIES. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH PORTFOLIO may invest in
Asset-Backed Securities. Asset-Backed Securities represent the securitization
techniques used to develop Mortgage-Backed Securities applied to a broad range
of other assets. Through the use of trusts and special purpose corporations,
various types of assets, primarily automobile and credit card receivables and
home equity loans, are being securitized in pass-through structures similar to
the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure.
RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and
Asset-Backed Securities have certain different characteristics than traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Portfolio purchases such
a security at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Alternatively, if
a Portfolio purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments may reduce,
yield to maturity. Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest a portion of its assets in
derivative Mortgage-Backed Securities such as Stripped Mortgage-Backed
Securities which are highly sensitive to changes in prepayment and interest
rates. The Investment Manager and/or the Sub-Adviser will seek to manage these
risks (and potential benefits) by investing in a variety of such securities.
Mortgage-Backed and Asset-Backed Securities, like all fixed-income securities,
generally decrease in value as a result of increases in interest rates. In
addition, although generally the value of fixed-income securities increases
during periods of falling interest rates and decreases during periods of rising
interest rates, as a result of prepayments and other factors, this is not always
the case with respect to Mortgage-Backed and Asset-Backed Securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of
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rising interest rates. Accordingly, amounts available for reinvestment by a
Portfolio are likely to be greater during a period of declining interest rates
and, as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Asset-Backed Securities, although less likely
to experience the same prepayment rates as Mortgage-Backed Securities, may
respond to certain of the same factors influencing prepayments, while at other
times different factors, such as changes in credit use and payment patterns
resulting from social, legal and economic factors, will predominate.
Mortgage-Backed and Asset-Backed Securities generally decrease in value as a
result of increases in interest rates and may benefit less than other fixed
income securities from declining interest rates because of the risk of
prepayment.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. However, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO will invest in CMOs issued by private entities only if the CMOs are
rated Aa or higher by Moody's or AA or higher by S&P, and the DIVERSIFIED INCOME
PORTFOLIO will invest in such CMOs only if the CMOs are rated Aaa by Moody's or
AAA by S&P, or, if unrated, such CMOs are determined to be of comparable quality
to the permitted rated investments. Also, a number of different factors,
including the extent of prepayment of principal of the Mortgage Assets, affect
the availability of cash for principal payments by the CMO issuer on any payment
date and, accordingly, affect the timing of principal payments on each CMO
class.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME
PORTFOLIO may invest in mortgage derivative securities, such as CMOs, the
average life of which is determined using mathematical models that incorporate
prepayment assumptions and other factors that involve estimates of future
economic and market conditions. These estimates may vary from actual future
results, particularly during periods of extreme market volatility. In addition,
under certain market conditions, such as those that developed in 1994, the
average weighted life of mortgage derivative securities may not accurately
reflect the price volatility of such securities. For example, in periods of
supply and demand imbalances in the market for such securities and/or in periods
of sharp interest rate movements, the prices of mortgage derivative securities
may fluctuate to a greater extent than would be expected from interest rate
movements alone.
The investments by the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO in mortgage derivative securities also subject
those Portfolios to extension risk. Extension risk is the possibility that
rising interest rates may cause prepayments to occur at a slower than expected
rate. This particular risk may effectively change a security which was
considered short or intermediate-term at the time of purchase into a long-term
security. Long-term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities. In
addition, as stated above, inverse floaters, a class of CMOs in which the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO may invest up to 10% of its total
assets, exhibit greater price volatility than the majority of CMOs.
Asset-Backed Securities involve certain risks that are not posed by
Mortgage-Backed Securities, resulting mainly from the fact that Asset-Backed
Securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
New instruments and variations of existing Mortgage-Backed Securities and
Asset-Backed Securities continue to be developed. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH
PORTFOLIO, following revision to the Fund's Prospectus, may invest in any such
instruments or variations as may be developed, to the extent consistent with
their investment objectives and policies and applicable regulatory requirements.
FOREIGN SECURITIES. The EMERGING MARKETS PORTFOLIO will invest primarily in
foreign securities. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the GLOBAL EQUITY PORTFOLIO will invest
extensively in foreign securities. The GROWTH PORTFOLIO may invest up to 25% of
the value of its total assets, and the DEVELOPING GROWTH PORTFOLIO may invest up
to 10% of the value of its total assets, in each case at the time of purchase,
in foreign securities (other than securities of Canadian issuers registered
under the Securities Exchange Act of 1934 or American Depository Receipts
("ADRs") (described below), on which there is no such limit). Investments in
certain Canadian issuers may be speculative due to certain political risks and
may be subject to substantial price fluctuations. Each of the AMERICAN VALUE
PORTFOLIO and the MID-CAP GROWTH PORTFOLIO may invest up to 35% of the value of
its total assets, at the time of purchase, in foreign securities. The UTILITIES
PORTFOLIO may invest up to 20% of the value of its total assets, at the time of
purchase, in foreign securities, with a maximum of 10% of the value of its total
assets, at the time of purchase, invested in such securities that are not ADRs.
The BALANCED GROWTH PORTFOLIO and the DIVIDEND GROWTH PORTFOLIO may invest in
ADRs. The VALUE-ADDED MARKET PORTFOLIO may purchase common stock, including
ADRs, of foreign corporations represented in the S&P Index (such securities are
listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ
Market System). Each Portfolio other than the MONEY MARKET PORTFOLIO may invest
in Eurodollar certificates of deposit. Each Portfolio's investments in unlisted
foreign securities, if any, are subject to the
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Portfolio's overall policy limiting its investments in illiquid securities to
15% or less of net assets.
Investors should carefully consider the risks of investing in securities of
foreign issuers and securities denominated in non-U.S. currencies. Fluctuations
in the relative rates of exchange among the currencies of the United States and
foreign countries will affect the value of a Portfolio's investments. Changes in
foreign currency exchange rates relative to the U.S. dollar will affect the U.S.
dollar value of the Portfolio's assets denominated in that currency and thereby
impact upon the Portfolio's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and demand on
the foreign exchange markets. These forces are themselves affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, foreign
currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade. The foreign currency transactions of a
Portfolio will be conducted on a spot basis or, in the case of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, through forward
foreign currency exchange contracts (described below) or futures contracts
(described below under "Options and Futures Transactions"). A Portfolio will
incur certain costs in connection with these currency transactions.
Investments in foreign securities will also occasion risks relating to political
and economic developments abroad, including the possibility of expropriations or
confiscatory taxation, limitations on the use or transfer of Portfolio assets
and any effects of foreign social, economic or political instability. Political
and economic developments in Europe, especially as they relate to changes in the
structure of the European Union and the anticipated development of a unified
common market, may have profound effects upon the value of a large segment of
the GLOBAL EQUITY PORTFOLIO, in particular. Continued progress in the evolution
of, for example, a united European common market may be slowed by unanticipated
political or social events and may, therefore, adversely affect the value of
certain of the securities held by a Portfolio. Foreign companies are not subject
to the regulatory requirements of U.S. companies and, as such, there may be less
publicly available information about such companies. Moreover, foreign companies
are not subject to uniform accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities of
U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of Portfolio trades effected in such markets. Inability to dispose
of portfolio securities due to settlement delays could result in losses to a
Portfolio due to subsequent declines in value of such securities and the
inability of the Portfolio to make intended security purchases due to settlement
problems could result in a failure of the Portfolio to make potentially
advantageous investments. To the extent a Portfolio purchases Eurodollar
certificates of deposit, consideration will be given to their domestic
marketability, the lower reserve requirements normally mandated for overseas
banking operations, the possible impact of interruptions in the flow of
international currency transactions, and future international political and
economic developments which might adversely affect the payment of principal or
interest.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may engage in transactions
involving forward foreign currency exchange contracts ("forward contracts"). A
forward contract involves an obligation to purchase or sell a currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
Portfolios may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The Portfolios will enter into forward contracts under various circumstances.
When a Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, desire to "lock in" the
price of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars or other
currency, of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the period between
the date on which the security is purchased or sold and the date on which
payment is made or received.
At other times, when, for example, it is believed that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar or some other foreign currency, a Portfolio may enter into a forward
contract to sell, for a fixed amount of dollars or other currency, the amount of
foreign currency approximating the value of some or all of the Portfolio's
securities (or securities which the Portfolio has purchased for its
37 - PROSPECTUS
<PAGE>
portfolio) denominated in such foreign currency. Under identical circumstances,
the Portfolio may enter into a forward contract to sell, for a fixed amount of
U.S. dollars or other currency, an amount of foreign currency other than the
currency in which the securities to be hedged are denominated approximating the
value of some or all of the portfolio securities to be hedged. This method of
hedging, called "cross-hedging," will be selected when it is determined that the
foreign currency in which the portfolio securities are denominated has
insufficient liquidity or is trading at a discount as compared with some other
foreign currency with which it tends to move in tandem.
In addition, when a Portfolio anticipates purchasing securities at some time in
the future, and wishes to lock in the current exchange rate of the currency in
which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to some or all of the value of the anticipated purchase, for a
fixed amount of U.S. dollars or other currency.
Lastly, the Portfolios are permitted to enter into forward contracts with
respect to currencies in which certain of their portfolio securities are
denominated and on which options have been written (see "Options and Futures
Transactions" below and in the Statement of Additional Information).
In all of the above circumstances, if the currency in which portfolio securities
(or anticipated portfolio securities) are denominated rises in value with
respect to the currency which is being purchased (or sold), then the Portfolio
will have realized fewer gains than had the Portfolio not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are not required to
enter into such transactions with regard to their foreign currency-denominated
securities and will not do so unless deemed appropriate by the Investment
Manager or the Sub-Adviser. Currently, only a limited market exists for certain
hedging transactions in future foreign exchange rates. This may limit the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO's ability to effectively hedge its
investments in Mexico. The Portfolios generally will not enter into a forward
contract with a term of greater than one year, although they may enter into
forward contracts for periods of up to five years. The Portfolios may be limited
in their ability to enter into hedging transactions involving forward contracts
by the Internal Revenue Code requirements relating to qualification as a
regulated investment company (see "Dividends, Distributions and Taxes").
AMERICAN DEPOSITORY RECEIPTS, EUROPEAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY
RECEIPTS. The DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the GROWTH
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also invest
in securities of foreign issuers in the form of American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") or other similar securities
convertible into securities of foreign issuers, including ADRs sponsored by
persons other than the underlying issuers ("unsponsored ADRs"). In addition, the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the BALANCED GROWTH PORTFOLIO,
the DIVIDEND GROWTH PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO and the AMERICAN
VALUE PORTFOLIO may invest in ADRs. In addition, the EMERGING MARKETS PORTFOLIO
may invest in Global Depository 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 evidencing ownership of the underlying securities. EDRs
are European receipts evidencing a similar arrangement. GDRs are typically
issued in bearer form by a foreign bank or trust company which evidence
ownership of the underlying foreign securities and which are designed for use in
European and other foreign securities markets. Generally, ADRs, in registered
form, are designed for use in the United States securities markets and EDRs, in
bearer form, are designed for use in European securities markets. Generally,
issuers of the stock of unsponsored ADRs are not obligated to distribute
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of such ADRs.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each of the GLOBAL EQUITY PORTFOLIO
and the EMERGING MARKETS PORTFOLIO may invest up to 10% of its total assets in
securities issued by other investment companies. Such investments are necessary
in order to participate in certain foreign markets where foreigners are
prohibited from investing directly in the securities of individual issuers. The
Portfolio will incur any indirect expenses incurred through investment in an
investment company, such as the payment of a management fee (which may result in
the payment of an additional advisory fee). Furthermore, it should be noted that
foreign investment companies are not subject to the U.S. securities laws and may
be subject to fewer or less stringent regulations than U.S. investment
companies.
INVESTMENTS IN FIXED-INCOME SECURITIES. Each Portfolio may invest in
fixed-income securities. All fixed-income securities are subject to two types of
risks: the credit risk and the interest rate risk. The credit risk relates to
the ability of the issuer to meet interest or principal payments or both as they
come due. Generally, higher yielding fixed-income securities are subject to a
credit risk to a greater extent than lower yielding fixed-income securities (see
below). The interest rate risk refers to the fluctuations in the net asset value
of any portfolio of fixed-income securities resulting from the inverse
relationship between price and yield of fixed-income securities; that is, when
the general level of interest rates rises, the prices of outstanding
fixed-income securities generally decline, and when interest rates fall, prices
generally rise.
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<PAGE>
INVESTMENTS IN SECURITIES RATED BAA BY MOODY'S OR BBB BY S&P. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES
PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-
CAP GROWTH PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the GLOBAL EQUITY
PORTFOLIO may invest a portion of their assets in fixed-income securities rated
at the time of purchase Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P").
Investments in fixed-income securities rated either Baa by Moody's or BBB by S&P
(the lowest credit ratings designated "investment grade") may have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken their capacity to make principal and
interest payments than would be the case with investments in securities with
higher credit ratings. If a bond held by any of these Portfolios is downgraded
by a rating agency to a rating below Baa or BBB, the Portfolio will retain such
security in its portfolio until the Investment Manager or, in the case of the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the Sub-Adviser determines that
it is practicable to sell the security without undue market or tax consequences
to the Portfolio. In the event that such downgraded securities constitute 5% or
more of the Portfolio's assets, the Investment Manager or, in the case of the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the Sub-Adviser will seek to
sell immediately sufficient securities to reduce the total to below 5%. The
risks of holding lower-rated securities are described below. See the Appendix
for an explanation of Moody's and S&P ratings.
Groupings (1) and (2) of the DIVERSIFIED INCOME PORTFOLIO may continue to hold
fixed-income securities which have been downgraded by a rating agency to a
rating as low as Baa or BBB. However, if a bond held by either of these
groupings is downgraded by a rating agency to a rating below Baa or BBB, the
Portfolio will seek to sell such security immediately.
SPECIAL CONSIDERATIONS FOR INVESTMENTS IN HIGH YIELD SECURITIES. Because of the
special nature of the DIVERSIFIED INCOME PORTFOLIO's and the EMERGING MARKETS
PORTFOLIO's investments in high yield securities, commonly known as "junk
bonds," the Investment Manager or, in the case of the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser must take account of certain special considerations
in assessing the risks associated with such investments. Although the growth of
the high yield securities market in the 1980s had paralleled a long economic
expansion, recently many issuers have been affected by adverse economic and
market conditions. It should be recognized that an economic downturn or increase
in interest rates is likely to have a negative effect on the high yield bond
market and on the value of the high yield securities held by the Portfolios, as
well as on the ability of the securities' issuers to repay principal and
interest on their borrowings.
The prices of high yield securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by a
Portfolio defaults, the Portfolio may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and change can be
expected to result in an increased volatility of market prices of high yield
securities and a concomitant volatility in the net asset value of a share of the
Portfolio. Moreover, the market prices of certain of the securities which are
structured as zero coupon and payment-in-kind securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash (see "Dividends,
Distributions and Taxes" for a discussion of the tax ramifications of
investments in such securities).
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of the Fund's Trustees to arrive at a fair
value for certain high yield securities at certain times and could make it
difficult for the Portfolios to sell certain securities.
New laws and proposed new laws may have a potentially negative impact on the
market for high yield bonds. For example, present legislation requires
federally-insured savings and loan associations to divest their investments in
high yield bonds. This legislation and other proposed legislation may have an
adverse effect upon the value of high yield securities and a concomitant
negative impact upon the net asset value of a share of the DIVERSIFIED INCOME
PORTFOLIO and the EMERGING MARKETS PORTFOLIO.
CONVERTIBLE SECURITIES. The DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GROWTH
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING
MARKETS PORTFOLIO may invest a portion of their assets in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Convertible securities rank
senior to common stocks in a corporation's capital structure and, therefore,
entail less risk than the corporation's common stock. The value of a convertible
security is a function of its "investment value" (its value as if it did not
have a conversion privilege), and its "conversion value" (the security's worth
if it were to be exchanged for the underlying security, at market value,
pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than its
conversion value, its price will be primarily a reflection of such investment
value and its price will be likely to
39 - PROSPECTUS
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increase when interest rates fall and decrease when interest rates rise, as with
a fixed-income security (the credit standing of the issuer and other factors may
also have an effect on the convertible security's value). If the conversion
value exceeds the investment value, the price of the convertible security will
rise above its investment value and, in addition, will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security.
Because of the special nature of the permitted investments of these Portfolios
in lower rated convertible securities, the Investment Manager or, in the case of
the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser must
take account of certain special considerations in assessing the risks associated
with such investments. The prices of lower rated securities have been found to
be less sensitive to changes in prevailing interest rates than higher rated
investments, but are likely to be more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. If the issuer of a fixed-income
security owned by the Portfolio defaults, the Portfolio may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
change can be expected to result in an increased volatility of market prices of
lower rated securities and a corresponding volatility in the net asset value of
a share of the Portfolio.
MONEY MARKET INSTRUMENTS. Money market instruments in which each Portfolio other
than the MONEY MARKET PORTFOLIO, the BALANCED GROWTH PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO may invest are securities issued or guaranteed by
the U.S. Government (Treasury bills, notes and bonds); obligations of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more; Eurodollar certificates of deposit; obligations of savings
banks and savings and loan associations having total assets of $1 billion or
more; fully insured certificates of deposit; and commercial paper rated within
the two highest grades by Moody's or S&P or, if not rated, issued by a company
having an outstanding debt issue rated AAA by S&P or Aaa by Moody's, and which
mature within thirteen months from the date of purchase. Money market
instruments in which the MONEY MARKET PORTFOLIO, the BALANCED GROWTH PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest are described above under "The
Money Market Portfolio," "The Diversified Income Portfolio" and "The Balanced
Growth Portfolio."
REPURCHASE AGREEMENTS. Each Portfolio of the Fund may enter into repurchase
agreements, which may be viewed as a type of secured lending by the Portfolio,
and which typically involve the acquisition by the Portfolio of debt securities,
from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Portfolio will
sell back to the institution, and that the institution will repurchase, the
underlying security ("collateral") at a specified price and at a fixed time in
the future, usually not more than seven days from the date of purchase. The
Portfolio will receive interest from the institution until the time when the
repurchase is to occur. Although such date is deemed by the Portfolio to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, each Portfolio follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the Investment
Manager or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser,
subject to procedures established by the Trustees of the Fund, and specifying
the required value of the collateral underlying the agreement.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of the MONEY MARKET
PORTFOLIO, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO may also use reverse repurchase agreements, and
each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED
INCOME PORTFOLIO may also use dollar rolls, as part of its investment strategy.
Reverse repurchase agreements involve sales by the Portfolio of portfolio assets
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price. During the reverse repurchase agreement period,
the Portfolio continues to receive principal and interest payments on these
securities. Generally, the effect of such a transaction is that the Portfolio
can recover all or most of the cash invested in the portfolio securities
involved during the term of the reverse repurchase agreement, while it will be
able to keep the interest income associated with those portfolio securities.
Such transactions are only advantageous if the interest cost to the Portfolio of
the reverse repurchase transaction is less than the cost of obtaining the cash
otherwise.
A Portfolio may enter into dollar rolls in which the Portfolio sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Portfolio forgoes principal and interest paid
on the securities. The Portfolio is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Portfolio will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. Government securities or other liquid
portfolio securities equal in value to its obligations in respect of reverse
repurchase agreements and
40 - PROSPECTUS
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dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk
that the market value of the securities the Portfolio is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement or dollar roll files
for bankruptcy or becomes insolvent, the Portfolio's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Portfolio's obligation to repurchase
the securities. Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage, and are considered borrowings by the Portfolio.
Under the requirements of the Act, each Portfolio is required to maintain an
asset coverage (including the proceeds of the borrowings) of at least 300% of
all borrowings. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO do not expect to engage in reverse repurchase
agreements and dollar rolls with respect to greater than 25% of the Portfolio's
total assets. For purposes other than meeting redemptions, reverse repurchase
agreements may not exceed 5% of the MONEY MARKET PORTFOLIO's total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, each Portfolio (other than the
VALUE-ADDED MARKET PORTFOLIO) may purchase securities on a when-issued or
delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment can take place a month or
more after the date of the commitment. While a Portfolio will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, a Portfolio may sell the securities
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest accrues to
the purchaser during this period. At the time a Portfolio makes the commitment
to purchase or sell securities on a when-issued, delayed delivery or forward
commitment basis, it will record the transaction and thereafter reflect the
value, each day, of such security purchased or, if a sale, the proceeds to be
received, in determining its net asset value. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price. A
Portfolio will also establish a segregated account with its custodian bank in
which it will continually maintain cash, U.S. Government securities or other
liquid portfolio securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis. An increase in
the percentage of a Portfolio's assets committed to the purchase of securities
on a when-issued, delayed delivery or forward commitment basis may increase the
volatility of the Portfolio's net asset value.
WHEN, AS AND IF ISSUED SECURITIES. Each Portfolio (other than the MONEY MARKET
PORTFOLIO and the VALUE-ADDED MARKET PORTFOLIO) may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio until the
Investment Manager or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the
Sub-Adviser determines that the issuance of the security is probable, whereupon
the accounting treatment for such commitment will be the same as for a
commitment to purchase a security on a when-issued, delayed delivery or forward
commitment basis, described above and in the Statement of Additional
Information. An increase in the percentage of a Portfolio's assets committed to
the purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value.
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES. Each of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
GROWTH PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING
MARKETS PORTFOLIO may invest up to 15% of its total assets in securities for
which there is no readily available market including certain of those which are
subject to restrictions on resale because they have not been registered under
the Securities Act of 1933, as amended (the "Securities Act") or which are
otherwise not readily marketable. (Securities eligible for resale pursuant to
Rule 144A under the Securities Act, and determined to be liquid pursuant to the
procedures discussed in the following paragraph, are not subject to the
foregoing limitation.) These securities are generally referred to as private
placements or restricted securities. Limitations on the resale of such
securities may have an adverse effect on their marketability, and may prevent
the Portfolio from disposing of them promptly at reasonable prices. The
Portfolio may have to bear the expense of registering such securities for resale
and the risk of substantial delays in effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits the Portfolios to sell restricted securities to
qualified institutional buyers without limitation. The Investment Manager or, in
the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH
PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser, pursuant to
procedures adopted by the Trustees of the Fund, will make a determination as to
the liquidity of each restricted security purchased by the Portfolio. If a
restricted security is determined to be "liquid," such security will not be
included within the category "illiquid securities," which under current policy
may not exceed 15% of a Portfolio's total assets.
Restricted securities in which the MONEY MARKET PORTFOLIO may invest are
described above under "The Money Market Portfolio."
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
each Portfolio may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive their
full value
41 - PROSPECTUS
<PAGE>
at maturity. The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such compounding at a
constant rate eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero coupon
security will be unable to participate in higher yields upon reinvestment of
interest received on interest-paying securities if prevailing interest rates
rise.
The zero coupon securities in which the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO may invest are primarily Canadian Government Securities with remaining
maturities of two years or less issued by Canadian provinces. Such securities
generally are currently readily available only in the form of zero coupon
securities.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent a Portfolio invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal tax
law requires that a holder (such as a Portfolio) of a zero coupon security
accrue a portion of the discount at which the security was purchased as income
each year even though the Portfolio receives no interest payments in cash on the
security during the year.
WARRANTS. Each Portfolio (other than the MONEY MARKET PORTFOLIO, the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the VALUE-ADDED MARKET PORTFOLIO)
may acquire warrants attached to other securities and, in addition, each
Portfolio other than the MONEY MARKET PORTFOLIO, the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO
and the VALUE-ADDED MARKET PORTFOLIO may invest up to 5% of the value of its
total assets in warrants not attached to other securities, including up to 2% of
such assets in warrants not listed on either the New York or American Stock
Exchange. Warrants are, in effect, an option to purchase equity securities at a
specific price, generally valid for a specific period of time, and have no
voting rights, pay no dividends and have no rights with respect to the
corporation issuing them. If warrants remain unexercised at the end of the
exercise period, they will lapse and the Portfolio's investment in them will be
lost. The prices of warrants do not necessarily move parallel to the prices of
the underlying securities.
REAL ESTATE INVESTMENT TRUSTS. Each of the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the GROWTH PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO, the DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may invest in real estate investment trusts, which pool investors' funds for
investments primarily in commercial real estate properties. Investment in real
estate investment trusts may be the most practical available means for the
Portfolios to invest in the real estate industry (the Portfolios are prohibited
from investing in real estate directly). As a shareholder in a real estate
investmenttrust, the Portfolio would bear its ratable share of the real estate
investment trust's expenses, including its advisory and administration fees. At
the same time the Portfolio would continue to pay its own investment management
fees and other expenses, as a result of which the Portfolio and its shareholders
in effect will be absorbing duplicate levels of fees with respect to investments
in real estate investment trusts. Real estate investment trusts are not
diversified and are subject to the risk of financing projects. They are also
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 Internal Revenue Code and failing to maintain exemption from the
Investment Company Act of 1940, as amended.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio of the Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided that such loans are
callable at any time by the Portfolio (subject to certain notice provisions
described in the Statement of Additional Information), and are at all times
secured by cash or money market instruments, which are maintained in a
segregated account pursuant to applicable regulations and that are equal to at
least the market value, determined daily, of the loaned securities. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, loans of portfolio securities will only be made to firms
deemed by the Investment Manager or, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks.
OPTIONS AND FUTURES TRANSACTIONS
Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may write covered call options
against securities held in its portfolio and covered put options on eligible
portfolio securities (the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO,
the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY
PORTFOLIO may also write covered put and call options on stock indexes) and
purchase options of the same or similar series to effect closing transactions,
and may hedge against potential changes in the market value of its investments
(or anticipated investments) by purchasing put and call options on securities
which it holds (or has the right to acquire) in its portfolio and engaging in
transactions involving interest rate futures contracts and bond index futures
contracts and options on such contracts. The BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO and the EMERGING
42 - PROSPECTUS
<PAGE>
MARKETS PORTFOLIO may also hedge against such changes by entering into
transactions involving stock index futures contracts and options thereon and
(except for the EMERGING MARKETS PORTFOLIO) options on stock indexes. The
VALUE-ADDED MARKET PORTFOLIO may purchase futures contracts on stock indexes
such as the S&P Index and the New York Stock Exchange Composite Index and may
sell such futures contracts to effect closing transactions. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also hedge against
potential changes in the market value of the currencies in which their
investments (or anticipated investments) are denominated by purchasing put and
call options on currencies and engaging in transactions involving currencies
futures contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills, on various foreign
currencies and on equity securities are listed on Exchanges and are written in
over-the-counter transactions ("OTC options"). Listed options are issued or
guaranteed by the exchange on which they trade or by a clearing corporation such
as the Options Clearing Corporation ("OCC"). Ownership of a listed call option
gives the Portfolio the right to buy from the OCC (in the U.S.) or other
clearing corporation or exchange the underlying security covered by the option
at the stated exercise price (the price per unit of the underlying security) by
filing an exercise notice prior to the expiration of the option. The writer
(seller) of the option would then have the obligation to sell to the OCC (in the
U.S.) or other clearing corporation or exchange the underlying security at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the
Portfolio the right to sell the underlying security to the OCC (in the U.S.) or
other clearing corporation or exchange at the stated exercise price. Upon notice
of exercise of the put option, the writer of the put would have the obligation
to purchase the underlying security from the OCC (in the U.S.) or other clearing
corporation or exchange at the exercise price.
Exchange-listed options are issued by the OCC (in the U.S.) or other clearing
corporation or exchange which assures that all transactions in such options are
properly executed. OTC options are purchased from or sold (written) to dealers
or financial institutions which have entered into direct agreements with the
Portfolio. With OTC options, such variables as expiration date, exercise price
and premium will be agreed upon between the Portfolio and the transacting
dealer, without the intermediation of a third party such as the OCC. If the
transacting dealer fails to make or take delivery of the securities (or, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the currency) underlying an option it has written, in accordance with
the terms of that option, the Portfolio would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Portfolios
will engage in OTC option transactions only with member banks of the Federal
Reserve System or primary dealers in U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
COVERED CALL WRITING. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO are permitted to write covered call options on
portfolio securities, without limit, and the BALANCED GROWTH PORTFOLIO is
permitted to write covered call options on portfolio securities, in an amount
not exceeding, in the aggregate with covered put options, 5% of the value of its
total assets, in order to aid them in achieving their investment objectives. In
the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, such options may be denominated in either U.S. dollars or foreign
currencies and may be on the U.S. dollar and foreign currencies. As a writer of
a call option, the Portfolio has the obligation, upon notice of exercise of the
option, to deliver the security (or amount of currency) underlying the option
prior to the expiration date of the option (certain listed and OTC put options
written by a Portfolio will be exercisable by the purchaser only on a specific
date).
COVERED PUT WRITING. As a writer of covered put options, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO or the EMERGING MARKETS
PORTFOLIO incurs an obligation to buy the security underlying the option from
the purchaser of the put, at the option's exercise price at any time during the
option period, at the purchaser's election (certain listed and OTC put options
written by a Portfolio will be exercisable by the purchaser only on a specific
date). The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, THE GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO will write put options for three
purposes: (1) to receive the income derived from the premiums paid by
purchasers; (2) when the Portfolio's management wishes to purchase the security
underlying the option at a price lower than its current market price, in which
case the Portfolio will write the covered put at an exercise price reflecting
the lower purchase price sought; and (3) to close out a long put option
position. The aggregate value of the obligations underlying the puts determined
as of the date the options are sold will not exceed 50% of a Portfolio's net
assets (in the case of the BALANCED GROWTH PORTFOLIO, 30% of the Portfolio's
total assets).
PURCHASING CALL AND PUT OPTIONS. The EMERGING MARKETS PORTFOLIO may purchase
listed and OTC call and put options in amounts equaling up to 10% of its total
assets, and each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH PORTFOLIO may purchase such
call and put options in amounts equalling up to 5% of its total assets. Each of
the UTILITIES PORTFOLIO, the AMERICAN
43 - PROSPECTUS
<PAGE>
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO
may purchase such call and put options and options on stock indexes in amounts
equalling up to 10% of its total assets, with a maximum of 5% of its total
assets invested in the purchase of stock index options (the BALANCED GROWTH
PORTFOLIO may purchase put and call options on stock indexes in amounts
equalling up to 5% of its total assets). These Portfolios may purchase call
options either to close out a covered call position or to protect against an
increase in the price of a security a Portfolio anticipates purchasing or, in
the case of call options on a foreign currency, to hedge against an adverse
exchange rate change of the currency in which the security the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO or the EMERGING MARKETS PORTFOLIO anticipates purchasing is
denominated vis-a-vis the currency in which the exercise price is denominated.
The Portfolio may purchase put options on securities which it holds (or has the
right to acquire) in its portfolio only to protect itself against a decline in
the value of the security. Similarly, each of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase put options on
currencies in which securities it holds are denominated only to protect itself
against a decline in value of such currency vis-a-vis the currency in which the
exercise price is denominated. The Portfolios may also purchase put options to
close out written put positions in a manner similar to call option closing
purchase transactions. There are no other limits on the ability of these
Portfolios to purchase call and put options.
STOCK INDEX OPTIONS. The BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY
PORTFOLIO may invest in options on stock indexes, which are similar to options
on stock except that, rather than the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or lesser than, in the case of a put, the exercise price of the option.
See "Risks of Options on Indexes," in the Statement of Additional Information.
FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP EQUITY PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase and sell
interest rate futures contracts that are currently traded, or may in the future
be traded, on U.S. commodity exchanges on such underlying securities as U.S.
Treasury bonds, notes, and bills and GNMA Certificates and bond index futures
contracts that are traded on U.S. commodity exchanges on such indexes as the
Moody's Investment-Grade Corporate Bond Index. The BALANCED GROWTH PORTFOLIO,
the UTILITIES PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may also purchase and sell stock index futures
contracts that are currently traded, or may in the future be traded, on U.S.
commodity exchanges on such indexes as the S&P 500 Index and the New York Stock
Exchange Composite Index. The GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may also purchase and sell futures contracts that are currently
traded, or may in the future be traded, on foreign commodity exchanges on such
underlying securities as common stocks and on such indexes of foreign equity
securities as may exist or come into being, such as the Financial Times Equity
Index. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may also purchase and sell futures contracts that are currently traded, or may
in the future be traded, on foreign commodity exchanges on such underlying
securities as foreign government fixed-income securities, on various currencies
("currency futures") and on such indexes of foreign fixed-income securities as
may exist or come into being. As a futures contract purchaser, a Portfolio
incurs an obligation to take delivery of a specified amount of the obligation
underlying the contract at a specified time in the future for a specified price.
As a seller of a futures contract, a Portfolio incurs an obligation to deliver
the specified amount of the underlying obligation at a specified time in return
for an agreed upon price.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and
the EMERGING MARKETS PORTFOLIO will purchase or sell interest rate futures
contracts and bond index futures contracts for the purpose of hedging their
fixed-income portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates or, in the case of the UTILITIES PORTFOLIO, to
facilitate asset reallocations into and out of the fixed-income area. The
BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will purchase or sell stock index futures contracts
for the purpose of hedging their equity portfolio (or anticipated portfolio)
securities against changes in their prices or, in the case of the UTILITIES
PORTFOLIO, to facilitate asset reallocations into and out of the equity area.
The VALUE-ADDED MARKET PORTFOLIO will purchase stock index futures contracts as
a temporary substitute for the purchase of individual stocks which may then be
purchased in orderly fashion, and may sell such contracts to effect closing
transactions. The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO will purchase or sell currency futures on currencies in which
their portfolio securities (or anticipated portfolio securities) are denominated
for the purposes of hedging against anticipated changes in currency exchange
rates.
OPTIONS ON FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY
44 - PROSPECTUS
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PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase and write call and put
options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will only purchase and write options on futures
contracts for identical purposes to those set forth above for the purchase of a
futures contract (purchase of a call option or sale of a put option) and the
sale of a futures contract (purchase of a put option or sale of a call option),
or to close out a long or short position in futures contracts.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. A Portfolio may close out its
position as writer of an option, or as a buyer or seller of a futures contract,
only if a liquid secondary market exists for options or futures contracts of
that series. There is no assurance that such a market will exist, particularly
in the case of OTC options, as such options will generally only be closed out by
entering into a closing purchase transaction with the purchasing dealer. Also,
exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased.
The extent to which a Portfolio may enter into transactions involving options
and futures contracts may be limited by the Internal Revenue Code's requirements
for qualification of each Portfolio as a regulated investment company and the
Fund's intention to qualify each Portfolio as such. See "Dividends,
Distributions and Taxes."
While the futures contracts and options transactions to be engaged in by the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and
the EMERGING MARKETS PORTFOLIO for the purpose of hedging their portfolio
securities are not speculative in nature, there are risks inherent in the use of
such instruments. One such risk is that the Portfolio's management could be
incorrect in its expectations as to the direction or extent of various interest
rate movements or the time span within which the movements take place. For
example, if a Portfolio sold interest rate futures contracts for the sale of
securities in anticipation of an increase in interest rates, and then interest
rates went down instead, causing bond prices to rise, the Portfolio would lose
money on the sale.
Another risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities,
currencies and indexes subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the U.S. dollar
cash prices of the portfolio securities (and, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the securities' denominated
currencies). Another such risk is that prices of interest rate futures contracts
may not move in tandem with the changes in prevailing interest rates against
which the Portfolio seeks a hedge. A correlation may also be distorted by the
fact that the futures market is dominated by short-term traders seeking to
profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, by
entering into transactions in foreign futures and options markets, will incur
risks similar to those discussed above under "Foreign Securities."
New options and futures contracts and other financial products and various
combinations thereof continue to be developed. The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may invest in any such options, futures and products as may be developed to the
extent consistent with their investment objectives and applicable regulatory
requirements, and the Fund will make any and all pertinent disclosures relating
to such investments in its Prospectus and/or Statement of Additional
Information. Except as otherwise noted above, there are no limitations on the
ability of any of these Portfolios to invest in options, futures and options on
futures.
PORTFOLIO TRADING
Although the Fund does not intend to engage in short-term trading of portfolio
securities as a means of achieving the investment objectives of the respective
Portfolios, each Portfolio may sell portfolio securities without regard to the
length of time they have been held whenever such sale will in the opinion of the
Investment Manager (or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the
Sub-Adviser) strengthen the Portfolio's position and contribute to its
investment objectives. In determining which securities to purchase for the
Portfolios or hold in a Portfolio, the Investment Manager and, in the case of
the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, the Sub-Adviser will rely on information from
various sources, including research, analysis and appraisals of brokers and
dealers, the views of Trustees of the Fund and others regarding economic
developments and interest rate trends, and the Investment Manager's and, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO
and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser's own analysis of factors
they deem relevant.
45 - PROSPECTUS
<PAGE>
Personnel of the Investment Manager and, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the Sub-Adviser have substantial experience in the use of the
investment techniques described above under the heading "Options and Futures
Transactions," which techniques require skills different from those needed to
select the portfolio securities underlying various options and futures
contracts.
Brokerage commissions are not normally charged on the purchase or sale of money
market instruments and U.S. Government obligations, or on currency conversions,
but such transactions will involve costs in the form of spreads between bid and
asked prices. Orders for transactions in portfolio securities and commodities
may be placed for the Fund with a number of brokers and dealers, including Dean
Witter Reynolds Inc. ("DWR"), Morgan Stanley & Co. Incorporated and other
broker-dealer affiliates of InterCapital and MSAM. Pursuant to an order of the
Securities and Exchange Commission, the Fund may effect principal transactions
in certain money market instruments with DWR. In addition, the Fund may incur
brokerage commissions on transactions conducted through DWR, Morgan Stanley &
Co. Incorporated and other brokers and dealers that are affiliates of
InterCapital and MSAM.
The MONEY MARKET PORTFOLIO is expected to have a high portfolio turnover due to
the short maturities of securities purchased, but this should not affect income
or net asset value as brokerage commissions are not normally charged on the
purchase or sale of money market instruments. It is not anticipated that the
portfolio turnover rates of the Portfolios will exceed the following percentages
in any year: NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO: 100%; DIVERSIFIED
INCOME PORTFOLIO: 150%; BALANCED GROWTH PORTFOLIO: 100%; UTILITIES PORTFOLIO:
100%; DIVIDEND GROWTH PORTFOLIO: 90%; VALUE-ADDED MARKET PORTFOLIO: 100%; GROWTH
PORTFOLIO: 200%; AMERICAN VALUE PORTFOLIO: 400%; MID-CAP GROWTH PORTFOLIO: 350%;
GLOBAL EQUITY PORTFOLIO: 100%; DEVELOPING GROWTH PORTFOLIO: 300%; and EMERGING
MARKETS PORTFOLIO: 100%. A portfolio turnover rate exceeding 100% in any one
year is greater than that of many other investment companies. Each Portfolio of
the Fund will incur underwriting discount costs (on underwritten securities)
and/or brokerage costs commensurate with its portfolio turnover rate. The
expenses of the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
relating to their portfolio management are likely to be greater than those
incurred by other investment companies investing primarily in securities issued
by domestic issuers as custodial costs, brokerage commissions and other
transaction charges related to investing in foreign markets are generally higher
than in the United States. Short-term gains and losses may result from portfolio
transactions. See "Dividends, Distributions and Taxes" for a discussion of the
tax implications of the Portfolios' trading policies. A more extensive
discussion of the Portfolios' brokerage policies is set forth in the Statement
of Additional Information.
PORTFOLIO MANAGEMENT
The following individuals are primarily responsible for the day-to-day
management of the Portfolios of the Fund (other than the MONEY MARKET
PORTFOLIO). Except as otherwise noted, each of these individuals has been a
primary portfolio manager of the designated Portfolio since the inception of the
Fund or the designated Portfolio: Philip A. Barach, James M. Goldberg, Frederick
H. Horton and Jeffrey E. Gundlach, Managing Directors of the Sub-Adviser, are
the primary portfolio managers of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO. Messrs. Barach, Gundlach and Goldberg have been portfolio managers
with affiliates of TCW Group for over five years. Mr. Horton has been a
portfolio manager with affiliates of TCW Group since October, 1993. From June
1991-September 1993, he was Senior Portfolio Manager for Dewey Square Investors,
prior to which time he was Senior Portfolio Manager for the Putnam Companies.
Peter M. Avelar and Rajesh K. Gupta, Senior Vice Presidents of InterCapital, and
Anne Pickrell and Peter J. Seeley, Vice Presidents of InterCapital, are the
primary portfolio co-managers of the DIVERSIFIED INCOME PORTFOLIO, Messrs.
Avelar and Gupta since the inception of the Portfolio and Ms. Pickrell and Mr.
Seeley since February 1998. Messrs. Avelar and Gupta and Ms. Pickrell have been
portfolio managers at InterCapital for over five years. Prior to joining
InterCapital in July 1994, Mr. Seeley was a portfolio manager at Nikko Capital
Management. Mr. Gupta and Paul D. Vance, Senior Vice Presidents of InterCapital,
have been the primary portfolio co-managers of the BALANCED GROWTH PORTFOLIO
since March 1998. Mr. Vance has been a portfolio manager with InterCapital for
over five years and is also the primary portfolio manager of the DIVIDEND GROWTH
PORTFOLIO. Edward F. Gaylor, Senior Vice President of InterCapital, is the
primary portfolio manager of the UTILITIES PORTFOLIO and has been a portfolio
manager with InterCapital for over five years. Kurt Feuerman, a Managing
Director of MSAM in its Institutional Equity Group, and Margaret Johnson, a
Principal of MSAM and a portfolio manager in its Institutional Equity Group,
have been the primary portfolio co-managers of the GROWTH PORTFOLIO since March
1998. Ms. Johnson has been a portfolio manager with MSAM for over five years.
Prior to joining MSAM in July 1993, Mr. Feuerman was a Managing Director of
Drexel Burnham Lambert. Kenton J. Hinchliffe, Senior Vice President of
InterCapital, is the primary portfolio manager of the VALUE-ADDED MARKET
PORTFOLIO and has been a portfolio manager with InterCapital for over five
years. Anita H. Kolleeny, Senior Vice President of InterCapital, is the primary
portfolio manager of the AMERICAN VALUE PORTFOLIO and is assisted by Michelle
Kaufman. Ms. Kolleeny has been a portfolio manager with InterCapital for over
five years. Prior to joining InterCapital in September 1993, Ms. Kaufman was a
securities analyst with Woodward and Associates (March-August 1993). Peter
Hermann, Vice President of InterCapital, has been the primary portfolio manager
of the MID-CAP GROWTH PORTFOLIO since January 1998. Prior to joining
InterCapital in March 1994, Mr. Hermann was a portfolio manager at The Bank of
New York. Mark Bavoso, Senior Vice President of InterCapital, has been the
primary portfolio manager of the GLOBAL EQUITY PORTFOLIO since August 1995 and
has been a portfolio
46 - PROSPECTUS
<PAGE>
manager with InterCapital for over five years. Jayne Stevlingson, Vice President
of InterCapital, is the primary portfolio manager of the DEVELOPING GROWTH
PORTFOLIO. Ms. Stevlingson has been a portfolio manager of the DEVELOPING GROWTH
PORTFOLIO since the inception of the Fund and has been the sole portfolio
manager of the Portfolio since May 1996. Ms. Stevlingson has been a portfolio
manager with InterCapital since October 1992, prior to which time she was a
portfolio manager with Bankers Trust New York Corp. (January 1990-September
1992). Shaun C.K. Chan, Managing Director of TCW and TCW Asia Ltd., Terence F.
Mahony, Managing Director of TCW, and Michael P. Reilly, a Managing Director of
TCW, are the primary portfolio managers of the EMERGING MARKETS PORTFOLIO. Mr.
Chan has been a portfolio manager with affiliates of TCW Group since 1993, prior
to which time he was Director of Wardley Investment Services (Hong Kong) Ltd.
Mr. Mahony has been a primary portfolio manager of the EMERGING MARKETS
PORTFOLIO since July 1996 and has been a portfolio manager with TCW since April
1996, prior to which time he was Chief Investment Officer for Global Emerging
Markets at HSBC Asset Management (September 1993-April 1996) and prior thereto
was a Director at Baring Asset Management. Mr. Reilly has been a primary
portfolio manager of the EMERGING MARKETS PORTFOLIO since December 1994 and has
been a portfolio manager with affiliates of TCW Group since June 1992, prior to
which time he was Vice President of Security Pacific Bank.
INVESTMENT RESTRICTIONS
--------------------------------------------------------------------
The investment restrictions listed below are among the restrictions that have
been adopted as fundamental policies of each Portfolio other than the MONEY
MARKET PORTFOLIO. In addition, the MONEY MARKET PORTFOLIO has adopted
restrictions two and five as fundamental policies. Under the Investment Company
Act of 1940, as amended (the "Act"), a fundamental policy may not be changed
with respect to a Portfolio without the vote of a majority of the outstanding
voting securities of that Portfolio, as defined in the Act.
Each Portfolio of the Fund may not:
1. As to 75% of its total assets, invest more than 5% of the value of
its total assets in the securities of any one issuer (other than obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities).
2. As to 75% of its total assets, purchase more than 10% of all
outstanding voting securities or any class of securities of any one issuer.
(All of the Portfolios of the Fund may, collectively, purchase more than 10%
of all outstanding voting securities or any class of securities of any one
issuer.)
3. With the exception of the UTILITIES PORTFOLIO, invest 25% or more of
the value of its total assets in securities of issuers in any one industry.
This restriction does not apply to obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities or, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the
DIVERSIFIED INCOME PORTFOLIO, to Mortgage-Backed Securities.
4. Invest more than 5% of the value of its total assets in securities
of issuers having a record, together with predecessors, of less than three
years of continuous operation. This restriction shall not apply to any
obligation issued or guaranteed by the United States Government, its
agencies or instrumentalities or, in the case of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO and the DIVERSIFIED INCOME PORTFOLIO, to
Mortgage-Backed Securities and Asset-Backed Securities.
5. Borrow money (except insofar as the MONEY MARKET PORTFOLIO, the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO and the BALANCED GROWTH PORTFOLIO may be deemed to have borrowed
by entrance into a reverse repurchase agreement or the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED GROWTH PORTFOLIO may be deemed to have borrowed by entrance into a
dollar roll), except from banks for temporary or emergency purposes or to
meet redemption requests which might otherwise require the untimely
disposition of securities, and, in the case of the Portfolios other than the
DEVELOPING GROWTH PORTFOLIO, not for investment or leveraging, provided that
borrowing in the aggregate (other than, in the case of the DEVELOPING GROWTH
PORTFOLIO, for investment or leveraging) may not exceed 5% (taken at the
lower of cost or current value) of the value of the Portfolio's total assets
(not including the amount borrowed).
The MONEY MARKET PORTFOLIO has also adopted the following restrictions as
fundamental policies:
1. With respect to 75% of its total assets, purchase any securities,
other than obligations of the U.S. Government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the MONEY MARKET PORTFOLIO's total assets would be invested in
securities of any one issuer. However, as a non-fundamental policy, the
MONEY MARKET PORTFOLIO will not invest more than 10% of its total assets in
the securities of any one issuer. Furthermore, pursuant to current
regulatory requirements, the MONEY MARKET PORTFOLIO may only invest more
than 5% of its total assets in the securities of a single issuer (and only
with respect to one issuer at a time) for a period of not more than three
business days and only if the securities have received the highest quality
rating by at least two NRSROs.)
2. Purchase any securities, other than obligations of domestic banks or
of the U.S. Government, or its agencies or instrumentalities, if,
immediately after such purchase, more than 25% of the value of the MONEY
MARKET PORTFOLIO's total
47 - PROSPECTUS
<PAGE>
assets would be invested in the securities of issuers in the same industry;
however, there is no limitation as to investments in domestic bank
obligations or in obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
In addition, as a non-fundamental policy, each Portfolio of the Fund may not
invest more than 15% (10% in the case of the MONEY MARKET PORTFOLIO) of its
total assets in "illiquid securities" (securities for which market quotations
are not readily available) and repurchase agreements which have a maturity of
longer than seven days. For purposes of this policy, securities eligible for
sale pursuant to Rule 144A under the Securities Act are not considered illiquid
if they are determined to be liquid under procedures adopted by the Trustees of
the Fund. As another non-fundamental policy, each Portfolio of the Fund may not
purchase securities of other investment companies, except in connection with a
merger, consolidation, reorganization or acquisition of assets or, in the case
of the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, in accordance
with the provisions of Section 12(d) of the Act and any Rules promulgated
thereunder (e.g., each of these Portfolios may not invest in more than 3% of the
outstanding voting securities of any investment company). For this purpose,
Mortgage-Backed Securities and Asset-Backed Securities are not deemed to be
investment companies.
All percentage limitations apply immediately after a purchase or initial
investment, and any subsequent change in any applicable percentage resulting
from market fluctuations or other changes in the amount of total assets does not
require elimination of any security from the Portfolio.
DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------------------
The net asset value per share is calculated separately for each Portfolio. In
general, the net asset value per share is computed by taking the value of all
the assets of the Portfolio, subtracting all liabilities, dividing by the number
of shares outstanding and adjusting the result to the nearest cent. The Fund
will compute the net asset value per share of each Portfolio once daily at 4:00
p.m., New York time (or, on days when the New York Stock Exchange closes prior
to 4:00 p.m., at such earlier time), on days the New York Stock Exchange is open
for trading. The net asset value per share will not be determined on Good Friday
and on such other Federal and non-Federal holidays as are observed by the New
York Stock Exchange.
The MONEY MARKET PORTFOLIO utilizes the amortized cost method in valuing its
portfolio securities, which method involves valuing a security at its cost
adjusted by a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The purpose of this method of calculation is to facilitate the
maintenance of a constant net asset value per share of $1.00. However, there can
be no assurance that the $1.00 net asset value will be maintained.
In the calculation of the net asset value of the Portfolios other than the MONEY
MARKET PORTFOLIO: (1) an equity portfolio security listed or traded on the New
York or American Stock Exchange or other domestic or foreign stock exchange is
valued at its latest sale price on that exchange prior to the time when assets
are valued (if there were no sales that day, the security is valued at the
latest bid price) (in cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market pursuant to procedures adopted by the Trustees); and (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest bid price prior to the time of valuation.
When market quotations are not readily available, including circumstances under
which it is determined by the Investment Manager (or, in the case of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, by the Sub-Adviser) that sale or bid prices are not
reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Board of Trustees. Valuation of
securities for which market quotations are not readily available may also be
based upon current market prices of securities which are comparable in coupon,
rating and maturity or an appropriate matrix utilizing similar factors. For
valuation purposes, quotations of foreign portfolio securities, other assets and
liabilities and forward contracts stated in foreign currency are translated into
U.S. dollar equivalents at the prevailing market rates prior to the close of the
New York Stock Exchange. Dividends receivable are accrued as of the ex-dividend
date except for certain dividends from foreign securities which are accrued as
soon as the Fund is informed of such dividends after the ex-dividend date.
Short-term debt securities with remaining maturities of sixty days or less at
the time of purchase are valued at amortized cost, unless the Trustees determine
such does not reflect the securities' market value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Certain of the portfolio securities of each Portfolio other than the MONEY
MARKET PORTFOLIO may be valued by an outside pricing service approved by the
Fund's Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters, and/or
research evaluations by its staff, including review of broker-dealer market
price quotations, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service.
48 - PROSPECTUS
<PAGE>
PURCHASE OF FUND SHARES
--------------------------------------------------------------------
Investments in the Fund may be made only by (1) Hartford Life Insurance Company
for allocation to certain separate accounts it established and maintains for the
purpose of funding variable annuity contracts and variable life insurance
policies it issues, and by (2) Hartford Life and Annuity Insurance Company for
allocation to certain separate accounts it established and maintains for the
purpose of funding variable annuity contracts and variable life insurance
policies it issues. Persons desiring to purchase annuity contracts or life
insurance policies funded by any Portfolio of the Fund should read this
Prospectus in conjunction with the Prospectus of the flexible premium deferred
annuity contracts or the flexible premium variable life insurance policies
issued by Hartford Life Insurance Company or Hartford Life and Annuity Insurance
Company (the "Companies").
In the future, shares of the Portfolios of the Fund may be allocated to certain
other separate accounts or sold to affiliated and/ or non-affiliated entities of
the Companies in connection with variable annuity contracts or variable life
insurance contracts. It is conceivable that in the future it may become
disadvantageous for both variable life and variable annuity contract separate
accounts to invest in the same underlying fund. Although the Companies and the
Fund do not currently foresee any such disadvantage, the Fund's Board of
Trustees intends to monitor events in order to identify any material
irreconcilable conflict between the interests of variable annuity contract
owners and variable life insurance policy owners and to determine what action,
if any, should be taken in response thereto.
Shares of each Portfolio of the Fund are offered to the Companies for allocation
to the Accounts without sales charge at the respective net asset values of the
Portfolios next determined after receipt by the Fund of the purchase payment in
the manner set forth above under "Determination of Net Asset Value." In the
interest of economy and convenience, certificates representing the Fund's shares
will not be physically issued.
REDEMPTION OF FUND SHARES
--------------------------------------------------------------------
Shares of any Portfolio of the Fund can be redeemed by the Companies at any time
for cash, without sales charge, at the net asset value next determined after
receipt of the redemption request. (For information regarding charges which may
be imposed upon the Contracts by the applicable Account, see the Prospectus for
the Contracts.)
The Fund reserves the right to suspend the right of redemption or to postpone
the date of payment upon redemption of the shares of any Portfolio for any
period during which the New York Stock Exchange is closed (other than weekend
and holiday closings) or trading on that Exchange is restricted, or during which
an emergency exists (as determined by the Securities and Exchange Commission) as
a result of which disposal of the portfolio securities owned by the Portfolio is
not reasonably practicable or it is not reasonably practicable for the Portfolio
to determine the value of its net assets, or for such other period as the
Securities and Exchange Commission may by order permit for the protection of
shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to distribute substantially all of
the net investment income and net realized capital gains, if any, of each
Portfolio. Dividends from net investment income and any distributions of
realized capital gains will be paid in additional shares of the Portfolio paying
the dividend or making the distribution and credited to the shareholder's
account.
MONEY MARKET PORTFOLIO. Dividends from net income on the MONEY MARKET PORTFOLIO
will be declared, payable on each day the New York Stock Exchange is open for
business to shareholders of record as of the close of business the preceding
business day. Net income, for dividend purposes, includes accrued interest and
accretion of acquisition, original issue and market discount, less the
amortization of market premium and the estimated expenses of the MONEY MARKET
PORTFOLIO. The amount of dividend may fluctuate from day to day and may be
omitted on some days if realized losses on portfolio securities exceed the MONEY
MARKET PORTFOLIO's net investment income. Dividends are automatically reinvested
daily in additional shares of the MONEY MARKET PORTFOLIO at the net asset value
per share at the close of business that day. Any net realized capital gains will
be declared and paid at least once per calendar year; net short-term gains may
be paid more frequently, with the distribution of dividends from net investment
income.
OTHER PORTFOLIOS. Dividends from net investment income, if any, on the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH
PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the GROWTH PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO will be declared
and paid monthly, and any net
49 - PROSPECTUS
<PAGE>
realized capital gains will be declared and paid at least once per calendar
year.
TAXES. Because the Fund intends to distribute substantially all of the net
investment income and capital gains of each Portfolio and otherwise qualify each
Portfolio as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code"), it is not expected that any Portfolio of the Fund
will be required to pay any Federal income tax on such income and capital gains.
Gains or losses on a Portfolio's transactions in certain listed options and on
futures and options on futures generally are treated as 60% long-term and 40%
short-term capital gains or losses. When a Portfolio engages in options and
futures transactions, various tax regulations applicable to the Portfolio may
have the effect of causing the Portfolio to recognize a gain or loss for tax
purposes before that gain or loss is realized, or to defer recognition of a
realized loss for tax purposes. Recognition, for tax purposes, of an unrealized
loss may result in a lesser amount of the realized net short-term gains of the
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the UTILITIES PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO being available for distribution.
These Portfolios may make certain elections which may minimize the impact of
these rules but which could also result in a higher portion of the Portfolio's
gains being treated as short-term capital gains.
With respect to investments by the Portfolios in zero coupon bonds and
investment by the DIVERSIFIED INCOME PORTFOLIO and the EMERGING MARKETS
PORTFOLIO in payment-in-kind bonds, the Portfolios accrue income prior to any
actual cash payments by their issuers. In order to continue to comply with
Subchapter M of the Code and remain able to forego payment of Federal income tax
on their income and capital gains, each Portfolio must distribute all of its net
investment income, including income accrued from zero coupon and payment-in-kind
bonds. As such, these Portfolios may be required to dispose of some of their
portfolio securities under disadvantageous circumstances to generate the cash
required for distribution.
Dividends, interest and capital gains received by a Portfolio on investments in
foreign issuers or which are denominated in foreign currency may give rise to
withholding and other taxes imposed by foreign countries, which may or may not
be refunded to the Portfolio.
Since the Companies are the only shareholders of the Fund, no discussion is
stated herein as to the Federal income tax consequences at the shareholder
level. For information concerning the Federal income tax consequences to holders
of variable annuity contracts, see the Prospectus for the Contracts.
PERFORMANCE INFORMATION
--------------------------------------------------------------------
From time to time the Fund advertises the "yield" and "effective yield" of the
MONEY MARKET PORTFOLIO. Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the MONEY MARKET
PORTFOLIO refers to the income generated by an investment in the Portfolio over
a given period (which period will be stated in the advertisement). This income
is then annualized. The "effective yield" for a seven-day period is calculated
similarly but, when annualized, the income earned by an investment in the MONEY
MARKET PORTFOLIO is assumed to be reinvested each week within a 365-day period.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The MONEY MARKET PORTFOLIO's
"yield" and "effective yield" do not reflect the deduction of any charges which
may be imposed on the Contracts by the applicable Account and are therefore not
equivalent to total return under a Contract (for a description of such charges,
see the Prospectus for the Contracts).
From time to time the Fund advertises the "yield" of each of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED GROWTH PORTFOLIO. The yield of a Portfolio is based on historical
earnings and is not intended to indicate future performance. The yield of a
Portfolio is computed by dividing the Portfolio's net investment income over a
30-day period by an average value (using the average number of shares entitled
to receive dividends and the net asset value per share at the end of the
period), all in accordance with applicable regulatory requirements. Such amount
is compounded for six months and then annualized for a twelve-month period to
derive the Portfolio's yield. The "yield" of a Portfolio does not reflect
deduction of any charges which may be imposed on the Contracts by the applicable
Account and is therefore not equivalent to total return under a Contract (for a
description of such charges, see the Prospectus for the Contracts).
From time to time the Fund may quote the "total return" of each Portfolio in
advertisements and sales literature. The total return of a Portfolio is based on
historical earnings and is not intended to indicate future performance. The
"average annual total return" of a Portfolio refers to a figure reflecting the
average annualized percentage increase (or decrease) in the value of an initial
investment in the Portfolio of $1,000 over the life of the Portfolio. Average
annual total return reflects all income earned by the Portfolio, any
appreciation or depreciation of the Portfolio's assets and all expenses incurred
by the Portfolio for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Portfolio. However, average annual total
return does not reflect the deduction of any charges which may be imposed on the
Contracts by the applicable Account which, if reflected, would reduce the
performance quoted.
50 - PROSPECTUS
<PAGE>
In addition to the foregoing, the Fund may advertise the total return of the
Portfolios over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations similarly
do not reflect the deduction of any charges which may be imposed on the
Contracts by the applicable Account. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in shares of a
Portfolio. The Fund from time to time may also advertise the performance of the
Portfolios relative to certain performance rankings and indexes compiled by
independent organizations, such as Lipper Analytical Services, Inc.
ADDITIONAL INFORMATION
--------------------------------------------------------------------
The shares of beneficial interest of the Fund, with $0.01 par value, are divided
into thirteen separate Portfolios, and the shares of each Portfolio are equal as
to earnings, assets and voting privileges with all other shares of that
Portfolio. There are no conversion, pre-emptive or other subscription rights.
Upon liquidation of the Fund or any Portfolio, shareholders of a Portfolio are
entitled to share pro rata in the net assets of that Portfolio available for
distribution to shareholders after all debts and expenses have been paid. The
shares do not have cumulative voting rights.
The assets received by the Fund on the sale of shares of each Portfolio and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, are allocated to each Portfolio, and constitute the assets of such
Portfolio. The assets of each Portfolio are required to be segregated on the
Fund's books of account.
Additional Portfolios (the proceeds of which would be invested in separate,
independently managed portfolios with distinct investment objectives, policies
and restrictions) may be offered in the future, but such additional offerings
would not affect the interests of the current shareholders in the existing
Portfolios.
On any matters affecting only one Portfolio, only the shareholders of that
Portfolio are entitled to vote. On matters relating to all the Portfolios but
affecting the Portfolios differently, separate votes by Portfolio are required.
Approval of an Investment Management Agreement and a change in fundamental
policies would be regarded as matters requiring separate voting by each
Portfolio. To the extent required by law, Hartford Life Insurance Company and
Hartford Life and Annuity Insurance Company, which are the only shareholders of
the Fund, will vote the shares of the Fund held in each Account in accordance
with instructions from Contract Owners, as more fully described under the
caption "Voting Rights" in the Prospectus for the Contracts. The Trustees of the
Fund have been elected by Hartford Life Insurance Company and Hartford Life and
Annuity Insurance Company, pursuant to the instructions of Contract Owners.
The Fund is not required to hold Annual Meetings of Shareholders and in ordinary
circumstances the Fund does not intend to hold such meetings. The Trustees may
call Special Meetings of Shareholders for action by shareholder vote as may be
required by the Act or the Declaration of Trust.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Dean Witter Trust FSB, an
affiliate of the Investment Manager and MSAM, whose address is Harborside
Financial Center, Plaza Two, Jersey City, NJ 07311, is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payments of dividends and
distributions on Fund shares.
CODE OF ETHICS. Directors, officers and employees of InterCapital and Dean
Witter Services Company Inc. are subject to a strict Code of Ethics adopted by
those companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment activities and
that actual and potential conflicts of interest are avoided. To achieve these
goals and comply with regulatory requirements, the Code of Ethics requires,
among other things, that personal securities transactions by employees of the
companies be subject to an advance clearance process to monitor that no
investment company managed or advised by InterCapital ("Dean Witter Fund") is
engaged at the same time in a purchase or sale of the same security. The Code of
Ethics bans the purchase of securities in an initial public offering, and also
prohibits engaging in futures and options transactions and profiting on
short-term trading (that is, a purchase within sixty days of a sale or a sale
within sixty days of a purchase) of a security. In addition, investment
personnel may not purchase or sell a security for their personal account within
thirty days before or after any transaction in any Dean Witter Fund managed by
them. Any violations of the Code of Ethics are subject to sanctions, including
reprimand, demotion or suspension or termination of employment. The Code
51 - PROSPECTUS
<PAGE>
of Ethics comports with regulatory requirements and the recommendations in the
1994 report by the Investment Company Institute Advisory Group on Personal
Investing.
The Sub-Advisers of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO also each have a Code of
Ethics which complies with regulatory requirements and, insofar as it relates to
persons associated with investment companies, the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.
YEAR 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the Transfer
Agent depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert to 1900
or some other date, due to the manner in which dates were encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Investment Manager and the
Transfer Agent have been actively working on necessary changes to their own
computer systems to prepare for the year 2000 and expect that their systems will
be adapted before that date, but there can be no assurance that they will be
successful, or that interaction with other non-complying computer systems will
not impair their services at that time.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
52 - PROSPECTUS
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
--------------------------------------------------------------------
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
BOND RATINGS
<TABLE>
<S> <C>
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 or 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 Bonds 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.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
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 therefore 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 desirable
investments. 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.
</TABLE>
CONDITIONAL RATING: Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its corporate and municipal
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers: Prime-1,
Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
BOND RATINGS
A Standard & Poor's bond rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.
53 - PROSPECTUS
<PAGE>
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. The ratings are
based, in varying degrees, on the following considerations: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligation; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces 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 Debt rated B has a greater vulnerability to default but presently has
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.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless Stan-
dard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates
that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the bonds being
rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no
comment on the likelihood or risk of default upon failure of such
completion.
</TABLE>
COMMERCIAL PAPER RATINGS
Standard and Poor's 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. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into group
categories, ranging from "A" for the highest quality obligations to "D" for
54 - PROSPECTUS
<PAGE>
the lowest. Ratings are applicable to both taxable and tax-exempt commercial
paper. The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 and 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 indicates that the degree of safety regarding timely payment is very
strong.
A-2 indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations carrying
this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
</TABLE>
55 - PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
DEAN WITTER
SELECT DIMENSIONS
INVESTMENT SERIES
- ----------------------------------------------------------------------
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES (the "Fund") is an open-end
diversified management investment company which is intended to provide a broad
range of investment alternatives with its thirteen separate Portfolios, each of
which has distinct investment objectives and policies:
- THE MONEY MARKET PORTFOLIO
- THE NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
- THE DIVERSIFIED INCOME PORTFOLIO
- THE BALANCED GROWTH PORTFOLIO
- THE UTILITIES PORTFOLIO
- THE DIVIDEND GROWTH PORTFOLIO
- THE VALUE-ADDED MARKET PORTFOLIO
- THE GROWTH PORTFOLIO
- THE AMERICAN VALUE PORTFOLIO
- THE MID-CAP GROWTH PORTFOLIO
- THE GLOBAL EQUITY PORTFOLIO
- THE DEVELOPING GROWTH PORTFOLIO
- THE EMERGING MARKETS PORTFOLIO
There can be no assurance that the investment objectives of the Portfolios
will be achieved. See "Investment Practices and Policies."
A Prospectus for the Fund dated March 2, 1998, which provides the basic
information you should know before allocating your investment under your
Contract to the Fund, may be obtained without charge from the Fund at its
address or telephone numbers listed below or from Dean Witter Reynolds Inc. at
any of its branch offices. This Statement of Additional Information is not a
Prospectus. It contains information in addition to and more detailed than that
set forth in the Prospectus for the Fund. It is intended to provide you
additional information regarding the activities and operations of the Fund, and
should be read in conjunction with the Prospectuses for the Fund and for the
flexible premium deferred variable annuity contracts or the flexible premium
variable life insurance policies issued by Hartford Life Insurance Company or
Hartford Life and Annuity Insurance Company.
Dean Witter
Select Dimensions Investment Series
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund and its Management................................. 3
Trustees and Officers....................................... 9
Investment Practices and Policies........................... 17
Investment Restrictions..................................... 49
Portfolio Transactions and Brokerage........................ 50
Purchase and Redemption of Fund Shares...................... 54
Dividends, Distributions and Taxes.......................... 57
Performance Information..................................... 59
Description of Shares of the Fund........................... 62
Custodians and Transfer Agent............................... 64
Independent Accountants..................................... 64
Reports to Shareholders..................................... 64
Legal Counsel............................................... 64
Experts..................................................... 64
Registration Statement...................................... 64
Financial Statements -- December 31, 1997................... 65
Report of Independent Accountants........................... 144
Appendix -- Ratings......................................... 145
</TABLE>
------------------------
Currently, the shares of the Fund are sold only to (1) Hartford Life
Insurance Company for allocation to certain of its separate accounts to fund the
benefits under certain flexible premium deferred variable annuity contracts and
certain flexible premium variable life insurance policies it issues, and to (2)
Hartford Life and Annuity Insurance Company for allocation to certain of its
separate accounts to fund the benefits under certain flexible premium deferred
variable annuity contracts and certain flexible premium variable life insurance
policies it issues. Such separate accounts are sometimes referred to
individually as an "Account" and collectively as the "Accounts." The variable
annuity contracts issued by Hartford Life Insurance Company and Hartford Life
and Annuity Insurance Company (the "Companies") are sometimes referred to as the
"Variable Annuity Contracts." The variable life insurance policies issued by the
Companies are sometimes referred to as the "Variable Life Policies," and the
Variable Annuity Contracts and the Variable Life Policies are sometimes referred
to as the "Contracts." Hartford Life and Annuity Insurance Company is a
wholly-owned subsidiary of Hartford Life Insurance Company. In the future,
shares may be allocated to certain other separate accounts or sold to affiliated
and/or non-affiliated entities of the Companies in connection with variable
annuity contracts or variable life insurance policies. The Companies will invest
in shares of the Fund in accordance with allocation instructions received from
Contract Owners, which allocation rights are further described in the Prospectus
for the Variable Annuity Contracts or the Variable Life Policies issued by
Hartford Life Insurance Company or Hartford Life and Annuity Insurance Company.
The Companies will redeem shares to the extent necessary to provide benefits
under the Contracts. It is conceivable that in the future it may become
disadvantageous for both variable life insurance and variable annuity contract
separate accounts to invest in the same underlying fund. Although the Companies
and the Fund do not currently foresee any such disadvantage, the Fund's Board of
Trustees intends to monitor events in order to identify any material
irreconcilable conflict between the interests of variable annuity contract
owners and variable life insurance contract owners and to determine what action,
if any, should be taken in response thereto.
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
THE FUND
The Fund was organized under the laws of the Commonwealth of Massachusetts
on June 2, 1994 and is a trust of the type commonly known as a "Massachusetts
business trust." On February 26, 1998, the Trustees of the Fund adopted an
amendment to the Declaration of Trust of the Fund changing the name of the
BALANCED PORTFOLIO to the BALANCED GROWTH PORTFOLIO and changing the name of the
CORE EQUITY PORTFOLIO to the GROWTH PORTFOLIO, effective March 2, 1998.
THE INVESTMENT MANAGER
Dean Witter InterCapital Inc. (the "Investment Manager" or "InterCapital"),
a Delaware corporation, whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. InterCapital is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), a Delaware
corporation. In an internal reorganization which took place in January, 1993,
InterCapital assumed the investment advisory, administrative and management
activities previously performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of InterCapital. (As
hereinafter used in this Statement of Additional Information, the terms
"InterCapital" and "Investment Manager" refer to DWR's InterCapital Division
prior to the internal reorganization and Dean Witter InterCapital Inc.
thereafter.) The daily management of the Fund and research relating to the
Fund's portfolios are conducted by or under the direction of officers of the
Fund and of the Investment Manager, subject to periodic review by the Fund's
Board of Trustees. Information as to these Trustees and officers is contained
under the caption, "Trustees and Officers."
The Investment Manager is also the investment manager or investment adviser
of the following investment companies: Dean Witter Liquid Asset Fund Inc., Dean
Witter High Yield Securities Inc., Dean Witter Tax-Free Daily Income Trust, Dean
Witter Developing Growth Securities Trust, Dean Witter Tax-Exempt Securities
Trust, Dean Witter Natural Resource Development Securities Inc., Dean Witter
Dividend Growth Securities Inc., Dean Witter American Value Fund, Dean Witter
U.S. Government Money Market Trust, Dean Witter World Wide Investment Trust,
Dean Witter Select Municipal Reinvestment Fund, Dean Witter U.S. Government
Securities Trust, Dean Witter California Tax-Free Income Fund, Dean Witter New
York Tax-Free Income Fund, Dean Witter Convertible Securities Trust, Dean Witter
Federal Securities Trust, Dean Witter Value-Added Market Series, Dean Witter
Utilities Fund, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
Strategist Fund, Dean Witter World Wide Income Trust, Dean Witter Intermediate
Income Securities, Dean Witter Capital Growth Securities, Dean Witter New York
Municipal Money Market Trust, Dean Witter European Growth Fund Inc., Dean Witter
Precious Metals and Minerals Trust, Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Pacific Growth Fund Inc., Dean Witter Multi-State Municipal
Series Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Health
Sciences Trust, Dean Witter Retirement Series, Dean Witter Global Dividend
Growth Securities, Dean Witter Limited Term Municipal Trust, Dean Witter
Short-Term Bond Fund, Dean Witter Global Utilities Fund, Dean Witter
International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Global
Asset Allocation Fund, Dean Witter Hawaii Municipal Trust, Dean Witter Capital
Appreciation Fund, Dean Witter Information Fund, Dean Witter Intermediate Term
U.S. Treasury Trust, Dean Witter Japan Fund, Dean Witter Income Builder Fund,
Dean Witter Special Value Fund, Dean Witter Financial Services Trust, Dean
Witter Market Leader Trust, Dean Witter S&P 500 Index Fund, Dean Witter Fund of
Funds, Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" PORTFOLIO,
Morgan Stanley Dean Witter Growth Fund, InterCapital Income Securities Inc.,
High Income Advantage Trust, High Income Advantage Trust II, High Income
Advantage Trust III, Dean Witter Government Income Trust, InterCapital Insured
Municipal Bond Trust, InterCapital Insured Municipal Trust, InterCapital Insured
Municipal Income Trust, InterCapital Insured Municipal Securities, InterCapital
California Insured Municipal Income Trust, InterCapital Insured California
Municipal Securities, InterCapital Quality Municipal Investment Trust,
InterCapital Quality Municipal Income Trust, InterCapital Quality Municipal
Securities, InterCapital California Quality Municipal Securities, InterCapital
New York Quality Municipal Securities, Active Assets Money Trust, Active Assets
Tax-Free Trust, Active Assets California Tax-Free Trust,
3
<PAGE>
Active Assets Government Securities Trust, Municipal Income Trust, Municipal
Income Trust II, Municipal Income Trust III, Municipal Income Opportunities
Trust, Municipal Income Opportunities Trust II, Municipal Income Opportunities
Trust III, Municipal Premium Income Trust and Prime Income Trust. The foregoing
investment companies, together with the Fund, are collectively referred to as
the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc., the Sub-Adviser of various
Portfolios of the Fund, is the investment adviser: TCW/DW North American
Government Income Trust, TCW/DW Latin American Growth Fund, TCW/DW Income and
Growth Fund, TCW/DW Small Cap Growth Fund, TCW/DW Total Return Trust, TCW/DW
Mid-Cap Equity Trust, TCW/DW Global Telecom Trust, TCW/DW Emerging Markets
Opportunities Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust 2002 and TCW/DW
Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves as: (i)
administrator of The BlackRock Strategic Term Trust Inc., a closed-end
investment company; (ii) sub-administrator of MassMutual Participation Investors
and Templeton Global Governments Income Trust, closed-end investment companies;
and (iii) investment adviser of Offshore Dividend Growth Fund and Offshore Money
Market Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in DWR's International Active
Assets Account program and are neither citizens nor residents of the United
States.
Pursuant to an Investment Management Agreement (the "Management Agreement")
with the Investment Manager, the Fund has retained the Investment Manager to
manage the investment of the assets of each Portfolio, including the placing of
orders for the purchase and sale of portfolio securities. The Investment Manager
obtains and evaluates such information and advice relating to the economy,
securities markets, and specific securities as it considers necessary or useful
to continuously manage the assets of the Portfolios of the Fund in a manner
consistent with their investment objectives and policies.
Under the terms of the Management Agreement, the Investment Manager also
maintains certain of the Fund's books and records and furnishes, at its own
expense, such office space, facilities, equipment, clerical help, bookkeeping
and certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed with
federal and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment Manager
pays the salaries of all personnel, including officers of the Fund, who are
employees of the Investment Manager. The Investment Manager also bears the cost
of telephone service, heat, light, power and other utilities provided to the
Fund. The Investment Manager has retained DWSC to perform its administrative
services under the Management Agreement.
Under the terms of the Management Agreement, the Investment Manager is
authorized to retain a sub-adviser or sub-advisers and, pursuant to a
Sub-Advisory Agreement between the Investment Manager and TCW Funds Management,
Inc. ("TCW"), the Investment Manager has retained TCW to provide the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the EMERGING MARKETS PORTFOLIO of
the Fund with investment advice and portfolio management, in each case subject
to the overall supervision of the Investment Manager. TCW is a wholly-owned
subsidiary of The TCW Group, Inc., whose direct and indirect subsidiaries,
including Trust Company of the West and TCW Asset Management Company, provide a
variety of trust, investment management and investment advisory services. As of
January 31, 1998, TCW and its affiliates had approximately $50 billion under
management or committed to management. Trust Company of the West and its
affiliates have managed securities portfolios for institutional investors since
1971. TCW is headquartered at 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017 and is registered as an investment adviser under the
Investment Advisers Act of 1940. TCW serves as investment adviser to the
thirteen TCW/DW Funds named above and also serves as investment adviser to TCW
Convertible Securities Fund, Inc., a closed-end investment company traded
4
<PAGE>
on the New York Stock Exchange, and to TCW Funds, Inc., open-end investment
companies, and acts as adviser or sub-adviser to other investment companies.
Robert A. Day, who is Chairman of the Board of Directors of TCW, may be
deemed to be a control person of the Sub-Adviser by virtue of the aggregate
ownership by Mr. Day and his family of more than 25% of the outstanding voting
stock of The TCW Group, Inc.
TCW in turn has entered into further sub-advisory agreements (the "Secondary
Sub-Advisory Agreements") with two of its affiliates, TCW Asia Limited, a Hong
Kong corporation, and TCW London International, Limited, a California
corporation (the "Secondary Sub-Advisers"), pursuant to which the Secondary
Sub-Advisers will assist TCW in providing services under the Sub-Advisory
Agreement in respect of the EMERGING MARKETS PORTFOLIO. Each of the Secondary
Sub-Advisers is a wholly-owned subsidiary of The TCW Group, Inc.
Pursuant to a Sub-Advisory Agreement between the Investment Manager and
Morgan Stanley Asset Management Inc. ("MSAM"), the Investment Manager has
retained MSAM to provide the GROWTH PORTFOLIO of the Fund with investment advice
and portfolio management, subject to the overall supervision of the Investment
Manager. MSAM, a subsidiary of MSDWD and an affiliate of the Investment Manager,
became the Sub-Adviser of the GROWTH PORTFOLIO on March 2, 1998, in the place of
TCW, which served as Sub-Adviser of that Portfolio until that date. MSAM,
together with its affiliated asset management companies, conducts a worldwide
portfolio management business and provides a broad range of portfolio management
services to customers in the United States and abroad. As of January 31, 1998,
MSAM, together with its affiliated asset management companies, had approximately
$148.7 billion in assets under management as an investment manager or as a
fiduciary adviser.
TCW and MSAM are sometimes collectively referred to as the "Sub-Advisers"
and individually as a "Sub-Adviser."
Expenses not expressly assumed by the Investment Manager under the
Management Agreement or by the Sub-Adviser of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO
pursuant to the applicable Sub-Advisory Agreement (see below) will be paid by
the Fund. Each Portfolio pays all other expenses incurred in its operation and a
portion of the Fund's general administration expenses allocated on the basis of
the asset size of the respective Portfolios. Expenses that are borne directly by
a Portfolio include, but are not limited to: charges and expenses of any
registrar, custodian, share transfer and dividend disbursing agent; brokerage
commissions; certain taxes; registration costs of the Portfolio and its shares
under federal and state securities laws; shareholder servicing costs; charges
and expenses of any outside service used for pricing of the shares of the
Portfolio; interest on borrowings by the Portfolio; fees and expenses of legal
counsel, including counsel to the Trustees who are not interested persons of the
Fund or of the Investment Manager (or the Sub-Adviser) (not including
compensation or expenses of attorneys who are employees of the Investment
Manager (or the Sub-Adviser)) and independent accountants; and all other
expenses attributable to a particular Portfolio. Expenses which are allocated on
the basis of size of the respective Portfolios include the costs and expenses of
printing, including typesetting, and distributing prospectuses and statements of
additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Trustees or members of any advisory board or
committee who are not employees of the Investment Manager (or the Sub-Adviser)
or any corporate affiliate of the Investment Manager (or the Sub-Adviser); state
franchise taxes; Securities and Exchange Commission fees; membership dues of
industry associations; postage; insurance premiums on property or personnel
(including officers and Trustees) of the Fund which inure to its benefit; and
all other costs of the Fund's operations properly payable by the Fund and
allocable on the basis of size of the respective Portfolios. Depending on the
nature of a legal claim, liability or lawsuit, litigation costs, payment of
legal claims or liabilities and any indemnification relating thereto may be
directly applicable to the Portfolio or allocated on the basis of the size of
the respective Portfolios. The Trustees have determined that this is an
appropriate method of allocation of expenses.
5
<PAGE>
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the annual
rate of 0.50% to the net assets of the MONEY MARKET PORTFOLIO; 0.65% to the net
assets of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO; 0.40% to the net
assets of the DIVERSIFIED INCOME PORTFOLIO; 0.60% to the net assets of the
BALANCED GROWTH PORTFOLIO; 0.65% to the net assets of the UTILITIES PORTFOLIO;
0.625% to the net assets of the DIVIDEND GROWTH PORTFOLIO; 0.50% to the net
assets of the VALUE-ADDED MARKET PORTFOLIO; 0.80% to the net assets of the
GROWTH PORTFOLIO; 0.625% to the net assets of the AMERICAN VALUE PORTFOLIO;
0.75% to the net assets of the MID-CAP GROWTH PORTFOLIO; 1.0% to the net assets
of the GLOBAL EQUITY PORTFOLIO; 0.50% to the net assets of the DEVELOPING GROWTH
PORTFOLIO; and 1.25% to the net assets of the EMERGING MARKETS PORTFOLIO, in
each case determined as of the close of each business day. Until December 31,
1995, the Investment Manager assumed all operating expenses of each Portfolio
then in existence (except for any brokerage fees and a portion of organizational
expenses) and waived the compensation provided for each Portfolio in its
Management Agreement with the Fund. The Investment Manager had undertaken, until
the earlier of December 31, 1996 or the attainment by the respective Portfolio
of $50 million of net assets, to continue to assume such expenses and waive such
compensation for each Portfolio then in existence (other than the DIVIDEND
GROWTH PORTFOLIO, whose net assets exceeded $50 million on December 31, 1995) to
the extent that such expenses and compensation on an annualized basis exceeded
0.50% of the average daily net assets of each respective Portfolio. The AMERICAN
VALUE PORTFOLIO, the MONEY MARKET PORTFOLIO, the VALUE-ADDED MARKET PORTFOLIO,
the DEVELOPING GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO attained $50
million of net assets on February 26, 1996, March 20, 1996, August 13, 1996,
September 14, 1996, and October 15, 1996, respectively. The Investment Manager
has undertaken to assume such expenses and waive such compensation for the
MID-CAP GROWTH PORTFOLIO until the earlier of July 31, 1998 or the attainment by
the Portfolio of $50 million in net assets. The Management Agreement also
provides that if the total operating expenses of a Portfolio (other than the
MID-CAP GROWTH PORTFOLIO), exclusive of taxes, interest, brokerage fees and
certain legal claims and liabilities and litigation and indemnification
expenses, as described in the Management Agreement, for the fiscal year exceed
2.5% of the first $30,000,000 of average daily net assets of the Portfolio, 2%
of the next $70,000,000 and 1.5% of any excess over $100,000,000, the Investment
Manager will reimburse the Portfolio for the amount of such excess, up to the
amount of the management fee for such Portfolio for that year. Such amount, if
any, will be calculated daily and credited on a monthly basis. For the fiscal
year ended December 31, 1996, the amount of compensation accrued to the
Investment Manager under the Management Agreement in effect for the
then-existing Portfolios was $2,508,088 ($288,326 for the MONEY MARKET
PORTFOLIO, $0 for the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, $36,906
for the DIVERSIFIED INCOME PORTFOLIO, $54,817 for the BALANCED GROWTH PORTFOLIO,
$100,392 for the UTILITIES PORTFOLIO, $1,015,687 for the DIVIDEND GROWTH
PORTFOLIO, $196,612 for the VALUE-ADDED MARKET PORTFOLIO, $6,411 for the GROWTH
PORTFOLIO, $473,945 for the AMERICAN VALUE PORTFOLIO, $179,010 for the GLOBAL
EQUITY PORTFOLIO, $155,982 for the DEVELOPING GROWTH PORTFOLIO and $0 for the
EMERGING MARKETS PORTFOLIO. With the exception of the DIVIDEND GROWTH PORTFOLIO,
the amounts shown are net of the Investment Manager's waiver of compensation
under the Management Agreement. For the fiscal year ended December 31, 1997, the
amount of compensation accrued to the Investment Manager under the Management
Agreement(s) then in effect was $7,234,436 ($463,709 for the MONEY MARKET
PORTFOLIO, $30,048 for the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
$186,066 for the DIVERSIFIED INCOME PORTFOLIO, $422,583 for the BALANCED GROWTH
PORTFOLIO, $261,168 for the UTILITIES PORTFOLIO, $2,477,416 for the DIVIDEND
GROWTH PORTFOLIO, $540,475 for the VALUE-ADDED MARKET PORTFOLIO, $254,398 for
the GROWTH PORTFOLIO, $1,082,276 for the AMERICAN VALUE PORTFOLIO, $0 for the
MID-CAP GROWTH PORTFOLIO, $852,703 for the GLOBAL EQUITY PORTFOLIO, $355,267 for
the DEVELOPING GROWTH PORTFOLIO, and $308,327 for the EMERGING MARKETS
PORTFOLIO.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of its obligations
thereunder, the Investment Manager is not liable to the Fund or any of its
investors for any act or omission by the Investment Manager or for any losses
sustained by the Fund or its investors. The Management Agreement in no way
restricts the Investment Manager from acting as investment manager or adviser to
others.
6
<PAGE>
The Investment Manager paid the organizational expenses of the Fund of
approximately $96,000 ($8,000 for each respective initial Portfolio) incurred
prior to the offering of the Fund's shares. The Fund has reimbursed the
Investment Manager for the full amount, exclusive of amounts waived of
approximately $22,000 ($1,833 for each respective initial Portfolio). Such
expenses have been deferred and are being amortized by the straight-line method
over a period not to exceed five years from the date of commencement of the
Fund's operations.
Both the Investment Manager and the Sub-Advisers have authorized any of
their directors, officers and employees who have been elected as Trustees or
officers of the Fund to serve in the capacities in which they have been elected.
Services furnished to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO by the Investment Manager
and the applicable Sub-Adviser may be furnished by directors, officers and
employees of the Investment Manager and the applicable Sub-Adviser. In
connection with the services rendered by a Sub-Adviser, the applicable Sub-
Adviser bears the following expenses: (a) the salaries and expenses of its
personnel; and (b) all expenses incurred by it in connection with performing the
services provided by it as Sub-Adviser, as described above.
As full compensation for the services and facilities furnished to the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO, the EMERGING
MARKETS PORTFOLIO and the Investment Manager, and the expenses of these
Portfolios and the Investment Manager assumed by the Sub-Adviser, the Investment
Manager pays the applicable Sub-Adviser monthly compensation equal to 40% of the
Investment Manager's monthly compensation payable under the Management Agreement
in respect of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH
PORTFOLIO and the EMERGING MARKETS PORTFOLIO. Pursuant to the Sub-Advisory
Agreement, if any reimbursement is made by the Investment Manager to the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING
MARKETS PORTFOLIO as a result of the Portfolio exceeding the expense limitation,
the Investment Manager will be reimbursed for 40% of such payment by the
Sub-Adviser. For the services to be provided to TCW by the Secondary
Sub-Advisers under the applicable Secondary Sub-Advisory Agreements, the Sub-
Adviser pays each Secondary Sub-Adviser monthly compensation determined by
applying the annual rate of 0.50% to the Portfolio's average daily net assets
for which the Secondary Sub-Adviser renders sub-advisory services. Prior to
March 1, 1998, TCW also served as Sub-Adviser to the BALANCED GROWTH PORTFOLIO
and was paid by the Investment Manager monthly compensation equal to 40% of the
Investment Manager's monthly compensation payable under the Management Agreement
in respect of that Portfolio, subject to the same reimbursement provisions
described above.
The Management Agreement, the Sub-Advisory Agreement in respect of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO and the EMERGING MARKETS PORTFOLIO, and
the Secondary Sub-Advisory Agreements in respect of the EMERGING MARKETS
PORTFOLIO were initially approved by the Trustees of the Fund on February 21,
1997 and by Hartford Life Insurance Company and Hartford Life and Annuity
Insurance Company pursuant to the instructions of Contract Owners on May 20,
1997, and took effect on May 31, 1997 upon the merger of Dean Witter, Discover &
Co. with Morgan Stanley Group Inc. Until March 2, 1998, the Sub-Advisory
Agreement also encompassed the BALANCED GROWTH PORTFOLIO (then named the
BALANCED PORTFOLIO) and the GROWTH PORTFOLIO (then named the CORE EQUITY
PORTFOLIO). These Agreements are substantially identical to prior Investment
Management, Sub-Advisory and Secondary Sub-Advisory Agreements that had been
initially approved by the Trustees of the Fund on August 25, 1994 and by
Hartford Life Insurance Company as the then sole shareholder on August 31, 1994
with respect to the initial Portfolios (the prior Management Agreement had been
approved with respect to the MID-CAP GROWTH PORTFOLIO by the Trustees of the
Fund on October 25, 1996 and by Hartford Life Insurance Company as the then sole
shareholders of the Portfolio on October 28, 1996). In October 1997, TCW
indicated its intention to resign as Sub-Adviser of the BALANCED GROWTH
PORTFOLIO and the GROWTH PORTFOLIO and on November 6, 1997 the Trustees of the
Fund determined that (i) InterCapital would assume the investment management
advice and portfolio management function then being performed by TCW for the
BALANCED GROWTH PORTFOLIO and (ii) the Sub-Advisory Agreement with MSAM
described above in respect of the GROWTH PORTFOLIO would be submitted to
shareholders for approval. Hartford Life Insurance Company and Hartford Life and
Annuity Insurance Company, pursuant to the
7
<PAGE>
instructions of Contract Owners, approved the Sub-Advisory Agreement with MSAM
in respect of the GROWTH PORTFOLIO on February 26, 1998 and the Sub-Advisory
Agreement with MSAM became effective on March 2, 1998. On that date, TCW also
resigned as Sub-Adviser of the BALANCED GROWTH PORTFOLIO and InterCapital
assumed all investment management advice and portfolio management functions for
that Portfolio. On November 6, 1997, the Trustees of the Fund also amended the
Investment Management Agreement to reduce the management fee payable by the
BALANCED GROWTH PORTFOLIO from 0.75% of the Portfolio's daily net assets to
0.60% of daily net assets, and to reduce the management fee payable by the
GROWTH PORTFOLIO from 0.85% of the Portfolio's daily net assets to 0.80% of
daily net assets, effective on March 2, 1998, and amended the Sub-Advisory
Agreement with TCW to delete references to the BALANCED GROWTH PORTFOLIO and the
GROWTH PORTFOLIO. The Management Agreement, the Sub-Advisory Agreements and the
Secondary Sub-Advisory Agreements are sometimes herein referred to as the
"Agreements."
The Agreements may be terminated at any time, without penalty, on thirty
days' notice by the Trustees of the Fund, by the holders of a majority, as
defined in the Investment Company Act of 1940, as amended (the "Act"), of the
outstanding shares of the Fund, or by the other party or parties to the
Agreements. Each Agreement will automatically terminate in the event of its
assignment (as defined in the Act). Under their terms, each Agreement has an
initial term ending April 30, 1999 and will continue from year to year
thereafter, provided continuance of the Agreement is approved at least annually
by the vote of the holders of a majority, as defined in the Act, of the
outstanding shares of each Portfolio (or, in the case of the Sub-Advisory
Agreements in respect of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the outstanding shares of
each of those Portfolios, or, in the case of the Secondary Sub-Advisory
Agreements in respect of the EMERGING MARKETS PORTFOLIO, the outstanding shares
of that Portfolio), or by the Trustees of the Fund; provided that in either
event such continuance is approved annually by the vote of a majority of the
Trustees of the Fund who are not parties to the Agreement or "interested
persons" (as defined in the Act) of any such party (the "Independent Trustees"),
which vote must be cast in person at a meeting called for the purpose of voting
on such approval. If the question of continuance of the Management Agreement,
the Sub-Advisory Agreements or the Secondary Sub-Advisory Agreements (or
adoption of any new Management, Sub-Advisory or Secondary Sub-Advisory
Agreement) is presented to shareholders, continuance (or adoption) with respect
to a Portfolio shall be effective only if approved by a majority vote of the
outstanding voting securities of that Portfolio. If the shareholders of any one
or more of the Portfolios should fail to approve the Management Agreement, a
Sub-Advisory Agreement or a Secondary Sub-Advisory Agreement, the Investment
Manager may nonetheless serve as Investment Manager with respect to any
Portfolio whose shareholders approved the Management Agreement, and the Sub-
Advisers and the Secondary Sub-Advisers may nonetheless serve as Sub-Adviser or
Secondary Sub-Adviser, as the case may be, with respect to any Portfolio whose
shareholders have approved the Management Agreement, the applicable Sub-Advisory
Agreement and the Secondary Sub-Advisory Agreements.
To the extent required by law, Hartford Life Insurance Company and Hartford
Life and Annuity Insurance Company, which are the only shareholders of the Fund,
will vote the shares of the Fund held by them in accordance with instructions
from Contract Owners, as more fully described under the caption "Voting Rights"
in the Prospectuses for the Contracts.
The Fund has acknowledged that the name "Dean Witter" is a property right of
DWR. The Fund has agreed that DWR or its parent company may use or, at any time,
permit others to use, the name "Dean Witter." The Fund has also agreed that in
the event the Management Agreement is terminated, or if the affiliation between
InterCapital and its parent company is terminated, the Fund will eliminate the
name "Dean Witter" from its name if DWR or its parent company shall so request.
8
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
InterCapital and TCW Funds Management, Inc. and with the 85 Dean Witter Funds
and the 11 TCW/DW Funds are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Michael Bozic (57) Chairman and Chief Executive Officer of Levitz Furniture Corporation
Trustee (since November, 1995); Director or Trustee of the Dean Witter Funds;
c/o Levitz Furniture Corporation formerly President and Chief Executive Officer of Hills Department
6111 Broken Sound Parkway, N.W. Stores (May, 1991-July, 1995); formerly variously Chairman, Chief
Boca Raton, Florida Executive Officer, President and Chief Operating Officer (1987-1991) of
the Sears Merchandise Group of Sears, Roebuck and Co.; Director of
Eaglemark Financial Services, Inc., the United Negro College Fund and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (64) Chairman and Chief Executive Officer and Director of InterCapital, DWSC
Chairman of the Board, and Dean Witter Distributors Inc. ("Distributors"); Executive Vice
President and Chief Executive President and Director of DWR; Chairman, Director or Trustee, President
Officer and Trustee and Chief Executive Officer of the Dean Witter Funds; Chairman, Chief
Two World Trade Center Executive Officer and Trustee of the TCW/DW Funds; Chairman and
New York, New York Director of Dean Witter Trust FSB ("DWT"); Director and/or officer of
various MSDWD subsidiaries.
Edwin J. Garn (65) Director or Trustee of the Dean Witter Funds; formerly United States
Trustee Senator (R-Utah) (1974-1992) and Chairman, Senate Banking Committee
c/o Huntsman Corporation (1980-1986); formerly Mayor of Salt Lake City, Utah (1972-1974);
500 Huntsman Way formerly Astronaut, Space Shuttle Discovery (April 12-19, 1985); Vice
Salt Lake City, Utah Chairman, Huntsman Corporation; Director of Franklin Covey (time
management systems), John Alden Financial Corp. (health insurance),
United Space Alliance (joint venture between Lockheed Martin and the
Boeing Company) and Nuskin Asia Pacific (multilevel marketing); member
of the board of various civic and charitable organizations.
John R. Haire (73) Chairman of the Audit Committee and Chairman of the Committee of the
Trustee Independent Directors or Trustees and Director or Trustee of the Dean
Two World Trade Center Witter Funds; Chairman of the Audit Committee and Chairman of the
New York, New York Committee of the Independent Trustees and Trustee of the TCW/DW Funds;
formerly President, Council for Aid to Education (1978-1989) and
Chairman and Chief Executive Officer of Anchor Corporation, an
Investment Adviser (1964-1978).
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Wayne E. Hedien (64) Retired; Director or Trustee of the Dean Witter Funds; Director of The
Trustee PMI Group, Inc. (private mortgage insurance); Trustee and Vice Chairman
c/o Gordon Altman Butowsky of The Field Museum of Natural History; formerly associated with the
Weitzen Shalov & Wein Allstate Companies (1966-1994), most recently as Chairman of The
Counsel to the Independent Allstate Corporation (March, 1993-December, 1994) and Chairman and
Trustees Chief Executive Officer of its wholly-owned subsidiary, Allstate
114 West 47th Street Insurance Company (July, 1989-December, 1994); director of various
New York, New York other business and charitable organizations.
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Co-Chairman and a founder of the Group of Seven Council (G7C), an
c/o Johnson Smick International, international economic commission; Director or Trustee of the Dean
Inc. Witter Funds; Trustee of the TCW/DW Funds; Director of NASDAQ (since
1133 Connecticut Avenue, N.W. June, 1995); Director of Greenwich Capital Markets Inc.
Washington, DC (broker-dealer); Chairman and Trustee of the Financial Accounting
Foundation (oversight organization for the FASB); formerly Vice
Chairman of the Board of Governors of the Federal Reserve System
(1986-1990) and Assistant Secretary of the U.S. Treasury (1982-1986).
Michael E. Nugent (61) General Partner, Triumph Capital, L.P., a private investment part-
Trustee nership; Director or Trustee of the Dean Witter Funds; Trustee of the
c/o Triumph Capital, L.P. TCW/DW Funds; formerly Vice President, Bankers Trust Company and BT
237 Park Avenue, Capital Corporation (1984-1988); director of various business
New York, New York organizations.
Philip J. Purcell* (54) Chairman of the Board of Directors and Chief Executive Officer of
Trustee MSDWD, DWR and Novus Credit Services Inc.; Director of InterCapital,
Two World Trade Center DWSC and Distributors; Director or Trustee of the Dean Witter Funds;
New York, New York Director and/or officer of various MSDWD subsidiaries.
John L. Schroeder (67) Retired; Director or Trustee of the Dean Witter Funds; Trustee of the
Trustee TCW/DW Funds; Director of Citizens Utilities Company; formerly
c/o Gordon Altman Butowsky Executive Vice President and Chief Investment Officer of the Home
Weitzen Shalov & Wein Insurance Company (August, 1991-September 1995).
Counsel to the Independent
Trustees
114 West 47th Street
New York, New York
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Barry Fink (43) Senior Vice President (since March, 1997) and Secretary and General
Vice President, Secretary and General Counsel (since February, 1997) of InterCapital and DWSC; Senior Vice
Counsel President (since March, 1997) and Assistant Secretary and Assistant
Two World Trade Center General Counsel (since February, 1997) of Dean Witter Distributors
New York, New York Inc.; Assistant Secretary of DWR (since August, 1996); Vice President,
Secretary and General Counsel of the Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice President (June,
1993-February, 1997), Vice President (until June, 1993) and Assistant
Secretary and Assistant General Counsel of InterCapital and DWSC and
Assistant Secretary of the Dean Witter Funds and the
TCW/DW Funds.
Peter M. Avelar (39) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Mark Bavoso (37) Senior Vice President of InterCapital (since June, 1993); Vice
Vice President President of various Dean Witter Funds; previously Vice President of
Two World Trade Center InterCapital.
New York, New York
Edward F. Gaylor (56) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Rajesh K. Gupta (37) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Peter Hermann (37) Vice President of InterCapital (since March, 1994); Vice President of
Vice President various Dean Witter Funds; previously a portfolio manager with The Bank
Two World Trade Center of New York.
New York, New York
Kenton J. Hinchliffe (53) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Anita H. Kolleeny (42) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Paula LaCosta (46) Vice President of InterCapital; Vice President of various Dean Witter
Vice President Funds.
Two World Trade Center
New York, New York
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Jonathan R. Page (51) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Anne Pickrell (44) Vice President of InterCapital (since April, 1996); Vice President of
Vice President various Dean Witter Funds; previously Assistant Vice President of
Two World Trade Center InterCapital.
New York, New York
Peter J. Seeley (48) Vice President of InterCapital (since April, 1996); Vice President of
Vice President various Dean Witter Funds; previously Senior Fixed-Income Portfolio
Two World Trade Center Manager with InterCapital (July, 1994-April, 1996) and prior thereto
New York, New York Senior Vice President of Nikko Capital Management (October, 1992-June,
1994).
Paul D. Vance (62) Senior Vice President of InterCapital; Vice President of various Dean
Vice President Witter Funds.
Two World Trade Center
New York, New York
Jayne Stevlingson (38) Vice President of InterCapital; Vice President of various Dean Witter
Vice President Funds.
Two World Trade Center
New York, New York
Ronald J. Worobel (55) Senior Vice President of InterCapital (since June 1993); Vice President
Vice President of various Dean Witter Funds; formerly Vice President of InterCapital.
Two World Trade Center
New York, New York
Philip A. Barach (45) Managing Director of TCW Funds Management, Inc.; Managing Director,
Vice President Mortgage-Backed Securities of Trust Company of the West and TCW Asset
865 South Figueroa Street Management Company; Vice President of various TCW/DW Funds.
Los Angeles, California
James M. Goldberg (52) Managing Director of TCW Funds Management, Inc.; Managing Director and
Vice President Chairman of the Fixed Income Policy Committee of Trust Company of the
865 South Figueroa Street West and TCW Asset Management Company; Vice President of various TCW/DW
Los Angeles, California Funds.
Jeffrey E. Gundlach (38) Group Managing Director of TCW Funds Management, Inc. ("TCW"); Managing
Vice President Director, Mortgage-Backed Securities of Trust Company of the West and
865 South Figueroa Street TCW Asset Management Company; Vice President of various TCW/DW Funds.
Los Angeles, California
Frederick H. Horton (39) Managing Director of TCW (since October, 1993); previously Senior
Vice President Portfolio Manager for Dewey Square Investors (June, 1991-September,
865 South Figueroa Street 1993) and prior thereto Senior Portfolio Manager for the Putnam
Los Angeles, California Companies; Vice President of various TCW/ DW Funds.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Terence F. Mahony (55) Managing Director and Head of Emerging Markets Equities of TCW (since
Vice President April, 1996); previously Chief Investment Officer for Global Emerging
865 South Figueroa Street Markets at HSBC Asset Management (September, 1993-April, 1996) and
Los Angeles, California prior thereto a Director of Baring Asset Management.
Michael P. Reilly (34) Managing Director of TCW (associated with TCW since June, 1992);
Vice President previously Vice President of Security Pacific Bank; Vice President of
865 South Figueroa Street various TCW/DW Funds.
Los Angeles, California
Michelle Kaufman (33) Vice President of InterCapital (since July, 1997) and portfolio manager
Assistant Vice President with InterCapital (since September, 1993); Vice President of various
Two World Trade Center Dean Witter Funds; previously Assistant Vice President of InterCapital
New York, New York (May, 1995-July, 1997) and prior thereto a security analyst with
Woodward and Associates (March-August, 1993).
Thomas F. Caloia (51) First Vice President and Assistant Treasurer of InterCapital and DWSC;
Treasurer Treasurer of the Dean Witter Funds and the TCW/DW Funds; previously
Two World Trade Center Vice President of InterCapital.
New York, New York
</TABLE>
- ---------
* Denotes Trustees who are "interested persons" of the Fund, as defined in the
Investment Company Act of 1940, as amended.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Mitchell M. Merin, President and Chief Strategic Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWT and
Director of DWT, Executive Vice President and Director of DWR, and Director of
SPS Transaction Services, Inc. and various other MSDWD subsidiaries, Robert S.
Giambrone, Senior Vice President of InterCapital, DWSC, Distributors and DWT and
Director of DWT, Joseph J. McAlinden, Executive Vice President and Chief
Investment Officer of InterCapital and Director of DWT, and Kevin Hurley, Senior
Vice President of InterCapital, are Vice Presidents of the Fund, and Marilyn K.
Cranney, First Vice President and Assistant General Counsel of InterCapital and
DWSC, LouAnne D. McInnis, Carsten Otto and Ruth Rossi, Vice Presidents and
Assistant General Counsels of InterCapital and DWSC, and Frank Bruttomesso and
Todd Lebo, staff attorneys with InterCapital, are Assistant Secretaries of the
Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees currently consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of this
Statement of Additional Information, there are a total of 85 Dean Witter Funds,
comprised of 129 portfolios. As of January 31, 1998, the Dean Witter Funds had
total net assets of approximately $96 billion and more than six million
shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, MSDWD. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience
13
<PAGE>
in business and finance, government service or academia; these are people whose
advice and counsel are in demand by others and for whom there is often
competition. To accept a position on the Funds' Boards, such individuals may
reject other attractive assignments because the Funds make substantial demands
on their time. Indeed, by serving on the Funds' Boards, certain Trustees who
would otherwise be qualified and in demand to serve on bank boards would be
prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1997,
the three Committees held a combined total of seventeen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and as Chairman
of the Committee of the Independent Trustees and the Audit Committee of the TCW/
14
<PAGE>
DW Funds. The current Committee Chairman has had more than 35 years experience
as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Fund pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Trustees an additional annual fee of $1,200). If a Board meeting
and a Committee meeting, or more than one Committee meeting, take place on a
single day, the Trustees are paid a single meeting fee by the Fund. The Fund
also reimburses such Trustees for travel and other out-of-pocket expenses
incurred by them in connection with attending such meetings. Trustees and
officers of the Fund who are or have been employed by the Investment Manager or
an affiliated company receive no compensation or expense reimbursement from the
Fund.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended December 31, 1997.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,700
Edwin J. Garn................................................. 1,900
John R. Haire................................................. 3,850
Wayne E. Hedien............................................... 532
Dr. Manuel H. Johnson......................................... 1,850
Michael E. Nugent............................................. 1,900
John L. Schroeder............................................. 1,900
</TABLE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 84 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1997.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds. Mr. Hedien's term as Director or
Trustee of each Dean Witter Fund commenced on September 1, 1997.
15
<PAGE>
CASH COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE AS
CHAIRMAN OF CHAIRMAN OF
COMMITTEES OF COMMITTEES OF TOTAL CASH
FOR SERVICE AS INDEPENDENT INDEPENDENT COMPENSATION
DIRECTOR OR FOR SERVICE AS DIRECTORS/ TRUSTEES FOR SERVICES
TRUSTEE AND TRUSTEE AND TRUSTEES AND AND AUDIT TO 84 DEAN
COMMITTEE MEMBER COMMITTEE MEMBER AUDIT COMMITTEES COMMITTEES WITTER FUNDS
OF 84 DEAN OF 14 TCW/DW OF 84 DEAN OF 14 AND 14 TCW/DW
NAME OF INDEPENDENT TRUSTEE WITTER FUNDS FUNDS WITTER FUNDS TCW/DW FUNDS FUNDS
- --------------------------- ---------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $133,602 -- -- -- $133,602
Edwin J. Garn.............. 149,702 -- -- -- 149,702
John R. Haire.............. 149,702 $73,725 $157,463 $ 25,350 406,240
Wayne E. Hedien............ 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson...... 145,702 71,125 -- -- 216,827
Michael E. Nugent.......... 149,702 73,725 -- -- 223,427
John L. Schroeder.......... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Dean
Witter Funds, not including the Fund, have adopted a retirement program under
which an Independent Trustee who retires after serving for at least five years
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal to 25.0% of his or
her Eligible Compensation plus 0.4166666% of such Eligible Compensation for each
full month of service as an Independent Director or Trustee of any Adopting Fund
in excess of five years up to a maximum of 50.0% after ten years of service. The
foregoing percentages may be changed by the Board.(1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for service
to the Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the 57 Dean Witter Funds (not including the Fund)
as of December 31, 1997, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the 57 Dean Witter
Funds as of December 31, 1997.
- ---------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
16
<PAGE>
RETIREMENT BENEFITS FROM ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
ESTIMATED
RETIREMENT ANNUAL
BENEFITS BENEFITS
ESTIMATED ACCRUED AS UPON
CREDITED YEARS ESTIMATED EXPENSES RETIREMENT
OF SERVICE AT PERCENTAGE OF BY ALL FROM ALL
RETIREMENT ELIGIBLE ADOPTING ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUNDS FUNDS(2)
- ----------------------------------------------------- ------------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Michael Bozic........................................ 10 50.0% $ 20,489 $ 47,025
Edwin J. Garn........................................ 10 50.0 30,878 47,025
John R. Haire........................................ 10 50.0 (19,823)(3) 127,897
Wayne E. Hedien...................................... 9 42.9 0 39,971
Dr. Manuel H. Johnson................................ 10 50.0 12,832 47,025
Michael E. Nugent.................................... 10 50.0 22,546 47,025
John L. Schroeder.................................... 8 41.7 39,350 39,504
</TABLE>
- ------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until June 1, 1998.
As of the date of this Statement of Additional Information, Hartford Life
Insurance Company and Hartford Life and Annuity Insurance Company owned all of
the outstanding shares of the Fund for allocation to the Accounts, and none of
the Fund's officers or Trustees was a Contract Owner under the Accounts.
INVESTMENT PRACTICES AND POLICIES
- --------------------------------------------------------------------------------
The Fund is an open-end diversified management investment company which is
intended to provide a broad range of investment alternatives with its thirteen
separate Portfolios, each of which has distinct investment objectives and
policies, as set forth below and in the Prospectus:
- THE MONEY MARKET PORTFOLIO seeks high current income, preservation of
capital and liquidity by investing in short-term money market instruments.
- THE NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO seeks to earn a high
level of current income while maintaining relatively low volatility of
principal, by investing primarily in investment grade fixed-income
securities issued or guaranteed by the U.S., Canadian or Mexican
governments.
- THE DIVERSIFIED INCOME PORTFOLIO seeks, as a primary objective, to earn a
high level of current income and, as a secondary objective, to maximize
total return, but only to the extent consistent with its primary
objective, by equally allocating its assets among three separate groupings
of fixed-income securities. Up to one-third of the securities in which the
DIVERSIFIED INCOME PORTFOLIO may invest will include securities rated
Baa/BBB or lower (such securities are commonly known as "junk bonds").
- THE BALANCED GROWTH PORTFOLIO seeks to provide capital growth with
reasonable current income by investing, under normal market conditions, at
least 60% of its total assets in a diversified portfolio of common stocks
of companies which have a record of paying dividends and, in the opinion
of the Investment Manager, have the potential for increasing dividends and
in securities convertible into common stock, and at least 25% of its total
assets in investment grade fixed-income (fixed-rate and adjustable-rate)
securities such as corporate notes and bonds and obligations issued or
guaranteed by the U.S. Government, its agencies and its instrumentalities.
17
<PAGE>
- THE UTILITIES PORTFOLIO seeks to provide current income and long-term
growth of income and capital by investing primarily in equity and
fixed-income securities of companies engaged in the public utilities
industry.
- THE DIVIDEND GROWTH PORTFOLIO seeks to provide reasonable current income
and long-term growth of income and capital by investing primarily in
common stock of companies with a record of paying dividends and the
potential for increasing dividends.
- THE VALUE-ADDED MARKET PORTFOLIO seeks to achieve a high level of total
return on its assets through a combination of capital appreciation and
current income by investing, on an equally weighted basis, in a
diversified portfolio of common stocks of the companies which are
represented in the Standard & Poor's 500 Composite Stock Price Index.
- THE GROWTH PORTFOLIO seeks long-term growth of capital by investing
primarily in common stocks and securities convertible into common stocks
issued by domestic and foreign companies.
- THE AMERICAN VALUE PORTFOLIO seeks long-term growth consistent with an
effort to reduce volatility by investing principally in common stock of
companies in industries which, at the time of the investment, are believed
to be attractively valued given their above average relative earnings
growth potential at that time.
- THE MID-CAP GROWTH PORTFOLIO seeks long-term capital growth by investing
principally in equity securities of "mid-cap" companies.
- THE GLOBAL EQUITY PORTFOLIO seeks a high level of total return on its
assets, primarily through long-term capital growth and, to a lesser
extent, from income. It seeks to achieve this objective through
investments in all types of common stocks and equivalents, preferred
stocks and bonds and other debt obligations of domestic and foreign
companies and governments and international organizations.
- THE DEVELOPING GROWTH PORTFOLIO seeks long-term capital growth by by
investing primarily in common stocks of smaller and medium-sized companies
that, in the opinion of the Investment Manager, have the potential for
growing more rapidly than the economy and which may benefit from new
products or services, technological developments or changes in management.
- THE EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies in emerging market
countries. The EMERGING MARKETS PORTFOLIO may invest up to 35% of its
total assets in high risk fixed-income securities that are rated below
investment grade or are unrated.
There can be no assurance that the Portfolios' investment objectives will be
achieved.
Each Portfolio of the Fund is subject to the diversification requirements of
Section 817(h) of the Internal Revenue Code relating to the favorable tax
treatment of variable annuity contracts. Regulations issued under such section
require each Portfolio to invest no more than 55% of its assets in any one
investment; no more than 70% of its assets in any two investments; no more than
80% of its total assets in any three investments; and no more than 90% of its
total assets in any four investments. For purposes of the regulations, all
securities of the same issuer are treated as a single investment. In addition,
the Portfolios are subject to the diversification requirements of the Act, as
described under the heading "Investment Restrictions" below and in the
Prospectus.
THE MONEY MARKET PORTFOLIO
VARIABLE AND FLOATING RATE OBLIGATIONS. As stated in the Prospectus, the
MONEY MARKET PORTFOLIO may invest in variable and floating rate obligations. The
interest rate payable on a variable rate obligation is adjusted at predesignated
periodic intervals and, on floating rate obligations, whenever there is a change
in the market rate of interest on which the interest rate payable is based.
Other features may include the right whereby the MONEY MARKET PORTFOLIO may
demand prepayment of the principal amount of the obligation prior to its stated
maturity (a "demand feature") and the right of the issuer to prepay the
principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. As a result, the purchase of variable rate and floating
rate obligations should enhance the ability of the MONEY MARKET PORTFOLIO to
maintain a stable net asset value per share (see "How Net Asset Value is
Determined") and to sell
18
<PAGE>
obligations prior to maturity at a price approximating the full principal amount
of the obligations. The principal benefits to the MONEY MARKET PORTFOLIO of
purchasing obligations with a demand feature are that liquidity and the ability
of the MONEY MARKET PORTFOLIO to obtain repayment of the full principal amount
of an obligation prior to maturity are enhanced. The payment of principal and
interest by issuers of certain obligations purchased by the MONEY MARKET
PORTFOLIO may be guaranteed by letters of credit or other credit facilities
offered by banks or other financial institutions. Such guarantees will be
considered in determining whether an obligation meets the MONEY MARKET
PORTFOLIO's investment quality requirements.
PRIVATE PLACEMENTS. As discussed in the Prospectus, the MONEY MARKET
PORTFOLIO may invest in commercial paper issued in reliance on the so-called
"private placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 (the "Securities Act") and which may be sold to other
institutional investors pursuant to Rule 144A under the Securities Act. The
adoption by the Securities and Exchange Commission of Rule 144A, which permits
the resale of certain restricted securities to institutional investors, had the
effect of broadening and increasing the liquidity of the institutional trading
market for securities subject to restrictions on resale to the general public.
Section 4(2) commercial paper sold pursuant to Rule 144A is restricted in that
is can be resold only to qualified institutional investors. However, since
institutions constitute virtually the entire market for such commercial paper,
the market for such Section 4(2) commercial paper is, in reality, as liquid as
that for other commercial paper. While the MONEY MARKET PORTFOLIO generally
holds to maturity commercial paper in its portfolio, the advent of Rule 144A has
greatly simplified the ability to sell Section 4(2) commercial paper to other
institutional investors.
Open-end investment companies are not permitted to hold over 15% (10% for
money market funds) of their net assets in securities for which there is no
established market ("illiquid securities"). However, under procedures adopted by
the Trustees of the Fund, the MONEY MARKET PORTFOLIO may purchase Section 4(2)
commercial paper without being subject to the limitation on illiquid investments
and will be able to utilize Rule 144A to sell that paper to other institutional
investors. The procedures require that the Investment Manager consider the
following factors in determining that any restricted security eligible for sale
pursuant to Rule 144A be considered liquid: (1) the frequency of trades and
quotes for the security, (2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers, (3) dealer
undertakings to make a market in the security, and (4) the nature of the
security and the nature of the marketplace trades (i.e., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The Investment Manager will report to the Trustees on a quarterly
basis on all restricted securities held by the MONEY MARKET PORTFOLIO with
regard to their ongoing liquidity. In the event any Section 4(2) commercial
paper or other restricted security held by the MONEY MARKET PORTFOLIO is
determined to be illiquid by the Trustees and the Investment Manager, that
investment would be included as an illiquid security subject to the limitation
on illiquid investments referred to above.
THE AMERICAN VALUE PORTFOLIO
INDUSTRY VALUATION APPROACH. As stated in the Prospectus, in managing the
AMERICAN VALUE PORTFOLIO, the Investment Manager generally seeks to identify
industries, rather than individual companies, as prospects for capital
appreciation. This approach is designed to capitalize on the basic assumptions
that industry trends are a primary force governing company earnings;
conventional forecasts may not fully reflect underlying industry conditions or
changing economic cycles; the market's perception of industry trends is often
transitory or exaggerated; and distortions in relative valuations may provide
significant buying or selling opportunities.
The Investment Manager generally seeks to invest assets of the AMERICAN
VALUE PORTFOLIO in industries it considers to exhibit underappreciated earnings
potential at the time of purchase and to sell those it considers to have peaked
in relative earnings potential.
The Investment Manager also uses models which employ economic indicators or
other financial variables to evaluate the relative attractiveness of industries.
Economic analysis includes traditional business cycle analysis and such
signposts as current Federal Reserve monetary posture, direction of commodity
prices, and global currency and economic trends. Economic indicators most
relevant to particular industries are reviewed. Some industries analyzed such as
aerospace and energy do not
19
<PAGE>
correlate with economic indicators and must be analyzed relative to their
respective specific industry cycles. Financial variables under consideration may
include corporate earnings growth and cashflow, corporate and industry asset
valuation, absolute and relative price/earnings ratios and dividend discount
valuations.
Once attractive industries have been identified, stocks to represent those
industries are selected utilizing a multivariate process that includes size and
quality of the company, earnings visibility of the company and various valuation
parameters. Valuation screens may include dividend discount model values,
price-to-book ratios, price to cashflow values, relative and absolute
price-to-earnings ratios and ratios of price to earnings multiples to earnings
growth. Price and earnings momentum ratings derived from external sources are
also factored into the stock selection decision. The Investment Manager also
evaluates fundamental company criteria such as product cycle analysis, revenue
growth, margin analysis, consistency of earnings profitability, proprietary
nature of the product and quality of management. Stocks may be selected from the
three capitalization tiers of the market: large capitalization, medium
capitalization, and small capitalization.
Based on the sum total of this analysis, approximately 40-60 industries are
studied and classified as attractive, moderately attractive or unattractive.
Attractive groups are purchased, moderately attractive groups are bought or
held, and unattractive groups are sold. The Investment Manager may utilize
services that examine historical industry relative price-to-earnings ranges for
input on the Investment Manager's valuation analysis.
A basic tenet of the industry valuation approach is that there is no
certainty of superior performance in any specific industry selection, but rather
that approximately equal weighting of investments in a group of industries, each
of which has been identified as underappreciated, can benefit from the
performance probabilities of the total group.
The foregoing represents the main outlines of the industry valuation
approach. The following describes its key features, all of which are subject to
modification as described below or as result of applying the asset allocation
disciplines described later.
1. Equal Industry Weightings.
After determining the industries that it considers to be attractive, the
Investment Manager generally attempts to invest approximately equal amounts of
the equity portion of the portfolio in securities of companies in each of such
industries, subject to adjustment for company weightings as set forth in the
next paragraph.
2. Equal Company Weightings.
From the total of all companies included in the industry valuation process,
the Investment Manager selects a limited number from each industry as
representative of that industry. Such selections are made on the basis of
various criteria, including size and quality of a company, the visibility of
earnings, product cycle analysis, historic track record and various valuation
parameters. Valuation screens may include dividend discount model values,
price-to-book ratios, price-to-cashflow values, relative and absolute
price-to-earnings ratios and ratios of price-earnings multiples to earnings
growth. Price and earnings momentum ratings derived from external sources are
also factored into the stock selection decision. Those companies which are in
attractive industries and which the Investment Manager believes to be attractive
investments are finally selected for inclusion in the portfolio. When final
selections are made, approximately equal amounts of the equity portion of the
portfolio are invested in each of such companies. This may vary depending on
whether the Investment Manager is in the process of building or reducing a stock
position. Consideration will also be given to valuation, capitalization and
liquidity profile. Stocks in industries not characterized as attractive may be
underweighted. Also, smaller capitalization issues may not be equally weighted
due to liquidity considerations.
3. Relative Industry Values.
Industry selection only attempts to identify industries whose securities
might be expected to perform relatively better than the market as represented by
the S&P Index. It does not seek to identify
20
<PAGE>
securities which will experience an absolute increase in value notwithstanding
market conditions. However, the process assumes that, despite interim
fluctuations in stock market prices, the long-term trend in equity security
values will be up.
4. Practical Applications.
In applying the industry valuation approach to management of the AMERICAN
VALUE PORTFOLIO, the Investment Manager will make adjustments in the portfolio
which reflect modifications of the underlying concepts whenever, in its opinion,
such adjustments are necessary or desirable to achieve the AMERICAN VALUE
PORTFOLIO's objectives. Such adjustments may include, for example, weighting
some industries or companies more or less than others, based upon the Investment
Manager's judgment as to the investment merits of specific companies. In
addition, without specific action by the Investment Manager, adjustments may
result from fluctuations in market prices which distort previously established
industry and company weightings. The portfolio may, at times, include securities
of industries which are unattractive due to consideration of stage-of-cycle
analysis or may not include representation in industries considered attractive
due to considerations such as valuation criteria, stage-of-cycle analysis or
lack of earnings visibility, balance sheet viability or management quality.
Also, independent of the application of the industry valuation process, the
AMERICAN VALUE PORTFOLIO continuously sells and redeems its own shares, and, as
a result, securities may have to be sold at times from the portfolio to meet
redemptions and monies received upon sale of the AMERICAN VALUE PORTFOLIO's
shares must be used to purchase portfolio securities. Such sales and purchases
of portfolio securities will result in a portfolio that does not completely
reflect equal weighting of investment in industries or companies.
ASSET ALLOCATION. Common stocks, particularly those sought for possible
capital appreciation, have historically experienced a great amount of price
fluctuation. The Investment Manager believes it is desirable to attempt to
reduce the risks of extreme price fluctuations even if such an attempt results,
as it likely will at times, in reducing the probabilities of obtaining greater
capital appreciation. Accordingly, the Investment Managers's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The AMERICAN VALUE PORTFOLIO may hold a portion of
its assets in fixed-income securities in an effort to moderate extremes of price
fluctuation. The determination of the appropriate asset allocation as between
equity and fixed-income investments will be made by the Investment Manager in
its discretion, based upon its evaluation of economic and market conditions.
THE MID-CAP GROWTH PORTFOLIO
As discussed in the Prospectus, the MID-CAP GROWTH PORTFOLIO offers
investors an opportunity to participate in a diversified portfolio of
securities, consisting principally of common stocks. The portfolio reflects an
investment decision-making process developed by the Portfolio's Investment
Manager.
INDUSTRY AND STOCK SELECTION APPROACH
As stated in the Prospectus, in managing the portfolio of the MID-CAP GROWTH
PORTFOLIO the Investment Manager generally seeks to identify industries, rather
than individual companies, as prospects for capital appreciation. This approach
is designed to capitalize on four basic assumptions: (1) industry trends are a
primary force governing company earnings; (2) conventional forecasts by security
analysts of company earnings do not fully reflect underlying industry conditions
or changing economic cycles; (3) the market's perception of industry trends is
often transitory or exaggerated; and (4) distortions in relative valuations
beyond their normal ranges provide significant buying or selling opportunities.
The Investment Manager will invest principally in those mid-cap companies
that have above-average relative growth potential. Mid-cap companies typically
have a better growth potential than their large-cap counterparts because they
are still in the early and more dynamic period of their corporate existences.
Often mid-size companies and the industries in which they are focused are still
evolving as opposed to the more mature industries served by large-cap companies.
Moreover, mid-cap companies are not considered "emerging" stocks, nor are they
as volatile as small-cap firms. This is due to the fact that mid-cap companies
have increased liquidity, attributable to their larger market capitalization as
well as longer and more established track records, and a stronger market
presence and dominance than small-cap firms. Consequently, because of the better
growth inherent in these companies and their
21
<PAGE>
industries, mid-cap companies offer superior return potential to large-cap
companies; yet, owing to their relatively larger size and better recognition in
the investment community, they have a reduced risk profile compared to smaller,
emerging or micro-cap companies.
The Investment Manager may use models which employ economic indicators or
other financial variables to evaluate the relative attractiveness of industries.
Considerations may pertain to an assessment of the stage of the economic cycle,
the anticipated direction or movement of interest rates, or a judgment as to
which industries and common stocks may show relative outperformance based on the
following: (1) economic indicators that may be specific to particular
industries; and (2) financial variables which could include an analysis of cash
flow, asset value, historical or projected earnings, absolute or relative
price/earnings ratios, dividend discount models, or other factors.
The Investment Manager will use an industry approach that seeks to diversify
the assets of the MID-CAP GROWTH PORTFOLIO in approximately 18 to 35 industries.
The Portfolio will hold less than 5% of its net assets in any one security and
will hold less than 10% of its net assets in any one industry. Companies will be
selected based on at least three-year track records, and purchases will be
primarily focused on companies that: (1) have the potential for above-average
relative earnings growth; (2) are focused in industries that are rapidly
expanding or have the potential to see increasing sales or earnings; (3)
historically have had well-defined and recurring revenues; or (4) are attractive
based on an assessment of private market or franchise values.
ASSET ALLOCATION. Common stocks, particularly those sought for possible
capital appreciation, have historically experienced a great amount of price
fluctuation. The Investment Manager believes it is desirable to attempt to
reduce the risks of extreme price fluctuations even if such an attempt results,
as it likely will at times, in reducing the probabilities of obtaining greater
capital appreciation. Accordingly, the Investment Manager's investment process
incorporates elements which may reduce, although certainly not eliminate, the
volatility of a portfolio. The MID-CAP GROWTH PORTFOLIO may hold a portion of
its portfolio in fixed-income securities in an effort to moderate extremes of
price fluctuation. The determination of the appropriate asset allocation as
between equity and fixed-income investments will be made by the Investment
Manager in its discretion, based upon its evaluation of economic and market
conditions.
THE DEVELOPING GROWTH PORTFOLIO
LEVERAGING. As discussed in the Prospectus, the DEVELOPING GROWTH PORTFOLIO
may borrow money, but only from a bank and in an amount up to 25% of the
Portfolio's total assets taken at the lower of market value or cost, not
including the amount borrowed, to seek to enhance capital appreciation by
leveraging its investments through purchasing securities with the borrowed
funds. Such borrowings will be subject to current margin requirements of the
Federal Reserve Board and where necessary the Portfolio may use any or all of
its securities as collateral for such borrowings. Any investment gains (and/ or
investment income) made with the additional monies in excess of interest paid
will cause the net asset value of the Portfolio's shares (and/or the Portfolio's
net income per share) to rise to a greater extent than would otherwise be the
case. Conversely, if the investment performance of the additional monies fails
to cover their cost to the Portfolio, net asset value (and/or net income per
share) will decrease to a greater extent than would otherwise be the case. This
is the speculative factor involved in leverage.
The DEVELOPING GROWTH PORTFOLIO will be required to maintain an asset
coverage (including the proceeds of borrowings) of at least 300% of such
borrowings in accordance with the provisions of the Act. If, due to market
fluctuations or other reasons, the value of the Portfolio's assets (including
the proceeds of borrowings) becomes at any time less than three times the amount
of any outstanding bank debt, the Portfolio, within three business days, will
reduce its bank debt to the extent necessary to meet the required 300% asset
coverage. In restoring the 300% asset coverage, the Portfolio may have to sell a
portion of its investments at a time when it may be disadvantageous to do so.
The investment policy provides that the Portfolio may not purchase or sell a
security on margin. The margin and bank borrowing restrictions will prevent the
ordinary purchase of a security which involves a cash borrowing from a broker of
any part of the purchase price of a security.
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In addition to borrowings for leverage, the Portfolio may also borrow from
banks an additional amount as a temporary measure for extraordinary or emergency
purposes and, for these purposes, in no event an amount greater than 5% of total
assets taken at the lower of market value or cost.
THE EMERGING MARKETS PORTFOLIO
EMERGING MARKET COUNTRY DESIGNATION. The following countries are not
included within the International Bank of Reconstruction and Development (the
"World Bank") definition of an emerging market country: Saudi Arabia, Ireland,
Spain, Israel, Hong Kong, Singapore, New Zealand, Australia, The United Kingdom,
Italy, The Netherlands, Kuwait, Canada, Belgium, Austria, France, United Arab
Emirates, Germany, Denmark, United States, Sweden, Finland, Norway, Japan and
Switzerland.
POLITICAL AND ECONOMIC RISKS. Even though opportunities for investment may
exist in emerging countries, any change in the leadership or policies of the
governments of those countries or in the leadership or policies of any other
government which exercises a significant influence over those countries, may
halt the expansion, or reverse the liberalization, of foreign investment
policies now occurring and thereby eliminate any investment opportunities which
may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property. The claims of
property owners against those governments were never finally settled. There can
be no assurance that any property represented by securities purchased by the
EMERGING MARKETS PORTFOLIO will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, the Portfolio could
lose a substantial portion of its investments in such countries. The Portfolio's
investments would similarly be adversely affected by exchange control
regulations in any of those countries.
SECURITIES MARKETS. The market capitalizations of listed equity securities
on major exchanges in emerging market countries is significantly smaller than in
the United States. A high proportion of the shares of many companies in emerging
market countries may be held by a limited number of persons, which may further
limit the number of shares available for investment by the EMERGING MARKETS
PORTFOLIO. A limited number of issuers in most, if not all, emerging securities
markets may represent a disproportionately large percentage of market
capitalization and trading value. The limited liquidity of emerging securities
markets may also affect the Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. In addition, certain
emerging securities markets are susceptible to being influenced by large
investors trading significant blocks of securities or by large dispositions of
securities resulting from the failure to meet margin calls when due.
The high volatility of certain emerging securities markets, as well as
currency fluctuations, may result in greater volatility in the Portfolio's net
asset value than would be the case for companies investing in domestic
securities. If the Portfolio were to experience unexpected net redemptions, it
could be forced to sell securities in its portfolio without regard to investment
merit, thereby decreasing the asset base over which Portfolio expenses can be
spread and possibly reducing the Portfolio's rate of return.
Emerging market securities exchanges and brokers are generally subject to
less governmental supervision and regulation than in the U.S., and emerging
market securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, emerging market securities exchange transactions may
be subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Portfolio are uninvested and no return is earned thereon. The inability of the
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems either could result
in losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Portfolio has entered into a contract to sell the security,
could result in possible liability to the purchaser.
RESTRICTIONS ON INVESTMENTS. The EMERGING MARKETS PORTFOLIO may be
prohibited under the Act from purchasing the securities of any company that, in
its most recent fiscal year, derived more than 15%
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of its gross revenues from securities related activities. In a number of
emerging market countries, commercial banks act as securities brokers and
dealers, investment advisers and underwriters or are otherwise engaged in
securities-related activities, which may limit the Portfolio's ability to hold
securities issued by the banks. The U.S. Securities and Exchange Commission has
proposed a rule which, if adopted, may permit the Portfolio to invest in certain
of these securities subject to certain restrictions.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the EMERGING MARKETS
PORTFOLIO. For example, certain countries require governmental approval prior to
investments by foreign persons or limit the amount of investment by foreign
persons in a particular company or limit the investment by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms than securities of the company available for purchase by nationals.
Moreover, the national policies of certain countries may restrict investment
opportunities in issuers or industries deemed sensitive to national interests.
In addition, some countries require governmental approval for the repatriation
of investment income, capital or the proceeds of securities sales by foreign
investors. The Portfolio could be adversely affected by delays in or a refusal
to grant any required governmental approval for repatriation, such as by the
application to it of other restrictions on investments.
DEBT-TO-EQUITY CONVERSIONS. THE EMERGING MARKETS PORTFOLIO may participate
with respect to up to 5% of its total assets in debt-to-equity conversions.
Debt-to-equity conversion programs are sponsored in varying degrees by certain
emerging market countries and permit investors to use external debt of a country
to make equity investments in local companies. Many conversion programs relate
primarily to investments in transportation, communication, utilities and similar
infrastructure related areas. The terms of the programs vary from country to
country, but include significant restrictions on the application of the proceeds
received in the conversion and on the repatriation of investment profits and
capital. In inviting conversion applications by holders of eligible debt, a
government will usually specify a minimum discount from par value that it will
accept for conversion. The Sub-Adviser believes that emerging market
debt-to-equity conversion programs may offer investors opportunities to invest
in otherwise restricted equity securities of emerging market countries with a
potential for significant capital appreciation and, to a limited extent, intends
to invest assets of the Portfolio in such programs in appropriate circumstances.
There can be no assurance that debt-to-equity conversion programs will continue
or be successful or that the Portfolio will be able to convert all or any of its
emerging market debt portfolio into equity investments.
ASIAN ECONOMIES AND SECURITIES MARKETS
The Asian continent covers approximately one-fifth of the earth's surface
and is home to over half the world's population. Certain of the Asian countries
in which the EMERGING MARKETS PORTFOLIO may invest include China, Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri
Lanka, Taiwan and Thailand. The discussion below focuses on some of the emerging
market countries in which the Sub-Adviser anticipates that the EMERGING MARKETS
PORTFOLIO will initially invest.
ASIAN ECONOMIES. In recent years, countries in the Asian region have
experienced real economic growth rates exceeding those experienced by many
Western industrialized countries.
The Sub-Adviser of the EMERGING MARKETS PORTFOLIO believes that economic
conditions in the Asian region exist to provide for high levels of economic
activity in the long-term, offering the potential for long-term capital
appreciation from investment in equity securities of Asian Companies (as defined
in the Prospectus). Among these conditions, as discussed below, are the
following: (i) the increasing industrialization of Asian economies, (ii)
favorable demographics and competitive wage rates, (iii) high rates of domestic
savings available to fund investment, particularly in the area of
infrastructure, (iv) the ability to attract foreign direct investment, (v) the
emergence of a regional trading zone and (vi) rising per capita incomes
available to support local markets for consumer goods.
INDUSTRIALIZATION OF ASIA. The rapid ongoing shift from primary industries
into industrial manufacturing has contributed to high rates of economic
activity. During the last two decades, there was a
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significant shift in the percentage of gross domestic product ("GDP") accounted
for by the agricultural sector in these markets and a marked increase in output
by the industrial sector, most markedly in Indonesia, Malaysia and Thailand.
Generally, in the Asian countries there is still potential for further
industrialization so as to reach the levels presently attained by the countries
of the industrialized world.
FAVORABLE DEMOGRAPHICS AND COMPETITIVE WAGES. Based on favorable
demographic statistics as to the Asian countries relative to the United States
and Western Europe and the existence in the region of low relative wage rates,
the Sub-Adviser believes that the competitive advantages of Asia through access
to a large pool of disciplined and low cost (and, in East Asia, well educated)
labor, will continue to lead to high levels of inward capital investment by
companies based in the industrialized world. Moreover, the demographic profile
of Asian countries shows a plentiful potential supply of new labor force
participants as indicated by the high percentage of the populations under
fifteen years of age. In this respect, China, India, Indonesia, Malaysia, the
Philippines and Thailand are well positioned. The larger this percentage, the
lower the likelihood of significant upward pressure on wage rates over the
medium term, thus ensuring a continuation of the current, favorable cost
structure these countries enjoy relative to the United States and Japan. In
addition, these countries in particular need to maintain a sufficient level of
overall economic activity in order to provide employment opportunities to new
entrants. If this cannot be achieved, as in the case of the Philippines, the
export of labor may occur. Direct investment and the establishment of labor
intensive industries, such as textiles, have had a favorable impact on job
creation in the Asian region. However, direct investment may be deterred by the
absence of basic infrastructure such as energy, telephone lines, ports, roads
and railways, as has occurred in the Philippines with shortages of electricity.
SAVINGS AND INFRASTRUCTURE. There is a need in the Asian countries for
substantial investment in infrastructure. A low penetration rate of telephone
lines per 1,000 population exists in each of China, India, Indonesia, Malaysia
and Thailand. Asia has the means to overcome the deficiency in infrastructure
given its high domestic savings rates. A high rate of savings is generally
associated with strong investment, rising productivity and faster GDP growth.
China, Indonesia, Korea and Singapore compare favorably with the United States
in this regard. The savings rates of India and the Philippines are the lowest in
the region and, in the opinion of the Sub-Adviser, may have to be raised if
investment, and hence growth, is to accelerate in such countries. China is still
in the process of developing a network of financial intermediaries capable of
channeling available funds between savers and investors, the lack of which may
constrain growth in the short term.
ABILITY TO ATTRACT FOREIGN DIRECT INVESTMENT. Foreign direct investment has
underpinned economic growth in the Asian region. With the rapid appreciation of
the Yen since the end of 1985, Japanese investment flows have increased
considerably. Japanese firms have built regional networks of affiliates in Asia,
where Japanese direct investment has grown predominantly in manufacturing,
especially in the electronics industry.
The Sub-Adviser believes that in addition to increasing the foreign supply
of capital, direct foreign investment from Japan confers a number of benefits
which enhance the long-term growth potential of a recipient country, including
but not limited to (i) the mobilization of domestic savings for productive
purpose in joint ventures between multinational corporations and local
companies, (ii) the improvement of local training and education as local
employees are exposed to modern production techniques and established training
methods, (iii) the modernization of management and accounting, (iv) a transfer
of technology and (v) the promotion of exports.
TRADE AND EXPORTS. Most of the countries in the Asian region have
historically pursued the Japanese development model of export-led growth. This,
together with the inflow of foreign manufacturing facilities, has led in general
to strong export sector performances. During the 1980s a significant proportion
of Asian exports were shipped to the United States and Europe, which resulted in
severe trade account imbalances. The appreciation of the Japanese Yen since the
end of 1985, together with increasingly persistent attempts on the part of
various U.S. administrations to lower Asian trade barriers, has resulted in a
shift in the pattern of trade.
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RISING PER CAPITA INCOMES. Overall economic activity in the Asian region
has been supported by a rising trend in per capita GDP. This trend is highly
significant in light of the fact that the Asian region contains three of the
world's four most populous nations: China, India and Indonesia. Consequently, in
the Sub-Adviser's opinion, the prospects for the establishment of substantial
local markets for a wide range of consumer products, both imported and
manufactured locally, are attractive.
ASIAN SECURITIES MARKETS. There has been no set pattern to the historical
developments of the stock markets in the region. Some stock exchanges, such as
that in Bombay, India, have been operating since as early as 1875, while the
Shenzhen Exchange in China, the most recently established, has operated only
since April, 1991. Additionally, for a wide variety of historical and/or
ideological reasons, foreign ownership restrictions have at some time been
imposed over most stock exchanges in the region.
Until 1987, investment in Indonesia was effectively closed to foreigners;
Korea generally opened up 10% of equity ownership to foreigners in 1992; Taiwan
offers extremely limited access to foreign investors and India is only now in
the process of authorizing direct access for approved international
institutional investors. China, Indonesia, Korea, Malaysia, the Philippines,
Singapore and Thailand have foreign investment restrictions which can result in
foreign owned stock trading at a substantial premium or discount to local
shares. Average daily volume can be much lower in these markets than a typical
day's trading volume in the United States, particularly in the small and medium
capitalization sectors of the less well developed stock markets. In some of
these markets, for example, Hong Kong, Taiwan and Thailand, retail trading is
comparatively more active and institutional investment accounts for a lower
proportion of total trading. A large volume of retail trading can result in more
volatile stock markets, although some markets have daily price fluctuation
limits.
Foreign investment restrictions may in the future be subject to change. For
example, the Securities Exchange Commission of Thailand is currently studying
various proposals to permit foreigners to hold local stock without voting
rights. If adopted, such proposals could have the effect of reducing or
eliminating the premium at which many foreign owned stocks presently trade. This
could have an adverse affect on the EMERGING MARKETS PORTFOLIO if it has
previously purchased such stocks at a premium. It is uncertain when or if such a
change may be implemented.
Since the mid 1980s, however, stock market development throughout the
region, both with respect to daily trading volume and the number of securities
traded, has gained momentum. In terms of market capitalization, after Japan,
Hong Kong is the largest stock market in Asia, followed by Korea. In recent
years, Indonesia has seen a significant expansion in the number of listed
companies, coupled with a significant increase in market capitalization. Also,
the number of listed companies in India, Taiwan and Thailand has increased
significantly in recent years, while annual stock exchange turnover in these
markets has risen dramatically.
LATIN AMERICAN ECONOMIES AND SECURITIES MARKETS
LATIN AMERICAN ECONOMIES. During the past ten years, the countries of Latin
America have undergone tremendous political and economic change. As countries
have moved towards democratic reforms and market-oriented economic policies,
many have benefited from an increase in trade and foreign investment which has
helped propel economic growth. In the opinion of the Sub-Adviser, with GDP
growth in the region expected to average between 4% to 6% over the next three to
five years, investment in equity securities of Latin American companies provides
the potential for high returns.
Political and economic reform in Latin America have been closely linked. At
the beginning of the 1980s, many Latin American countries were ruled by
authoritative, and often military, governments. The traditional inward-oriented
economics policies, which were characterized by state ownership of industries
and restrictive trade barriers, became discredited as countries in the region
continuously suffered from heavy debt loads, shrinking economies, balance of
payment difficulties and high inflation. More recently, economic reforms in the
region have begun under democratically elected governments. Reform has centered
around lowering tariffs and dismantling trade barriers, privatizing state-owned
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industrial and utility companies and reducing government spending. The incoming
democratic movement was partially dependent on economic revival.
Trade barriers were reduced by several means. First, nominal tariffs were
lowered significantly, especially in countries such as Brazil, Mexico, Argentina
and Colombia. Although Latin American tariffs have seen substantial declines as
a result of reforms, tariffs are still relatively high compared to those of
industrialized nations. Second, import restrictions were sharply reduced and
trade borders were opened.
Privatization has also been a key component of economic reform. The
conversion of ownership from the state to the private sector has attracted
foreign and repatriated capital. Privatized business include railroads,
telephones/telecommunications, airlines and other industrial concerns. Monies
raised from privatization provide an additional source of financing for Latin
American governments, and the newly privatized businesses have incentives to
operate efficiently since they must now compete against foreign imports and must
also provide a return to shareholders.
While economic and political reforms in Latin America have been successful
to date, it is uncertain whether these reforms can be sustained over the
long-term. The prospects for sustained democratic and market-oriented policies
are improved since countries in the region are joining GATT (General Agreements
on Tariffs and Trade), which has forced the adoption of GATT rules regarding
customs valuation, anti-dumping and subsidies. In addition, the recent passage
of NAFTA (North American Free Trade Agreement), which took effect on January 1,
1994, will have a positive effect on cross-border trade between the U.S. and
Mexico. In addition, other trade pacts such as the Columbia-Venezuela free trade
agreement, the G-3 Agreement (Mexico, Venezuela and Columbia) and the Mercosur
agreement, which were implemented on January 1, 1995 (Argentina, Brazil, Uruguay
and Paraguay), will further expand trade and investment opportunities.
However, many problems still exist in Latin America. The region continues to
experience social and income inequities, and the high levels of poverty have
contributed to increased levels of social unrest. In addition, not all countries
have tightened fiscal and monetary policies. While there are opportunities for
extraordinary returns in Latin America, such returns are accompanied by greater
risk of loss of capital than in developed countries.
LATIN AMERICAN SECURITIES MARKETS. Latin American stock markets have grown
significantly over the past decade. The largest of these stock markets, measured
in terms of market capitalization, are Mexico, Brazil, Chile and Argentina.
The Sub-Adviser believes that economic growth and growth in stock market
capitalization may create an environment for improving performance in stock
markets. The Sub-Adviser also believes the economic expansion of developing
markets in part is led by increased foreign investment from companies seeking
lower cost production facilities or new markets. Latin American markets with low
hourly wages and large populations have attracted companies relocating from the
higher production cost environments of North America, Western Europe and Japan.
Other characteristics, including high economic growth rates, falling rates of
inflation, falling interest rates and improving credit ratings, may also
contribute to attracting new foreign investment for capital improvement or
manufacturing, and potentially to improving performance of stock markets.
Historic and current economic data demonstrate the positive changes experienced
by several Latin American markets over the past decade. Of course, this past
performance was achieved during a period of generally favorable circumstances
for emerging and developing markets and is no guarantee of future trends or
results.
GENERAL PORTFOLIO TECHNIQUES
MONEY MARKET SECURITIES
As stated in the Prospectus, the money market instruments in which each
Portfolio other than the MONEY MARKET PORTFOLIO, the BALANCED GROWTH PORTFOLIO
and the DIVERSIFIED INCOME PORTFOLIO may invest include U.S. Government
securities, bank obligations, Eurodollar certificates of deposit, obligations of
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savings institutions, fully insured certificates of deposit and commercial
paper. Such securities are limited to:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed as to
principal and interest by the United States or its agencies (such as the
Export-Import Bank of the United States, Federal Housing Administration and
Government National Mortgage Association) or its instrumentalities (such as the
Federal Home Loan Bank), including Treasury bills, notes and bonds;
BANK OBLIGATIONS. Obligations (including certificates of deposit, bankers'
acceptances, commercial paper (see below) and other debt obligations) of banks
subject to regulation by the U.S. Government and having total assets of $1
billion or more, and instruments secured by such obligations, not including
obligations of foreign branches of domestic banks except as permitted below;
EURODOLLAR CERTIFICATES OF DEPOSIT. Eurodollar certificates of deposit
issued by foreign branches of domestic banks having total assets of $1 billion
or more (investments in Eurodollar certificates may be affected by changes in
currency rates or exchange control regulations, or changes in governmental
administration or economic or monetary policy in the United States and abroad);
OBLIGATIONS OF SAVING INSTITUTIONS. Certificates of deposit of savings
banks and savings and loan associations, having total assets of $1 billion or
more (investments in savings institutions above $100,000 in principal amount are
not protected by federal deposit insurance);
FULLY INSURED CERTIFICATES OF DEPOSIT. Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is federally insured by the Bank Insurance
Fund or the Savings Association Insurance Fund (each of which is administered by
the Federal Deposit Insurance Corporation), limited to $100,000 principal amount
per certificate and to 15% or less of the Portfolio's total assets in all such
obligations and in all illiquid assets, in the aggregate; and
COMMERCIAL PAPER. Commercial paper rated within the two highest grades by
Standard & Poor's Corporation ("S&P") or Moody's Investors Service Inc.
("Moody's") or, if not rated, issued by a company having an outstanding debt
issue rated at least AAA by S&P or Aaa by Moody's.
U.S. GOVERNMENT SECURITIES
As discussed in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest in,
among other securities, securities issued by the U.S. Government, its agencies
or instrumentalities. Such securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association ("GNMA"), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose issuing
agency or instrumentality has the right to borrow, to meet its obligations,
from an existing line of credit with the U.S. Treasury. Among the agencies
and instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation
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("FHLMC") and the U.S. Postal Service. The U.S. Treasury has no legal
obligation to provide such line of credit and may choose not to do so.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are the Federal Farm
Credit System and the Federal Home Loan Banks.
Neither the value nor the yield of the U.S. Government securities which may
be invested in by the Portfolios are guaranteed by the U.S. Government. Such
values and yield will fluctuate with changes in prevailing interest rates,
economic factors and fiscal and monetary policies. Generally, as prevailing
interest rates rise, the value of any U.S. Government securities held by the
Portfolios will fall. Such securities with longer maturities generally tend to
produce higher yields and are subject to greater market fluctuation as a result
of changes in interest rates than debt securities with shorter maturities.
MORTGAGE-BACKED SECURITIES
Certain of the U.S. Government securities in which the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED GROWTH PORTFOLIO may invest, e.g., certificates issued by GNMA, FNMA
and FHLMC, are "mortgage-backed securities," which evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the timely
payment of the principal and interest on mortgages underlying the certificates,
whether or not such amounts are collected by the issuer on the underlying
mortgages. (A pass-through security is formed when mortgages are pooled together
and undivided interests in the pool or pools are sold. The cash flow from the
mortgages is passed through to the holders of the securities in the form of
periodic payments of interest, principal and prepayments net of a service fee).
The average life of such certificates varies with the maturities of the
underlying mortgage instruments, which may be up to thirty years but which may
include mortgage instruments with maturities of fifteen years, adjustable rate
mortgage instruments, variable rate mortgage instruments, graduated rate
mortgage instruments and/or other types of mortgage instruments. The assumed
average life of mortgages backing the majority of GNMA and FNMA certificates is
twelve years, and of FHLMC certificates is ten years. The average life is likely
to be substantially shorter than the original maturity of the mortgage pools
underlying the certificates, as a pool's duration may be shortened by
unscheduled or early payments of principal on the underlying mortgages. (Such
prepayments occur when the holder of an individual mortgage prepays the
remaining principal before the mortgage's scheduled maturity date.) In periods
of falling interest rates, the rate of prepayment tends to increase thereby
shortening the actual average life of a pool of mortgage-related securities.
Conversely, in periods of rising rates, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the pool. Prepayment
rates vary widely, and therefore it is not possible to accurately predict the
average life or realized yield of a particular pool.
The occurrence of mortgage prepayments is affected by factors including the
prevailing level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions. Prepayment
rates are important because of their effect on the yield and price of the
securities. If the Portfolio has purchased securities backed by pools containing
mortgages whose yields exceed the prevailing interest rate, any premium (i.e., a
price in excess of principal amount) paid for such securities may be lost. As a
result, the net asset value of shares of the Portfolio and the Portfolio's
ability to achieve its investment objectives may be adversely affected by
mortgage prepayments.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages insured by the Federal
Housing Administration ("FHA") or the Farmers Home Administration or guaranteed
by the Veterans Administration ("VA"). The GNMA Certificates that the Portfolios
will invest in are the "modified pass-through" type in that GNMA guarantees the
timely payment of monthly installments of principal and interest due on the
mortgage pool whether or not such amounts are
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collected by the issuer on the underlying mortgages. The National Housing Act
provides that the full faith and credit of the United States is pledged to the
timely payment of principal and interest by GNMA of the amounts due on the GNMA
Certificates. Additionally, GNMA is empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments some of which have maturities of 30 years. The
average life of the GNMA Certificate is likely to be substantially less than the
original maturity of the underlying mortgage pool because of prepayments or
refinancing of the mortgages or foreclosure. (Due to GNMA guarantee,
foreclosures impose no risk to principal investments.) Statistics indicate that
the average life of the type of mortgages backing the majority of GNMA
Certificates is approximately 12 years and for this reason it is standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the actual maturities of the underlying instruments and the
associated average life assumption. Historically, actual average life has been
consistent with the 12-year assumption referred to above. The actual yield of
each GNMA Certificate is influenced by the prepayment experience of the mortgage
pool underlying the Certificates. Such prepayments are passed through to the
registered holder of the Certificate along with the regular monthly payments of
principal and interest, which has the effect of reducing future payments, and
consequently the yield. Reinvestment by the Portfolios of prepayments may occur
at higher or lower interest rates than the original investment.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the rate provided for by such FHLMC Certificate, whether
or not received. FHLMC also guarantees to each registered holder a FHLMC
Certificate ultimate collection of all principal of the related mortgage loans,
without any offset or deduction, but does not, generally, guarantee the timely
payment of scheduled principal. FHLMC may remit the amount due on account of its
guarantee of collection of principal at any time after default on any underlying
mortgage loan, but not later than 30 days following (i) foreclosure sale, (ii)
payment of a claim by any mortgage insurer or (iii) the expiration of any right
of redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. The obligations of FHLMC under its guarantee are obligations solely
of FHLMC and are not backed by the full faith and credit of the U.S. Government.
The FHLMC has the right, however, to borrow from an existing line of credit with
the U.S. Treasury in order to meet is obligations.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC Certificates group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participants comprising another FHLMC Certificate
group.
FNMA CERTIFICATES. The Federal National Mortgage Association ("FNMA") is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA was originally
established in 1938 as a U.S. Government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder owned
and privately managed corporation by legislation enacted in 1968. FNMA provides
funds to the mortgage market primarily by purchasing home mortgage loans form
local lenders, thereby replenishing their funds for additional lending. FNMA
acquires funds to purchase home mortgage loans from many capital
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market investors that may not ordinarily invest in mortgage loans directly,
thereby expanding the total amount of funds available for housing.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects. FNMA Certificates have an assumed average life similar to GNMA
Certificates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As discussed in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may enter into forward foreign currency exchange
contracts ("forward contracts") as a hedge against fluctuations in future
foreign exchange rates. Each of these Portfolios will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. A forward
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large, commercial banks) and their customers. Such forward
contracts will only be entered into with United States banks and their foreign
branches or foreign banks whose assets total $1 billion or more. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades.
When management of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO or the EMERGING
MARKETS PORTFOLIO believes that the currency of a particular foreign country may
suffer a substantial movement against the U.S. dollar, it may enter into a
forward contract to purchase or sell, for a fixed amount of dollars or other
currency, the amount of foreign currency approximating the value of some or all
of the Portfolio's securities denominated in such foreign currency. The
Portfolio will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, the management of
these Portfolios believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Portfolio will be served. The Portfolio's custodian bank will place cash, U.S.
Government securities or other liquid portfolio securities in a segregated
account of the Portfolio in an amount equal to the value of the Portfolio's
total assets committed to the consummation of forward contracts entered into
under the circumstances set forth above. If the value of the securities placed
in the segregated account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts.
Where, for example, the Portfolio is hedging a portfolio position consisting
of foreign fixed-income securities denominated in a foreign currency against
adverse exchange rate moves vis-a-vis the U.S.
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dollar, at the maturity of the forward contract for delivery by the Portfolio of
a foreign currency, the Portfolio may either sell the portfolio security and
make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast the market value of portfolio securities at the
expiration of the contract. Accordingly, it may be necessary for the Portfolio
to purchase additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount of
foreign currency the Portfolio is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio securities if its market value exceeds
the amount of foreign currency the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio securities and engages in an
offsetting transaction, the Portfolio will incur a gain or loss to the extent
that there has been movement in spot or forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into a
new forward contract to sell the foreign currency. Should forward prices decline
during the period between the Portfolio's entering into a forward contract for
the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Portfolio will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
If the Portfolio purchases a fixed-income security which is denominated in
U.S. dollars but which will pay out its principal based upon a formula tied to
the exchange rate between the U.S. dollar and a foreign currency, it may hedge
against a decline in the principal value of the security by entering into a
forward contract to sell an amount of the relevant foreign currency equal to
some or all of the principal value of the security.
At times when the Portfolio has written a call option on a fixed-income
security or the currency in which it is denominated, it may wish to enter into a
forward contract to purchase or sell the foreign currency in which the security
is denominated. A forward contract would, for example, hedge the risk of the
security on which a call currency option has been written declining in value to
a greater extent than the value of the premium received for the options. The
Portfolio will maintain with its Custodian, at all times, cash, U.S. Government
securities, or other high grade debt obligations in a segregated account equal
in value to all forward contract obligations and option contract obligations
entered into in hedge situations such as this.
Although each Portfolio values its assets daily in terms of U.S. dollars,
the Portfolios do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. Each Portfolio will, however, do so from
time to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the spread between the prices at which they are buying
and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Portfolio at one rate, while offering a lesser rate of exchange
should the Portfolio desire to resell that currency to the dealer.
SOVEREIGN DEBT OBLIGATIONS
As discussed in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO may invest in Canadian and Mexican Sovereign Debt and the EMERGING
MARKETS PORTFOLIO may invest in Sovereign Debt of emerging market countries.
Political conditions, in terms of a country or agency's willingness to meet the
terms of its debt obligations, are of considerable significance. Investors
should be aware that the Sovereign Debt instruments in which the EMERGING
MARKETS PORTFOLIO may invest involve great risk and are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and Standard & Poor's Corporation.
Sovereign Debt generally offers high yields, reflecting not only perceived
credit risk, but also the need to compete with other local investments in
domestic financial markets. Mexico and certain other
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emerging market countries are among the largest debtors to commercial banks and
foreign governments. A foreign debtor's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the foreign
debtor's policy towards the International Monetary Fund and the political
constraints to which a sovereign debtor may be subject. Sovereign debtors may
default on their Sovereign Debt. Sovereign debtors may also be dependent on
expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearages on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a sovereign debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to service
its debts.
In recent years, some of the emerging market countries in which the EMERGING
MARKETS PORTFOLIO expects to invest have encountered difficulties in servicing
their Sovereign Debt. Some of these countries have withheld payments of interest
and/or principal of Sovereign Debt. These difficulties have also led to
agreements to restructure external debt obligations; in particular, commercial
bank loans, typically by rescheduling principal payments, reducing interest
rates and extending new credits to finance interest payments on existing debt.
In the future, holders of Sovereign Debt may be requested to participate in
similar reschedulings to such debt.
The ability or willingness of the governments of Mexico and other emerging
market countries to make timely payments on their Sovereign Debt is likely to be
influenced strongly by a country's balance of trade and its access to trade and
other international credits. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of such commodities. Increased protectionism on the part of a country's
trading partners could also adversely affect its exports. Such events could
extinguish a country's trade account surplus, if any. To the extent that a
country receives payment for its exports in currencies other than hard
currencies, its ability to make hard currency payments could be affected.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Portfolio's
investments. The countries issuing such instruments are faced with social and
political issues and some of them have experienced high rates of inflation in
recent years and have extensive internal debt. Among other effects, high
inflation and internal debt service requirements may adversely affect the cost
and availability of future domestic sovereign borrowing to finance governmental
programs, and may have other adverse social, political and economic
consequences. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While the Sub-Adviser intends to invest the assets of the
Portfolio in a manner that will minimize the exposure to such risks, there can
be no assurance that adverse political changes will not cause the Portfolio to
suffer a loss of interest or principal on any of its holdings.
As a result of all of the foregoing, a government obligor may default on its
obligations. If such an event occurs, the Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign government debt securities to obtain recourse may be subject
to the political climate in the relevant country. Bankruptcy, moratorium and
other similar laws applicable to issuers of Sovereign Debt Obligations may be
substantially different from those applicable to issuers of private debt
obligations. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
Periods of economic uncertainty may result in the volatility of market
prices of Sovereign Debt and in turn, the Portfolio's net asset value, to a
greater extent than the volatility inherent in domestic securities.
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The value of Sovereign Debt will likely vary inversely with changes in
prevailing interest rates, which are subject to considerable variance in the
international market.
HIGH YIELD SECURITIES
As discussed in the Prospectus, the DIVERSIFIED INCOME PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will also invest in high yield, high risk
fixed-income securities rated Baa or lower by Moody's Investors Service Inc.
("Moody's"), or BBB or lower by Standard & Poor's Corporation ("S&P"). The
ratings of fixed-income securities by Moody's and S&P are a generally accepted
barometer of credit risk. They are, however, subject to certain limitations from
an investor's standpoint.
Such limitations include the following: the rating of an issuer is heavily
weighted by past developments and does not necessarily reflect probable future
conditions; there is frequently a lag between the time a rating is assigned and
the time it is updated; and there may be varying degrees of difference in credit
risk of securities in each rating category. The Investment Manager and, for the
EMERGING MARKETS PORTFOLIO, the Sub-Adviser will attempt to reduce the overall
portfolio credit risk through diversification and selection of portfolio
securities based on considerations mentioned below.
While the ratings provide a generally useful guide to credit risks, they do
not, nor do they purport to, offer any criteria for evaluating the interest rate
risk. Changes in the general level of interest rates cause fluctuations in the
prices of fixed-income securities already outstanding and will therefore result
in fluctuation in net asset value of the Portfolio's shares. The extent of the
fluctuation is determined by a complex interaction of a number of factors. The
Investment Manager or, for the EMERGING MARKETS PORTFOLIO, the Sub-Adviser will
evaluate those factors it considers relevant and will make portfolio changes
when it deems it appropriate in seeking to reduce the risk of depreciation in
the value of the assets of the Portfolio. However, in seeking to achieve the
Portfolio's primary objective, there will be times, such as during periods of
rising interest rates, when depreciation and realization of capital losses on
securities in the portfolio will be unavoidable. Moreover, medium and
lower-rated securities and non-rated securities of comparable quality tend to be
subject to wider fluctuations in yield and market values than higher rated
securities. Such fluctuations after a security is acquired do not affect the
cash income received from that security but are reflected in the net asset value
of the Portfolio.
REPURCHASE AGREEMENTS
As discussed in the Prospectus, when cash may be available to a Portfolio
for only a few days, it may be invested by the Portfolio in repurchase
agreements until such time as it may otherwise be invested or used for payments
of obligations of the Portfolio. These agreements, which may be viewed as a type
of secured lending by the Portfolio, typically involve the acquisition by the
Portfolio of debt securities from a selling financial institution such as a
bank, savings and loan association or broker-dealer. The agreement provides that
the Portfolio will sell back to the institution, and that the institution will
repurchase, the underlying security ("collateral"), which is held by the
Portfolio's custodian bank, at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The
Portfolio will receive interest from the institution until the time when the
repurchase is to occur. Although such date is deemed by the Portfolio to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits. While repurchase agreements
involve certain risks not associated with direct investments in debt securities,
the Portfolios follow procedures designed to minimize such risks. These
procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions, whose financial
conditions will be continually monitored. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the resale price, which consists of the purchase price paid to the seller of the
securities plus the accrued resale premium which is defined as the amount
specified in the repurchase agreement or the daily amortization of the
difference between the purchase price and the resale price specified in the
repurchase agreement. In the case of the MONEY MARKET PORTFOLIO, such collateral
will consist entirely of securities that are direct obligations of, or that are
fully guaranteed as to principal and interest by, the United States or any
agency thereof, and/or certificates of deposit, bankers' acceptances which are
eligible for acceptance by a Federal Reserve Bank, and, if the seller is a bank,
mortgage related securities (as such term is defined in section 3(a)(41) of the
Securities Exchange Act of 1934) that
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at the time the repurchase agreement is entered into are rated in the highest
rating category by the "Requisite NRSROs" (see "Purchase and Redemption of Fund
Shares--Determination of Net Asset Value"). Additionally, in the case of the
MONEY MARKET PORTFOLIO, the collateral must qualify the repurchase agreement for
preferential treatment under the Federal Deposit Insurance Act of the Federal
Bankruptcy Code. In the event of a default or bankruptcy by a selling financial
institution, the Portfolio will seek to liquidate such collateral. However, the
exercising of the right by a Portfolio to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Portfolio could suffer a loss. It is the current policy of each
Portfolio not to invest in repurchase agreements that do not mature within seven
days if any such investment, together with any other illiquid assets held by the
Portfolio, amounts to more than 15% (10% in the case of the MONEY MARKET
PORTFOLIO) of its net assets. The investments by a Portfolio in repurchase
agreements may at times be substantial when, in the view of the Investment
Manager, liquidity, tax or other considerations warrant.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, each Portfolio of the
Fund may lend its portfolio securities to brokers, dealers and other financial
institutions, provided that such loans are callable at any time by the Portfolio
(subject to notice provisions described below), and are at all times secured by
cash or money market instruments, which are maintained in a segregated account
pursuant to applicable regulations and that are equal to at least 100% of the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the Portfolio continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as collateral, which will be invested in short-term obligations. A Portfolio
will not lend portfolio securities having a value of more than 25% of its total
assets.
A loan may be terminated by the borrower on one business day's notice, or by
the Portfolio on four business days' notice. If the borrower fails to deliver
the loaned securities within four days after receipt of notice, the Portfolio
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made of
firms deemed by the Fund's management to be creditworthy and when the income
which can be earned from such loans justifies the attendant risks. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Portfolio.
When voting or consent rights which accompany loaned securities pass to the
borrower, a Portfolio will follow the policy of calling the loaned securities,
in whole or in part as may be appropriate, to be delivered within one day after
notice, to permit the exercise of such rights if the matters involved would have
a material effect on the Portfolio's investment in such loaned securities. The
Portfolio will pay reasonable finder's, administrative and custodial fees in
connection with a loan of its securities. The creditworthiness of firms to which
a Portfolio lends its portfolio securities will be monitored on an ongoing
basis.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
As discussed in the Prospectus, from time to time, in the ordinary course of
business, each Portfolio of the Fund may purchase securities on a when-issued or
delayed delivery basis or may purchase or sell securities on a forward
commitment basis. When such transactions are negotiated, the price is fixed at
the time of commitment, but delivery and payment can take place a month or more
after the date of the commitment. While the Portfolio will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Portfolio may sell the securities
before the settlement date, if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest or dividends
accrue to the purchaser prior to the settlement date. At the time the Portfolio
makes the commitment to purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security purchased or, if a
sale, the proceeds to be received, in determining
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the net asset value of the Portfolio. At the time of delivery of the securities,
the value may be more or less than the purchase or sale price. The Portfolio
will also establish a segregated account with its custodian bank in which it
will continually maintain cash or U.S. Government securities or other liquid
portfolio securities equal in value to commitments to purchase securities on a
when-issued, delayed delivery or forward commitment basis; subject to this
requirement, a Portfolio may purchase securities on such basis without limit. An
increase in the percentage of a Portfolio's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Portfolio's net asset value.
WHEN, AS AND IF ISSUED SECURITIES
As discussed in the Prospectus, each Portfolio other than the MONEY MARKET
PORTFOLIO and the VALUE-ADDED MARKET PORTFOLIO may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized in the portfolio of the Portfolio
until the Investment Manager determines that issuance of the security is
probable. At such time, the Fund will record the transaction and, in determining
the net asset value of the Portfolio, will reflect the value of the security
daily. At such time, the Portfolio will also establish a segregated account with
its custodian bank in which it will maintain cash or U.S. Government securities
or other liquid portfolio securities equal in value to recognized commitments
for such securities. The value of the Portfolio's commitments to purchase the
securities of any one issuer, together with the value of all securities of such
issuer owned by the Portfolio, may not exceed 5% of the value of the Portfolio's
total assets at the time the initial commitment to purchase such securities is
made (see "Investment Restrictions" in the Prospectus). Subject to the foregoing
restrictions, these Portfolios may purchase securities on such basis without
limit. An increase in the percentage of a Portfolio's assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. These Portfolios may also sell securities on
a "when, as and if issued" basis provided that the issuance of the security will
result automatically from the exchange or conversion of a security owned by the
Portfolio at the time of the sale.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, each of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO
may write covered call options against securities held in its portfolio and
covered put options on eligible portfolio securities (the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO and the GLOBAL
EQUITY PORTFOLIO may also write covered put and call options on stock indexes)
and purchase options of the same series to effect closing transactions, and may
hedge against potential changes in the market value of investments (or
anticipated investments) by purchasing put and call options on portfolio (or
eligible portfolio) securities and engaging in transactions involving interest
rate futures contracts and bond index futures contracts and options on such
contracts. In addition, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO,
the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also hedge against such changes
by entering into transactions involving stock index futures contracts and
options thereon, and (except for the EMERGING MARKETS PORTFOLIO) options on
stock indexes. The VALUE-ADDED MARKET PORTFOLIO may purchase futures contracts
on stock indexes such as the S&P Index and the New York Stock Exchange Composite
Index and may sell such futures contracts to effect closing transactions. The
NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may
also hedge against potential changes in the market value of the
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currencies in which their investments (or anticipated investments) are
denominated by purchasing put and call options on currencies and engaging in
transactions involving currencies futures contracts and options on such
contracts.
OPTIONS ON TREASURY BONDS AND NOTES. Because trading interest in options
written on Treasury bonds and notes tends to center on the most recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
OPTIONS ON TREASURY BILLS. Because a deliverable Treasury bill changes from
week to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if a Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its Custodian, so that they
will be treated as being covered.
OPTIONS ON GNMA CERTIFICATES. Currently, options on GNMA Certificates are
only traded over-the-counter. Since the remaining principal balance of GNMA
Certificates declines each month as a result of mortgage payments, a Portfolio,
as a writer of a GNMA call holding GNMA Certificates as "cover" to satisfy its
delivery obligation in the event of exercise, may find that the GNMA
Certificates it holds no longer have a sufficient remaining principal balance
for this purpose. Should this occur, the Portfolio will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA Certificates
in the cash market in order to maintain its cover. A GNMA Certificate held by
the Portfolio to cover an option position in any but the nearest expiration
month may cease to represent cover for the option in the event of a decline in
the GNMA coupon rate at which new pools are originated under the FHA/VA loan
ceiling in effect at any given time, as such decline may increase the
prepayments made on other mortgage pools. If this should occur, the Portfolio
will no longer be covered, and the Portfolio will either enter into a closing
purchase transaction or replace such Certificate with a Certificate which
represents cover. When the Portfolio closes out its position or replaces such
Certificate, it may realize an unanticipated loss and incur transaction costs.
OPTIONS ON FOREIGN CURRENCIES. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may purchase and write options on foreign currencies
for purposes similar to those involved with investing in forward foreign
currency exchange contracts. For example, in order to protect against declines
in the dollar value of portfolio securities which are denominated in a foreign
currency, the Portfolio may purchase put options on an amount of such foreign
currency equivalent to the current value of the portfolio securities involved.
As a result, the Portfolio would be enabled to sell the foreign currency for a
fixed amount of U.S. dollars, thereby "locking in" the dollar value of the
portfolio securities (less the amount of the premiums paid for the options).
Conversely, these Portfolios may purchase call options on foreign currencies in
which securities they anticipate purchasing are denominated to secure a set U.S.
dollar price for such securities and protect against a decline in the value of
the U.S. dollar against such foreign currency. These Portfolios may also
purchase call and put options to close out written option positions.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
SECURITIES PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may also write call options on foreign currency to protect against
potential declines in its portfolio securities which are denominated in foreign
currencies. If the U.S. dollar value of the portfolio securities falls as a
result of a decline in the exchange rate between the foreign currency in which a
security is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio
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securities above the exercise price of the option and, in fact, only receives a
benefit from the writing of the option to the extent that the value of the
portfolio securities falls below the price of the premium received. The NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also write
options to close out long call option positions. A put option on a foreign
currency would be written by the Portfolio for the same reason it would purchase
a call option, namely, to hedge against an increase in the U.S. dollar value of
a foreign security which the Portfolio anticipates purchasing. Here, the receipt
of the premium would offset, to the extent of the size of the premium, any
increased cost to the Portfolio resulting from an increase in the U.S. dollar
value of the foreign security. However, the Portfolio could not benefit from any
decline in the cost of the foreign security which is greater than the price of
the premium received. These Portfolios may also write options to close out long
put and call option positions.
The markets in foreign currency options are relatively new and the ability
of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO to
establish and close out positions on such options is subject to the maintenance
of a liquid secondary market. Although a Portfolio will not purchase or write
such options unless and until, in the opinion of the management of the
Portfolio, the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the risks in
connection with the underlying currency, there can be no assurance that a liquid
secondary market will exist for a particular option at any specific time. In
addition, options on foreign currencies are affected by all of those factors
which influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
COVERED CALL WRITING. As stated in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO are permitted to write covered call options on portfolio securities,
and the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, THE DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO are
permitted to write covered call options on the U.S. dollar and foreign
currencies, in each case without limit, in order to aid in achieving their
investment objectives. Generally, a call option is "covered" if the Portfolio
owns, or has the right to acquire, without additional cash consideration (or for
additional cash consideration held for the Portfolio by its Custodian in a
segregated account) the underlying security (currency) subject to the option
except that in the case of call options on U.S. Treasury Bills, a Portfolio
might own U.S. Treasury Bills of a different series from those underlying the
call option, but with a principal amount and value corresponding to the exercise
price and a maturity date no later than that of the securities (currency)
deliverable under the call option. A call option is also covered if the
Portfolio holds a call on the same security (currency) as the underlying
security of the written option, where the exercise price of the call used for
coverage is equal to or less
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than the exercise price of the call written or greater than the exercise price
of the call written if the mark-to-market difference is maintained by the
Portfolio in cash, U.S. Government securities or other liquid portfolio
securities which the Portfolio holds in a segregated account maintained with the
Portfolio's Custodian.
The Portfolio will receive from the purchaser, in return for a call it has
written, a "premium;" i.e., the price of the option. Receipt of these premiums
may better enable the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO to achieve a higher
current income return than would be realized from holding the underlying
securities (and, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, currencies) alone. Moreover, the premium received
will offset a portion of the potential loss incurred by the Portfolio if the
securities (currencies) underlying the option are ultimately sold (exchanged) by
the Portfolio at a loss. The premium received will fluctuate with varying
economic market conditions. If the market value of the portfolio securities (or,
in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, the currencies in which they are denominated) upon which call
options have been written increases, the Portfolio may receive a lower total
return from the portion of its portfolio upon which calls have been written than
it would have had such calls not been written.
As regards listed options and certain over-the-counter ("OTC") options,
during the option period, the Portfolio may be required, at any time, to deliver
the underlying security (currency) against payment of the exercise price on any
calls it has written (exercise of certain listed and OTC options may be limited
to specific expiration dates). This obligation is terminated upon the expiration
of the option period or at such earlier time when the writer effects a closing
purchase transaction. A closing purchase transaction is accomplished by
purchasing an option of the same series as the option previously written.
However, once the Portfolio has been assigned an exercise notice, the Portfolio
will be unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on
an outstanding call option, to prevent an underlying security (currency) from
being called, to permit the sale of an underlying security (or the exchange of
the underlying currency) or to enable the Portfolio to write another call option
on the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain resulting
from a closing purchase transaction could be offset in whole or in part or
exceeded by a decline in the market value of the underlying security (currency).
If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised, the
Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received when the option was written, less the commission paid.
Options written by a Portfolio normally have expiration dates of up to to
eighteen months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
(currency) at the time the option is written. See "Risks of Options and Futures
Transactions," below.
COVERED PUT WRITING. As stated in the Prospectus, as a writer of a covered
put option, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, THE
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
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Portfolio or the EMERGING MARKETS PORTFOLIO incurs an obligation to buy the
security underlying the option from the purchaser of the put, at the option's
exercise price at any time during the option period, at the purchaser's election
(certain listed and OTC put options written by the Portfolio will be exercisable
by the purchaser only on a specific date). A put is "covered" if the Portfolio
maintains, in a segregated account maintained on its behalf at its Custodian,
cash, U.S. Government securities or other liquid portfolio securities in an
amount equal to at least the exercise price of the option, at all times during
the option period. Similarly, a written put position could be covered by the
Portfolio by its purchase of a put option on the same security as the underlying
security of the written option, where the exercise price of the purchased option
is equal to or more than the exercise price of the put written or less than the
exercise price of the put written if the mark-to-market difference is maintained
by the Portfolio in cash, U.S. Government securities or other liquid portfolio
securities which the Portfolio holds in a segregated account maintained at its
Custodian. In writing puts, the Portfolio assumes the risk of loss should the
market value of the underlying security decline below the exercise price of the
option (any loss being decreased by the receipt of the premium on the option
written). In the case of listed options, during the option period, the Portfolio
may be required, at any time, to make payment of the exercise price against
delivery of the underlying security. The operation of and limitations on covered
put options in other respects are substantially identical to those of call
options.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and
the EMERGING MARKETS PORTFOLIO will write put options for three purposes: (1) to
receive the income derived from the premiums paid by purchasers; (2) when the
Investment Manager (or, for the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO
and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser) wishes to purchase the
security underlying the option at a price lower than its current market price,
in which case the Portfolio will write the covered put at an exercise price
reflecting the lower purchase price sought; and (3) to close out a long put
option position. The potential gain on a covered put option is limited to the
premium received on the option (less the commissions paid on the transaction)
while the potential loss equals the difference between the exercise price of the
option and the current market price of the underlying securities when the put is
exercised, offset by the premium received (less the commissions paid on the
transaction).
PURCHASING CALL AND PUT OPTIONS. As stated in the Prospectus, the EMERGING
MARKETS PORTFOLIO may purchase listed and OTC call and put options in amounts
equalling up to 10% of its total assets, and each of the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO and the
BALANCED GROWTH PORTFOLIO may purchase such call and put options in amounts
equalling up to 5% of its total assets. Each of the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY
PORTFOLIO may purchase such call and put options and options on stock indexes in
amounts equalling 10% of its total assets, with a maximum of 5% of its total
assets invested in the purchase of stock index options. These Portfolios may
purchase call options in order to close out a covered call position (see
"Covered Call Writing" above) or purchase call options on securities they intend
to purchase. Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO may purchase a call option on foreign currency to hedge
against an adverse exchange rate move of the currency in which the security it
anticipates purchasing is denominated vis-a-vis the currency in which the
exercise price is denominated. The purchase of the call option to effect a
closing transaction on a call written over-the-counter may be a listed or an OTC
option. In either case, the call purchased is likely to be on the same
securities (currencies) and have the same terms as the written option. If
purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by the
Portfolio.
Each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase put options on
securities (and, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, on currencies) which it holds (or
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has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security (currency). If the value of the underlying
security (currency) were to fall below the exercise price of the put purchased
in an amount greater than the premium paid for the option, the Portfolio would
incur no additional loss. These Portfolios may also purchase put options to
close out written put positions in a manner similar to call options closing
purchase transactions. In addition, a Portfolio may sell a put option which it
has previously purchased prior to the sale of the securities (currencies)
underlying such option. Such a sale would result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid on the put option when it was purchased. Any such
gain or loss could be offset in whole or in part by a change in the market value
of the underlying security (currency). If a put option purchased by a Portfolio
expired without being sold or exercised, the Portfolio would realize a loss.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security (or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, the value of the security's denominated currency)
increase, but has retained the risk of loss should the price of the underlying
security (or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO,
the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, the value of the security's denominated currency) decline.
The covered put writer also retains the risk of loss should the market value of
the underlying security decline below the exercise price of the option less the
premium received on the sale of the option. In both cases, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver or receive the underlying
securities at the exercise price.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. If a covered call
option writer is unable to effect a closing purchase transaction or to purchase
an offsetting over-the-counter option, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, a covered call
option writer may not be able to sell an underlying security at a time when it
might otherwise be advantageous to do so. A secured put option writer who is
unable to effect a closing purchase transaction or to purchase an offsetting
over-the-counter option would continue to bear the risk of decline in the market
price of the underlying security until the option expires or is exercised. In
addition, a covered writer would be unable to utilize the amount held in cash or
U.S. Government securities or other liquid portfolio securities as security for
the put option for other investment purposes until the exercise or expiration of
the option.
A Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, as such options will generally only be closed out by entering into
a closing purchase transaction with the purchasing dealer. However, a Portfolio
may be able to purchase an offsetting option which does not close out its
position as a writer but constitutes an asset of equal value to the obligation
under the option written. If the Portfolio is not able to either enter into a
closing purchase transaction or purchase an offsetting position, it will be
required to maintain the securities subject to the call, or the collateral
underlying the put, even though it might not be advantageous to do so, until a
closing transaction can be entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on
an Exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an Exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an Exchange; (v) inadequacy of the facilities of an Exchange or
the Options Clearing Corporation ("OCC") to handle current trading volume; or
(vi) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that
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had been issued by the OCC as a result of trades on that Exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which a Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by a Portfolio,
the Portfolio could experience a loss of all or part of the value of the option.
Transactions are entered into by a Portfolio only with brokers or financial
institutions deemed creditworthy by the Portfolio's management.
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). An Exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which a Portfolio may write.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
STOCK INDEX OPTIONS. The BALANCED GROWTH PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the
GLOBAL EQUITY PORTFOLIO may invest in options on stock indexes. As stated in the
Prospectus, options on stock indexes are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
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. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified multiple
(the "multiplier"). The multiplier for an index option performs a function
similar to the unit of trading for a stock option. It determines the total
dollar value per contract of each point in the difference between the exercise
price of an option and the current level of the underlying index. A multiplier
of 100 means that a one-point difference will yield $100. Options on different
indexes may have different multipliers. The writer of the option is obligated,
in return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash and a gain or loss depends on price
movements in the stock market generally (or in a particular segment of the
market) rather than the price movements in individual stocks. Currently, options
are traded on, among other indexes, the S&P 100 Index and the S&P 500 Index on
the Chicago Board Options Exchange, the Major Market Index and the Computer
Technology Index, Oil Index and Institutional Index on the American Stock
Exchange and the NYSE Index and NYSE Beta Index on the New York Stock Exchange,
The Financial News Composite Index on the Pacific Stock Exchange and the Value
Line Index, National O-T-C Index and Utilities Index on the Philadelphia Stock
Exchange, each of which and any similar index on which options are traded in the
future which include stocks that are not limited to any particular industry or
segment of the market is referred to as a "broadly based stock market index."
Options on broad-based stock indexes provide the Portfolio with a means of
protecting the Portfolio against the risk of market-wide price movements. If the
Investment Manager anticipates a market decline, the Portfolio could purchase a
stock index put option. If the expected market decline materialized, the
resulting decrease in the value of the Portfolio's portfolio would be offset to
the extent of the increase in the value of the put option. If the Investment
Manager anticipates a market rise, the Portfolio may purchase a stock index call
option to enable the Portfolio to participate in such rise until completion of
anticipated common stock purchases by the Portfolio. Purchases and sales of
stock index options also enable the Investment Manager to more speedily achieve
changes in a Portfolio's equity positions.
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The BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO and the GLOBAL EQUITY PORTFOLIO will
write put options on stock indexes only if such positions are covered by cash,
U.S. Government securities or other liquid portfolio securities equal to the
aggregate exercise price of the puts, or by a put option on the same stock index
with a strike price no lower than the strike price of the put option sold by the
Portfolio, which cover is held for the Portfolio in a segregated account
maintained for it by its Custodian. All call options on stock indexes written by
a Portfolio will be covered either by a portfolio of stocks substantially
replicating the movement of the index underlying the call option or by holding a
separate call option on the same stock index with a strike price no higher than
the strike price of the call option sold by the Portfolio.
RISKS OF OPTIONS ON INDEXES. Because exercises of stock index options are
settled in cash, call writers such as the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO
and the GLOBAL EQUITY PORTFOLIO cannot provide in advance for their potential
settlement obligations by acquiring and holding the underlying securities. A
call writer can offset some of the risk of its writing position by holding a
diversified portfolio of stocks similar to those on which the underlying index
is based. However, most investors cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same stocks as the underlying index,
and, as a result, bear a risk that the value of the securities held will vary
from the value of the index. Even if an index call writer could assemble a stock
portfolio that exactly reproduced the composition of the underlying index, the
writer still would not be fully covered from a risk standpoint because of the
"timing risk" inherent in writing index options. When an index option is
exercised, the amount of cash that the holder is entitled to receive is
determined by the difference between the exercise price and the closing index
level on the date when the option is exercised. As with other kinds of options,
the writer will not learn that it has been assigned until the next business day,
at the earliest. The time lag between exercise and notice of assignment poses no
risk for the writer of a covered call on a specific underlying security, such as
a common stock, because there the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value may
have declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds stocks that exactly match
the composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those stocks against payment of the
exercise price. Instead, it will be required to pay cash in an amount based on
the closing index value on the exercise date; and by the time it learns that it
has been assigned, the index may have declined, with a corresponding decline in
the value of its stock portfolio. This "timing risk" is an inherent limitation
on the ability of index call writers to cover their risk exposure by holding
stock positions.
A holder of an index option who exercises it before the closing index value
for that day is available runs the risk that the level of the underlying index
may subsequently change. If such a change causes the exercised option to fall
out-of-the-money, the exercising holder will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
If dissemination of the current level of an underlying index is interrupted,
or if trading is interrupted in stocks accounting for a substantial portion of
the value of an index, the trading of options on that index will ordinarily be
halted. If the trading of options on an underlying index is halted, an exchange
may impose restrictions prohibiting the exercise of such options.
FUTURES CONTRACTS. As stated in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may purchase and sell interest rate futures contracts that are traded,
or may in the future be traded, on U.S. commodity exchanges on such underlying
securities as U.S. Treasury bonds, notes, bills and GNMA Certificates and bond
index futures contracts that are traded, or may in the future be traded, on U.S.
commodity exchanges on such indexes as the Moody's Investment-Grade Corporate
Bond Index. The BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the
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AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also purchase and sell stock
index futures contracts that are traded on U.S. commodity exchanges on such
indexes as the S&P 500 Index and the New York Stock Exchange Composite Index.
The GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also purchase
and sell futures contracts that are currently traded, or may in the future be
traded, on foreign commodity exchanges on such underlying securities as common
stocks and on such indexes of foreign equity securities as may exist or come
into being, such as the Financial Times Equity Index. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may also purchase and sell
futures contracts that are currently traded, or may in the future be traded, on
foreign commodity exchanges on such underlying securities as foreign government
fixed-income securities, on various currencies ("currency futures") and on such
indexes of foreign fixed-income securities as may exist or come into being.
As a futures contract purchaser, a Portfolio incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, a Portfolio incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and
the EMERGING MARKETS PORTFOLIO will purchase or sell interest rate futures
contracts for the purpose of hedging their fixed-income portfolio (or
anticipated portfolio) securities against changes in prevailing interest rates
or, in the case of the UTILITIES PORTFOLIO, to alter the Portfolio's asset
allocation in fixed-income securities. If it is anticipated that interest rates
may rise and, concomitantly, the price of certain of its portfolio securities
fall, a Portfolio may sell an interest rate futures contract or a bond index
futures contract. If declining interest rates are anticipated, or if the
Investment Manager wishes to increase the UTILITIES PORTFOLIO's allocation of
fixed-income securities, a Portfolio may purchase an interest rate futures
contract or a bond index futures contract to protect against a potential
increase in the price of securities the Portfolio intends to purchase.
Subsequently, appropriate securities may be purchased by the Portfolio in an
orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts.
The BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO will purchase or sell stock index futures contracts
for the purpose of hedging their equity portfolio (or anticipated portfolio)
securities against changes in their prices. If the Investment Manager
anticipates that the prices of stock held by a Portfolio may fall or wishes to
decrease the UTILITIES PORTFOLIO's asset allocation in equity securities, the
Portfolio may sell a stock index futures contract. Conversely, if the Investment
Manager wishes to increase the assets of the UTILITIES PORTFOLIO which are
invested in stocks or as a hedge against anticipated prices rises in those
stocks which the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO or the EMERGING MARKETS PORTFOLIO intends to purchase, the Portfolio
may purchase stock index futures contracts. This allows the Portfolio to
purchase equities, in accordance with the asset allocations of the Portfolio's
management, in an orderly and efficacious manner. The circumstances under which
the VALUE-ADDED MARKET PORTFOLIO may purchase and sell stock index futures are
described below.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO will
purchase or sell currency futures on currencies in which their portfolio
securities (or anticipated portfolio securities) are denominated for the
purposes of hedging against anticipated changes in currency exchange rates.
These Portfolios will enter into currency futures contracts for the same reasons
as set forth under the heading "Forward Foreign Currency Exchange Contracts"
above for entering into forward foreign currency exchange contracts; namely, to
"lock-in" the value of a security purchased or sold in a given currency
vis-a-vis a different currency or to hedge against an adverse currency exchange
rate movement of a portfolio security's (or anticipated portfolio security's)
denominated currency vis-a-vis a different currency.
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In addition to the above, interest rate and bond index and stock index (and
currency) futures contracts will be bought or sold in order to close out a short
or long position in a corresponding futures contract.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without the making or taking of delivery. Index futures
contracts provide for the delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the open or close
of the last trading day of the contract and the futures contract price. A
futures contract sale is closed out by effecting a futures contract purchase for
the same aggregate amount of the specific type of security (or, in the case of
the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO,
currency) and the same delivery date. If the sale price exceeds the offsetting
purchase price, the seller would be paid the difference and would realize a
gain. If the offsetting purchase price exceeds the sale price, the seller would
pay the difference and would realize a loss. Similarly, a futures contract
purchase is closed out by effecting a futures contract sale for the same
aggregate amount of the specific type of security (currency) and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that a Portfolio will be able to enter into a closing transaction.
INTEREST RATE FUTURES CONTRACTS. When The NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP
GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO or the EMERGING MARKETS PORTFOLIO
enters into a futures contract, it is initially required to deposit with its
Custodian, in an account in the name of the broker performing the transaction,
an "initial margin" of cash or U.S. Government securities or other liquid
portfolio securities equal to approximately 2% of the contract amount. Initial
margin requirements are established by the Exchanges on which futures contracts
trade and may, from time to time, change. In addition, brokers may establish
margin deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on the futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked to market daily and
the Portfolio may be required to make subsequent deposits of cash or U.S.
Government securities, called "variation margin," with the Portfolio's futures
contract clearing broker, which are reflective of price fluctuations in the
futures contract. Currently, interest rate futures contracts can be purchased on
debt securities such as U.S. Treasury Bills and Bonds, U.S. Treasury Notes with
maturities between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates
of Deposit.
INDEX FUTURES CONTRACTS. As discussed in the Prospectus, the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may invest in bond index futures contracts, and the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may invest in stock
index futures contracts. The VALUE-ADDED MARKET PORTFOLIO may purchase stock
index futures contracts as a temporary substitute for the purchase of individual
stocks which may then be purchased in orderly fashion, and may sell such
contracts to effect closing transactions. An index futures contract sale creates
an obligation by the Portfolio, as seller, to deliver cash at a specified future
time. An index futures contract purchase would create an obligation by the
Portfolio, as purchaser, to take delivery of cash at a specified future time.
Futures contracts on indexes do not require the physical delivery of securities,
but provide for a final cash settlement on the expiration date which reflects
accumulated profits and losses credited or debited to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts.
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Currently, the initial margin requirements range from 3% to 10% of the contract
amount for index futures. In addition, due to current industry practice, daily
variations in gains and losses on open contracts are required to be reflected in
cash in the form of variation margin payments. The Portfolio may be required to
make additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, the Portfolio may
elect to close the position by taking an opposite position which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio and the Portfolio realizes a loss or a
gain.
Currently, index futures contracts can be purchased or sold with respect to,
among others, the Standard & Poor's 500 Stock Price Index and the Standard &
Poor's 100 Stock Price Index on the Chicago Mercantile Exchange, the New York
Stock Exchange Composite Index on the New York Futures Exchange, the Major
Market Index on the American Stock Exchange, the Value Line Stock Index on the
Kansas City Board of Trade and the Moody's Investment-Grade Corporate Bond Index
on the Chicago Board of Trade.
CURRENCY FUTURES. As noted above, the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO may invest in foreign currency futures. Generally,
foreign currency futures provide for the delivery of a specified amount of a
given currency, on the exercise date, for a set exercise price denominated in
U.S. dollars or other currency. Foreign currency futures contracts would be
entered into for the same reason and under the same circumstances as forward
foreign currency exchange contracts. The Portfolio's management will assess such
factors as cost spreads, liquidity and transaction costs in determining whether
to utilize futures contracts or forward contracts in its foreign currency
transactions and hedging strategy. Currently, currency futures exist for, among
other foreign currencies, the Japanese yen, German mark, Canadian dollar,
British pound, Swiss franc and European currency unit.
Purchasers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the buying and selling of futures generally. In
addition, there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulation
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the
Portfolios will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of the Portfolio's management, the
market for such options has developed sufficiently that the risks in connection
with such options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts.
OPTIONS ON FUTURES CONTRACTS. The NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the
UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO,
the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may purchase and
write call and put options on futures contracts which are traded on an exchange
and enter into closing transactions with respect to such options to terminate an
existing position. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the term of
the option. Upon the exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option is accompanied
by delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract at
the time of exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
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The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN
VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and
the EMERGING MARKETS PORTFOLIO will only purchase and write options on futures
contracts for identical purposes to those set forth above for the purchase of a
futures contract (purchase of a call option or sale of a put option) and the
sale of a futures contract (purchase of a put option or sale of a call option),
or to close out a long or short position in futures contracts. If, for example,
the Investment Manager (or, in the case of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the Sub-Adviser) wished
to protect against an increase in interest rates and the resulting negative
impact on the value of a portion of a Portfolio's fixed-income portfolio, it
might write a call option on an interest rate futures contract, the underlying
security of which correlates with the portion of the portfolio the Portfolio's
management seeks to hedge. Any premiums received in the writing of options on
futures contracts may, of course, augment the income of the Portfolio and
thereby provide a further hedge against losses resulting from price declines in
portions of its portfolio.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. The NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED
GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the
MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS
PORTFOLIO may not enter into futures contracts or purchase related options
thereon if, immediately thereafter, the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds 5%
of the value of the Portfolio's total assets, after taking into account
unrealized gains and unrealized losses on such contracts it has entered into,
provided, however, that in the case of an option that is in-the-money (the
exercise price of the call (put) option is less (more) than the market price of
the underlying security) at the time of purchase, the in-the-money amount may be
excluded in calculating the 5%. The VALUE-ADDED MARKET PORTFOLIO is similarly
limited in its purchase of stock index futures contracts. However, there is no
overall limitation on the percentage of a Portfolio's assets which may be
subject to a hedge position. In addition, in accordance with the regulations of
the Commodity Futures Trading Commission ("CFTC") under which the Fund is
exempted from registration as a commodity pool operator, these Portfolios may
only enter into futures contracts and options on futures contracts transactions
for purposes of hedging a part or all of the Portfolio's portfolio. If the CFTC
changes its regulations so that a Portfolio would be permitted to write options
on futures contracts for income purposes without CFTC registration, these
Portfolios may engage in such transactions for those purposes. Except as
described above, and in the Prospectus with respect to the BALANCED GROWTH
PORTFOLIO, there are no other limitations on the use of futures and options
thereon by these Portfolios.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. As stated
in the Prospectus, the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES
PORTFOLIO, the AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may sell a futures
contract to protect against the decline in the value of securities (or, in the
case of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the currency in which securities are denominated) held by
the Portfolio. However, it is possible that the futures market may advance and
the value of securities (or, in the case of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY
PORTFOLIO and the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the currency
in which they are denominated) held in the Portfolio may decline. If this
occurred, the Portfolio would lose money on the futures contract and also
experience a decline in value of its portfolio securities. However, while this
could occur for a very brief period or to a very small degree, over time the
value of a diversified portfolio will tend to move in the same direction as the
futures contracts.
If the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED
INCOME PORTFOLIO, the BALANCED GROWTH PORTFOLIO, the UTILITIES PORTFOLIO, the
AMERICAN VALUE PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the
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GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO purchases a futures
contract to hedge against the increase in value of securities the Portfolio
intends to buy (or, in the case of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO, the currency in which they are denominated), and the
value of such securities (currency) decreases, then the Portfolio may determine
not to invest in the securities as planned and will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities.
If a Portfolio maintains a short position in a futures contract or has sold
a call option on a futures contract, it will cover this position by holding, in
a segregated account maintained at its Custodian, cash, U.S. Government
securities or other liquid portfolio securities equal in value (when added to
any initial or variation margin on deposit) to the market value of the
securities (currencies) underlying the futures contract or the exercise price of
the option. Such a position may also be covered by owning the securities
(currencies) underlying the futures contract (in the case of a stock index
futures contract a portfolio of securities substantially replicating the
relevant index), or by holding a call option permitting the Portfolio to
purchase the same contract at a price no higher than the price at which the
short position was established.
In addition, if a Portfolio holds a long position in a futures contract or
has sold a put option on a futures contract, it will hold cash, U.S. Government
securities or other liquid portfolio securities equal to the purchase price of
the contract or the exercise price of the put option (less the amount of initial
or variation margin on deposit) in a segregated account maintained for the
Portfolio by its Custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Portfolio has insufficient cash,
it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to take or make delivery of the instruments underlying
interest rate futures contracts it holds at a time when it is disadvantageous to
do so. The inability to close out options and futures positions could also have
an adverse impact on the Portfolio's ability to effectively hedge its portfolio.
With regard to the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO, futures contracts and options thereon which are purchased or
sold on foreign commodities exchanges may have greater price volatility than
their U.S. counterparts. Furthermore, foreign commodities exchanges may be less
regulated and under less governmental scrutiny than U.S. exchanges. Brokerage
commissions, clearing costs and other transaction costs may be higher on foreign
exchanges. Greater margin requirements may limit the ability of these Portfolios
to enter into certain commodity transactions on foreign exchanges. Moreover,
differences in clearance and delivery requirements on foreign exchanges may
occasion delays in the settlement of the Portfolio's transactions effected on
foreign exchanges.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Portfolio, the Portfolio could experience a loss of
all or part of the value of the option. Transactions are entered into by a
Portfolio only with brokers or financial institutions deemed creditworthy by the
Portfolio's management.
While the futures contracts and options transactions to be engaged in by a
Portfolio for the purpose of hedging the Portfolio's portfolio securities are
not speculative in nature, there are risks inherent in the use of such
instruments. One such risk which may arise in employing futures contracts to
protect against
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the price volatility of portfolio securities (and, for the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL
EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the currencies in which
they are denominated) is that the prices of securities and indexes subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Portfolio's portfolio
securities (and the currencies in which they are denominated). Another such risk
is that prices of interest rate futures contracts may not move in tandem with
the changes in prevailing interest rates against which the Portfolio seeks a
hedge. A correlation may also be distorted by the fact that the futures market
is dominated by short-term traders seeking to profit from the difference between
a contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
As stated in the Prospectus, there may exist an imperfect correlation
between the price movements of futures contracts purchased by a Portfolio and
the movements in the prices of the securities (currencies) which are the subject
of the hedge. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the debt securities
and futures markets could result. Price distortions could also result if
investors in futures contracts opt to make or take delivery of underlying
securities rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends may still not result in a successful hedging
transaction.
As stated in the Prospectus, there is no assurance that a liquid secondary
market will exist for futures contracts and related options in which the
Portfolios may invest. In the event a liquid market does not exist, it may not
be possible to close out a futures position, and in the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
of variation margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent a Portfolio
from closing out a contract which may result in reduced gain or increased loss
to the Portfolio. The absence of a liquid market in futures contracts might
cause the Portfolios to make or take delivery of the underlying securities
(currencies) at a time when it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Portfolio notwithstanding that the purchase or sale of a futures contract would
not result in a loss, as in the instance where there is no movement in the
prices of the futures contract or underlying securities (currencies).
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus, the
investment restrictions listed below have been adopted by the Fund as
fundamental policies of the Portfolios, except as otherwise indicated. Under the
Act, a fundamental policy may not be changed with respect to a Portfolio without
the vote of a majority of the outstanding voting securities of that Portfolio,
as defined in the Act. Such a majority is defined as the lesser of (a) 67% or
more of the shares of the Portfolio present at a meeting of shareholders of the
Fund, if the holders of more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Portfolio. For purposes of the following restrictions and those
contained in the Prospectus: (i) all percentage limitations apply immediately
after a purchase or initial investment; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in the
amount of total or net assets does not require elimination of any security from
the portfolio.
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Each Portfolio of the Fund may not:
1. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Portfolio may purchase securities of
issuers which engage in real estate operations and securities secured by
real estate or interests therein (as such, in case of default of such
securities, a Portfolio may hold the real estate securing such security).
2. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that the Portfolio
may invest in the securities of companies which operate, invest in, or
sponsor such programs.
3. Pledge its assets or assign or otherwise encumber them except: (a)
to secure borrowings effected within the limitations set forth in
restriction (5) in the Prospectus or (b), in the case of the DEVELOPING
GROWTH PORTFOLIO, to secure borrowings effected in connection with leverage.
For the purpose of this restriction, collateral arrangements with respect to
initial or variation margin for futures are not deemed to be pledges of
assets.
4. Issue senior securities as defined in the Act except insofar as the
Portfolio may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement or reverse repurchase agreement; (b)
purchasing any securities on a when-issued or delayed delivery basis; (c)
purchasing or selling any financial futures contracts or options thereon;
(d) borrowing money in accordance with restrictions described above and in
the Prospectus; or (e) lending portfolio securities.
5. Make loans of money or securities, except: (a) by the purchase of
portfolio securities in which the Portfolio may invest consistent with its
investment objective and policies; (b) by investing in repurchase
agreements; or (c) by lending its portfolio securities or (d), in the case
of the EMERGING MARKETS PORTFOLIO, by investing in loan participations and
loan assignments.
6. Make short sales of securities.
7. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of portfolio securities. The deposit or
payment by the Portfolio of initial or variation margin in connection with
futures contracts or related options thereon is not considered the purchase
of a security on margin.
8. Purchase or sell commodities or commodities contracts except that
the Portfolios may purchase or sell futures contracts or options on futures.
9. Engage in the underwriting of securities, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security. (The Portfolios may invest in restricted
securities subject to the fundamental (in the case of the MONEY MARKET
PORTFOLIO) and non-fundamental (in the case of the other Portfolios)
limitations contained in the Prospectus).
10. Invest for the purpose of exercising control or management of any
other issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER. Although the Fund does not intend to engage in
short-term trading of portfolio securities as a means of achieving the
investment objectives of the respective Portfolios, each Portfolio may sell
portfolio securities without regard to the length of time they have been held
whenever such sale will in the opinion of the Investment Manager or, in the case
of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and
the EMERGING MARKETS PORTFOLIO, the applicable Sub-Adviser strengthen the
Portfolio's position and contribute to its investment objectives. A 100%
turnover rate would occur, for example, if all the portfolio securities of a
Portfolio (other than short-term money market securities) were replaced once
during the fiscal year. Based on this definition, it is anticipated that the
MONEY MARKET PORTFOLIO's policy of investing in securities with remaining
maturities of less than one year will not result in a quantifiable portfolio
turnover rate. It is not anticipated that the portfolio turnover rates
50
<PAGE>
of the Portfolios will exceed the following percentages in any one year: NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO: 100%; DIVERSIFIED INCOME PORTFOLIO:
150%; BALANCED GROWTH PORTFOLIO: 100%; UTILITIES PORTFOLIO: 100%; DIVIDEND
GROWTH PORTFOLIO: 90%; VALUE-ADDED MARKET PORTFOLIO: 100%; GROWTH PORTFOLIO:
200%; AMERICAN VALUE PORTFOLIO: 400%; MID-CAP EQUITY PORTFOLIO: 350%; GLOBAL
EQUITY PORTFOLIO: 100%; DEVELOPING GROWTH PORTFOLIO: 300%; and EMERGING MARKETS
PORTFOLIO: 100%.
PORTFOLIO TRANSACTIONS AND BROKERAGE. Subject to the general supervision of
the Board of Trustees, The Investment Manager and, for the NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS
PORTFOLIO, the Sub-Advisers are responsible for decisions to buy and sell
securities for each Portfolio of the Fund, the selection of brokers and dealers
to effect the transactions, and the negotiation of brokerage commissions, if
any. Purchases and sales of securities on a stock exchange are effected through
brokers who charge a commission for their services. 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 which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. For the fiscal years ended
December 31, 1995, 1996, and 1997, the Portfolios of the Fund paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
BROKERAGE BROKERAGE BROKERAGE
COMMISSIONS COMMISSIONS COMMISSIONS
PAID FOR FISCAL PAID FOR FISCAL PAID FOR FISCAL
YEAR YEAR YEAR
NAME OF PORTFOLIO ENDED 12/31/95 ENDED 12/31/96 ENDED 12/31/97
- -------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Diversified Income Portfolio...................... $ 250 $ 413 $ 1,875
Balanced Growth Portfolio......................... 15,809 26,227 52,983
Utilities Portfolio............................... 23,207 28,391 23,494
Dividend Growth Portfolio......................... 71,743 288,011 420,488
Value-Added Market Portfolio...................... 18,694 39,218 48,470
Growth Portfolio.................................. 5,090 19,971 45,268
American Value Portfolio.......................... 52,029 313,876 764,656
Mid-Cap Growth Portfolio.......................... -- -- 23,517
Global Equity Portfolio........................... 74,761 243,803 433,239
Developing Growth Portfolio....................... 12,872 91,128 143,389
Emerging Markets Portfolio........................ 21,667 106,025 140,267
</TABLE>
Purchases of money market instruments are made from dealers, underwriters
and issuers; sales, if any, prior to maturity, are made to dealers and issuers.
The Fund does not normally incur brokerage commission expense on such
transactions. Money market instruments 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.
The Investment Manager and, for the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO, the
Sub-Advisers currently serve as investment advisors to a number of clients,
including other investment companies, and may in the future act as investment
manager or adviser to others. It is the practice of the Investment Manager or
the Sub-Advisers to cause purchase and sale transactions to be allocated among
the Portfolios of the Fund and others whose assets they manage in such manner as
they deem equitable. In making such allocations among the Portfolios of the Fund
and other client accounts, various factors may be considered, including the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other client accounts.
In the case of certain initial and secondary public offerings, the Investment
Manager or the Sub-Advisers may utilize a pro-rata allocation process based on
the size of the Dean Witter Funds involved and the number of shares available
from the public offering. These procedures may, under certain circumstances,
have an adverse effect on the Fund.
51
<PAGE>
The policy of the Fund regarding purchases and sales of securities for the
various Portfolios is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Investment Manager (or the applicable Sub-Adviser)
from obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Investment Manager (or the applicable Sub-Adviser) relies upon its
experience and knowledge regarding commissions generally charged by various
brokers and on its judgment in evaluating the brokerage and research services
received from the broker effecting the transaction. Such determinations are
necessarily subjective and imprecise, as in most cases an exact dollar value for
those services is not ascertainable.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and regulation
of foreign securities exchanges and brokers than in the United States.
In seeking to implement the policies of the Portfolios of the Fund, the
Investment Manager or the applicable Sub-Adviser effects transactions with those
brokers and dealers who the Investment Manager or the applicable Sub-Adviser
believes provide the most favorable prices and are capable of providing
efficient executions. If the Investment Manager or the applicable Sub-Adviser
believes such price and execution are obtainable from more than one broker or
dealer, it may give consideration to placing portfolio transactions with those
brokers and dealers who also furnish research and other services to the Fund,
the Investment Manager or the Sub-Adviser. Such services may include, but are
not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investment; wire services; and appraisals
or evaluations of portfolio securities.
The information and services received by the Investment Manager and the
Sub-Advisers from brokers and dealers may be of benefit to the Investment
Manager or the Sub-Advisers in the management of accounts of some of their other
clients and may not in all cases benefit a Portfolio of the Fund directly. While
the receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed by
the Investment Manager or the applicable Sub-Adviser and thus reduce its
expenses, it is of indeterminable value and the fees paid to the Investment
Manager and the Sub-Advisers are not reduced by any amount that may be
attributable to the value of such services. For its fiscal year ended December
31, 1997, the Fund directed the payment of brokerage commissions in connection
with transactions in the following aggregate amounts to brokers because of
research services provided, as follows:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS AGGREGATE DOLLAR
DIRECTED IN CONNECTION AMOUNT OF TRANSACTIONS
WITH RESEARCH SERVICES FOR WHICH SUCH
PROVIDED COMMISSIONS WERE PAID
FOR FISCAL YEAR FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO ENDED 12/31/97 12/31/97
- ----------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Balanced Growth Portfolio.................................. $ 36,779 $ 33,369,947
Utilities Portfolio........................................ 7,854 3,713,356
Dividend Growth Portfolio.................................. 253,987 197,922,361
Growth Portfolio........................................... 29,745 26,026,837
American Value Portfolio................................... 647,193 494,334,590
Mid-Cap Growth Portfolio................................... 12,162 6,817,404
Global Equity Portfolio.................................... 389,503 106,971,796
Developing Growth Portfolio................................ 98,219 41,217,854
Emerging Markets Portfolio................................. 136,994 28,886,628
</TABLE>
52
<PAGE>
Pursuant to an order of the Securities and Exchange Commission, the Fund may
effect principal transactions in certain money market instruments with DWR. The
Fund will limit its transactions with DWR to U.S. Government and Government
Agency Securities, Bank Money Instruments (i.e., Certificates of Deposit and
Bankers' Acceptances) and Commercial Paper. Such transactions will be effected
with DWR only when the price available from DWR is better than that available
from other dealers. During the fiscal years ended December 31, 1995, 1996 and
1997, the Fund did not effect any principal transactions with DWR.
Consistent with the policy described above, brokerage transactions in
securities listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by the affiliated broker or dealer must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on an exchange during a comparable period of time. This
standard would allow the affiliated broker or dealer to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the Trustees who are not "interested" persons of the
Fund, as defined in the Act, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to an
affiliated broker or dealer are consistent with the foregoing standard. The Fund
does not reduce the management fee it pays to the Investment Manager by any
amount of the brokerage commissions it may pay to an affiliated broker or
dealer.
During the fiscal years ended December 31, 1995 and 1996, the Fund paid a
total of $142,255 ($6,745 for the BALANCED PORTFOLIO, $22,805 for the UTILITIES
PORTFOLIO, $67,555 for the DIVIDEND GROWTH PORTFOLIO, $740 for the CORE EQUITY
PORTFOLIO, $29,871 for the AMERICAN VALUE PORTFOLIO, $6,836 for the GLOBAL
EQUITY PORTFOLIO and $7,703 for the DEVELOPING GROWTH PORTFOLIO), and $374,061
($5,464 for the BALANCED GROWTH PORTFOLIO, $25,530 for the UTILITIES PORTFOLIO,
$173,213 for the DIVIDEND GROWTH PORTFOLIO, $4,616 for the GROWTH PORTFOLIO,
$108,676 for the AMERICAN VALUE PORTFOLIO, $28,026 for the GLOBAL EQUITY
PORTFOLIO and $28,536 for the DEVELOPING GROWTH PORTFOLIO), respectively, in
brokerage commissions to DWR. For its fiscal year ended December 31, 1997, the
Fund paid a total of $322,173 in brokerage commissions to DWR for transactions
as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
DOLLAR AMOUNT OF
EXECUTED TRADES ON
BROKERAGE COMMISSIONS PERCENTAGE OF AGGREGATE WHICH BROKERAGE
PAID TO DWR FOR BROKERAGE COMMISSIONS COMMISSIONS WERE PAID
FISCAL YEAR FOR FISCAL YEAR ENDED FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO ENDED 12/31/97 12/31/97 12/31/97
- ---------------------------------- ------------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Balanced Growth Portfolio......... $ 4,707 8.88 % 11.31 %
Utilities Portfolio............... 15,600 66.40 72.76
Dividend Growth Portfolio......... 148,680 35.36 43.81
Growth Portfolio.................. 3,655 8.07 10.08
American Value Portfolio.......... 73,465 9.61 11.84
Mid-Cap Growth Portfolio.......... 9,511 40.44 48.22
Global Equity Portfolio........... 38,917 8.98 24.88
Developing Growth Portfolio....... 27,638 19.27 22.50
</TABLE>
During the period June 1 through December 31, 1997, the Fund paid a total of
$48,790 in brokerage commissions to MS & Co., which broker-dealer became an
affiliate of the Investment Manager on
53
<PAGE>
May 31, 1997 upon consummation of the merger of Dean Witter, Discover & Co. with
Morgan Stanley Group Inc. These commissions were paid for transactions as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
DOLLAR AMOUNT OF
EXECUTED TRADES ON
PERCENTAGE OF AGGREGATE WHICH BROKERAGE
BROKERAGE COMMISSIONS BROKERAGE COMMISSIONS COMMISSIONS WERE PAID
PAID TO MS & CO. FOR FOR FISCAL YEAR ENDED FOR FISCAL YEAR ENDED
NAME OF PORTFOLIO PERIOD 6/1/97-12/31/97 12/31/97 12/31/97
- ------------------------------------ ----------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Balanced Growth Portfolio........... $ 165 0.31 % 0.28 %
Dividend Growth Portfolio........... 11,150 2.65 3.29
Growth Portfolio.................... 135 0.30 0.27
American Value Portfolio............ 27,095 3.54 4.95
Mid-Cap Growth Portfolio............ 850 3.61 4.32
Global Equity Portfolio............. 3,141 0.73 0.86
Developing Growth Portfolio......... 2,758 1.92 1.81
Emerging Markets Portfolio.......... 3,274 2.33 3.22
</TABLE>
During the fiscal year ended December 31, 1997, the BALANCED GROWTH
PORTFOLIO purchased bonds issued by Merrill Lynch & Co. Inc. and Bear Stearns &
Co., Inc., the AMERICAN VALUE PORTFOLIO purchased common stock issued by Lehman
Brothers Holdings Inc., Merrill Lynch & Co. Inc. and Bear Stearns & Co., Inc.,
the GROWTH PORTFOLIO purchased common stocks issued by Merrill Lynch & Co.,
Inc., and the VALUE-ADDED MARKET PORTFOLIO purchased common stock issued by
Merrill Lynch & Co. Inc., which issuers were among the ten brokers or the ten
dealers which executed transactions for or with the Fund or the applicable
Portfolio in the largest dollar amounts during the year. At December 31, 1997,
the BALANCED GROWTH PORTFOLIO held common stock issued by Merrill Lynch & Co.
Inc. with a market value of $1,239,937, the AMERICAN VALUE PORTFOLIO held common
stock issued by Lehman Brothers Holdings Inc. and Merrill Lynch & Co. Inc. with
markets values of $1,020,000 and $2,261,063, respectively, the GROWTH PORTFOLIO
held common stock issued by Merrill Lynch & Co. Inc. with a market value of
$1,057,594, and the VALUE-ADDED MARKET PORTFOLIO held common stock issued by
Merrill Lynch & Co. Inc. with a market value of $277,162.
PURCHASE AND REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
As discussed in the Prospectus, investments in the Fund may be made only by
(1) Hartford Life Insurance Company for allocation to certain separate accounts
it established and maintains for the purpose of funding variable annuity
contracts and variable life insurance policies it issues, and by (2) Hartford
Life and Annuity Insurance Company for allocation to certain separate accounts
it established and maintains for the purpose of funding variable annuity
contracts and variable life insurance policies it issues. These separate
accounts are sometimes referred to individually as an "Account" and collectively
as the "Accounts." The Fund offers the shares of each Portfolio of the Fund to
Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company
(the "Companies") without sales charge at the respective net asset values of the
Portfolios next determined after receipt by the Fund of the purchase payment in
the manner set forth under the caption "Determination of Net Asset Value" below
and in the Prospectus. Shares of any Portfolio of the Fund can be redeemed by
the Companies at any time for cash, without sales charge, at the net asset value
next determined after receipt of the redemption request. Such payment may be
postponed or the right of redemption suspended at times when normal trading is
not taking place on the New York Stock Exchange, as discussed in the Prospectus.
(For information regarding charges which may be imposed upon the Contracts by
the Account, see the Prospectus for the Contracts.)
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, the net asset value of the shares of the
each Portfolio is determined once daily at 4:00 p.m., New York time (or, on days
when the New York Stock Exchange closes prior to 4:00 p.m., at such earlier
time), on each day that the New York Stock Exchange is open for trading. The
54
<PAGE>
New York Stock Exchange currently observes the following holidays: New Year's
Day, Reverend Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
As discussed in the Prospectus, the MONEY MARKET PORTFOLIO utilizes the
amortized cost method in valuing its portfolio securities for purposes of
determining the net asset value of its shares. The MONEY MARKET PORTFOLIO
utilizes the amortized cost method in valuing its portfolio securities even
though the portfolio securities may increase or decrease in market value,
generally in connection with changes in interest rates. The amortized cost
method of valuation involves valuing a security at its cost at the time of
purchase adjusted by a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the MONEY MARKET PORTFOLIO would receive if it
sold the investment. During such periods, the yield to investors in the MONEY
MARKET PORTFOLIO may differ somewhat from that obtained in a similar company
which uses mark-to-market values for all of its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the MONEY MARKET
PORTFOLIO would be able to obtain a somewhat higher (lower) yield than would
result from investment in such a similar company and existing investors would
receive less (more) investment income. The purpose of this method of calculation
is to facilitate the maintenance of a constant net asset value per share of
$1.00.
The use of the amortized cost method to value the portfolio securities of
the MONEY MARKET PORTFOLIO and the maintenance of the per share net asset value
of $1.00 is permitted pursuant to Rule 2a-7 of the Act (the "Rule") and is
conditioned on its compliance with various conditions contained in the Rule
including: (a) the Trustees are obligated, as a particular responsibility within
the overall duty of care owed to the Portfolio's shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Portfolio's investment objectives, to stabilize the net asset value per
share as computed for the purpose of distribution and redemption at $1.00 per
share; (b) the procedures include (i) calculation, at such intervals as the
Trustees determine are appropriate and as are reasonable in light of current
market conditions, of the deviation, if any, between net asset value per share
using amortized cost to value portfolio securities and net asset value per share
based upon available market quotations with respect to such portfolio
securities; (ii) periodic review by the Trustees of the amount of deviation as
well as methods used to calculate it; and (iii) maintenance of written records
of the procedures, and the Trustees' considerations made pursuant to them and
any actions taken upon such consideration; (c) the Trustees should consider what
steps should be taken, if any, in the event of a difference of more than 1/2 of
1% between the two methods of valuation; and (d) the Trustees should take such
action as they deem appropriate (such as shortening the average portfolio
maturity, realizing gains or losses, withholding dividends or, as provided by
the Declaration of Trust, reducing the number of outstanding shares of the MONEY
MARKET PORTFOLIO) to eliminate or reduce to the extent reasonably practicable
material dilution or other unfair results to investors or existing shareholders
which might arise from differences between the two methods of valuation. Any
reduction of outstanding shares will be effected by having each shareholder
proportionately contribute to the MONEY MARKET PORTFOLIO's capital the necessary
shares that represent the amount of excess upon such determination. Each
Contract Owner will be deemed to have agreed to such contribution in these
circumstances by allocating investment under his or her Contract to the MONEY
MARKET PORTFOLIO.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the MONEY MARKET
PORTFOLIO's interest in the instrument is subject to market action) until the
date noted on the face of the instrument as the date on which the principal
amount must be paid, or in the case of an instrument called for redemption, the
date on which the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to
55
<PAGE>
a demand feature is deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
A "NRSRO" is a nationally recognized statistical rating organization. The
term "Requisite NRSROs" means (i) any two NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer, or (ii) if only
one NRSRO has issued a rating with respect to such security or issuer at the
time a fund purchases or rolls over the security, that NRSRO.
An Eligible Security is generally defined in the Rule to mean (i) a security
with a remaining maturity of 397 calendar days or less that has received a
short-term rating (or that has been issued by an issuer that has received a
short-term rating with respect to a class of debt obligations, or any debt
obligation within that class, that is comparable in priority and security with
the security) by the Requisite NRSROs in one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (ii) a security: (A) that at the time of
issuance had a remaining maturity of more than 397 calendar days but that has a
remaining maturity of 397 calendar days or less; and (B) whose issuer has
received from the Requisite NRSROs a rating with respect to a class of debt
obligations (or any debt obligation within that class) that is now comparable in
priority and security with the security, in one of the two highest short-term
rating categories (within which there may be sub-categories or gradations
indicating relative standing); or (iii) an unrated security that is of
comparable quality to a security meeting the requirements of (i) or (ii) above,
as determined by the money market fund's board of directors.
As permitted by the Rule, the Board has delegated to the Fund's Investment
Manager, subject to the Board's oversight pursuant to guidelines and procedures
adopted by the Board, the authority to determine which securities present
minimal credit risks and which unrated securities are comparable in quality to
rated securities.
Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its
investments in securities, other than Government securities, so that, at the
time of purchase: (a) except as further limited in (b) below with regard to
certain securities, no more than 5% of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible
Security, or that have been determined to be of comparable quality: (i) no more
than 5% in the aggregate of the Portfolio's total assets in all such securities,
and (ii) no more than the greater of 1% of total assets, or $1 million, in the
securities of any one issuer.
Also, as required by the Rule, the MONEY MARKET PORTFOLIO will limit its
investments in securities, other than Government securities, so that, at the
time of purchase: (a) except as further limited in (b) below with regard to
certain securities, no more than 5% of its total assets will be invested in the
securities of any one issuer; and (b) with respect to Eligible Securities that
have received a rating in less than the highest category by any one of the
NRSROs whose ratings are used to qualify the security as an Eligible Security,
or that have been determined to be of comparable quality: (i) no more than 5% in
the aggregate of the Portfolio's total assets in all such securities, and (ii)
no more than the greater of 1% of total assets, or $1 million, in the securities
of any one issuer.
The presence of a line of credit or other credit facility offered by a bank
or other financial institution which guarantees the payment obligation of the
issuer, in the event of a default in the payment of principal or interest of an
obligation, may be taken into account in determining whether an investment is an
Eligible Security, provided that the guarantee itself is an Eligible Security.
The Rule further requires that the MONEY MARKET PORTFOLIO limit its
investments to U.S. dollar-denominated instruments which the Trustees determine
present minimal credit risks and which are Eligible Securities. The Rule also
requires the Portfolio to maintain a dollar-weighted average portfolio maturity
(not more than 90 days) appropriate to its objective of maintaining a stable net
asset value of $1.00 per share and precludes the purchase of any instrument with
a remaining maturity of more than 397 days. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio
56
<PAGE>
maturity of more than 90 days, the Portfolio will invest its available cash in
such a manner as to reduce such maturity to 90 days or less as soon as is
reasonably practicable.
If the Board determines that it is no longer in the best interests of the
MONEY MARKET PORTFOLIO and its shareholders to maintain a stable price of $1 per
share or if the Board believes that maintaining such price no longer reflects a
market-based net asset value per share, the Board has the right to change from
an amortized cost basis of valuation to valuation based on market quotations.
The Fund will notify shareholders of the Portfolio of any such change.
As stated in the Prospectus, in the calculation of the net asset value of
the Portfolios other than the MONEY MARKET PORTFOLIO, short-term debt securities
with remaining maturities of sixty days or less at the time of purchase are
valued at amortized cost, unless the Trustees determine such does not reflect
the securities' market value, in which case these securities will be valued at
their fair value as determined by the Trustees. Other short-term debt securities
will be valued on a mark-to-market basis until such time as they reach a
remaining maturity of sixty days, whereupon they will be valued at amortized
cost using their value on the 61st day unless the Trustees determine such does
not reflect the securities' market value, in which case these securities will be
valued at their fair value as determined by the Trustees. Listed options on debt
securities are valued at the latest sale price on the exchange on which they are
listed unless no sales of such options have taken place that day, in which case
they will be valued at the mean between their latest bid and asked prices.
Unlisted options on debt securities and all options on equity securities are
valued at the mean between their latest bid and asked prices. Futures are valued
at the latest sale price on the commodities exchange on which they trade unless
the Trustees determine that such price does not reflect their market value, in
which case they will be valued at their fair value as determined by the
Trustees. All other securities and other assets are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision of the Trustees.
Generally, trading in foreign securities, as well as corporate bonds, United
States government securities and money market instruments, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
a Portfolio's shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of the New York Stock
Exchange. Occasionally, events which may affect the values of such securities
and such exchange rates may occur between the times at which they are determined
and the close of the New York Stock Exchange and will therefore not be reflected
in the computation of a Portfolio's net asset value. If events that may
materially affect the value of such securities occur during such period, then
these securities may be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO. As discussed in the Prospectus, dividends from net
income on the MONEY MARKET PORTFOLIO will be declared payable on each day the
New York Stock Exchange is open for business to shareholders of record as of the
close of business the preceding business day. Net income, for dividend purposes,
includes accrued interest and accretion of acquisition, original issue and
market discount, less the amortization of market premium and the estimated
expenses of the MONEY MARKET PORTFOLIO. Net income will be calculated
immediately prior to the determination of net asset value per share of the MONEY
MARKET PORTFOLIO (see "Determination of Net Asset Value" above and in the
Prospectus). The amount of dividend may fluctuate from day to day and may be
omitted on some days if realized losses on portfolio securities exceed the Money
Market Portfolio's net investment income. The Trustees may revise the above
dividend policy, or postpone the payment of dividends, if the MONEY MARKET
PORTFOLIO should have or anticipate any large unexpected expense, loss or
fluctuation in net assets which in the opinion of the Trustees might have a
significant adverse effect on shareholders. On occasion, in order to maintain a
constant $1.00 per share net asset value, the Trustees may direct that the
number of outstanding shares of the MONEY MARKET PORTFOLIO be reduced in each
shareholder's account. Such reduction may result in taxable income to a
shareholder in excess of the net increase (i.e., dividends,
57
<PAGE>
less such reductions), if any, in the shareholder's account for a period.
Furthermore, such reduction may be realized as a capital loss when the shares
are liquidated. Any net realized capital gains will be declared and paid at
least once per calendar year, except that net short-term gains may be paid more
frequently, with the distribution of dividends from net investment income.
OTHER PORTFOLIOS. The dividend policies of the NORTH AMERICAN GOVERNMENT
SECURITIES PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the BALANCED GROWTH
PORTFOLIO, the UTILITIES PORTFOLIO, the DIVIDEND GROWTH PORTFOLIO, the
VALUE-ADDED MARKET PORTFOLIO, the GROWTH PORTFOLIO, the AMERICAN VALUE
PORTFOLIO, the MID-CAP GROWTH PORTFOLIO, the GLOBAL EQUITY PORTFOLIO, the
DEVELOPING GROWTH PORTFOLIO and the EMERGING MARKETS PORTFOLIO are discussed in
the Prospectus. In computing interest income, these Portfolios will not accrete
any discount or amortize any premium resulting from the purchase of debt
securities except those original issue discounts for which accretion is required
for federal income tax purposes. Additionally, with respect to market discount
on bonds, a portion of any capital gain realized upon disposition may be
recharacterized as taxable ordinary income in accordance with the provisions of
the Internal Revenue Code (the "Code"). Dividends, interest and capital gains
received by the Portfolios on investments in foreign issuers or which are
denominated in foreign currency may give rise to withholding and other taxes
imposed by foreign countries. Realized gains and losses on security transactions
are determined on the identified cost method.
Gains or losses on sales of securities by a Portfolio will be long-term
gains or losses if the securities have been held by the Portfolio for more than
twelve months. Gains or losses on the sale of securities held for twelve months
or less will be short-term gains or losses.
OPTIONS AND FUTURES. Exchange-traded futures contracts, listed options on
futures contracts and certain listed options are classified as "Section 1256"
contracts under the Code. Unless the Portfolio makes an election as discussed
below, the character of gain or loss resulting from the sale, disposition,
closing out, expiration or other termination of Section 1256 contracts would
generally be treated as long-term capital gain or loss to the extent of 60
percent thereof and short-term capital gain or loss to the extent of 40 percent
thereof and such Section 1256 contracts would also be required to be marked-to-
market at the end of the Fund's fiscal year, for purposes of federal income tax
calculations.
Over-the-counter options are not classified as Section 1256 contracts and
are not subject to the mark-to-market or 60 percent-40 percent taxation rules.
When call options written by a Portfolio, or put options purchased by a
Portfolio, are exercised, the gain or loss realized on the sales of the
underlying securities may be either short-term or long-term, depending upon the
holding period of the securities. In determining the amount of gain or loss, the
sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.
If a Portfolio holds a security which is offset by a Section 1256 contract,
the Portfolio would be deemed to hold a "mixed straddle" position, as such is
defined in the Code. A Portfolio may elect to identify its mixed straddle
positions pursuant to Section 1256(d) of the Code and thereby avoid application
of both the mark-to-market and 60 percent-40 percent taxation rules. The
Portfolio may also make certain other elections with respect to mixed straddles
which could avoid or limit the application of certain rules which could, in
certain circumstances, cause deferral or disallowance of losses, change
long-term capital gains into short-term capital gains, or change short-term
capital losses into long-term capital losses.
Entering into a mixed straddle could result in the recognition of unrealized
gain or loss which would be taken into account in determining the amount of
income available for the Portfolio's distributions, and can result in an amount
which is greater or less than the Portfolio's net realized gains being available
for distribution. If an amount which is less than the Portfolio's net realized
gains is available for distribution, the Portfolio may elect to distribute more
than such available amount, up to the full amount of such net realized gains.
Such a distribution may, in part, constitute a return of capital to the
shareholders. If the Portfolio does not elect to identify a mixed straddle, no
recognition of gain or loss on the securities in its portfolio will result when
the mixed straddle is entered into. However, any losses realized on the straddle
will be governed by a number of tax rules which might, under certain
circumstances, defer or disallow the losses in whole or in part, change
long-term gains into short-term gains, or change short-term losses
58
<PAGE>
into long-term losses. A deferral or disallowance of recognition of a realized
loss may result in an amount being available for the Portfolio's distributions
which is greater than the Portfolio's net realized gains.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS (NORTH AMERICAN
GOVERNMENT SECURITIES PORTFOLIO, DIVERSIFIED INCOME PORTFOLIO, GLOBAL EQUITY
PORTFOLIO AND EMERGING MARKETS PORTFOLIO). In general, gains from foreign
currencies and from foreign currency options, foreign currency futures and
forward foreign exchange contracts relating to investments in stock, securities
or foreign currencies are currently considered to be qualifying income for
purposes of determining whether each of the NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO, the DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the
EMERGING MARKETS PORTFOLIO qualifies as a regulated investment company. It is
currently unclear, however, who will be treated as the issuer of certain foreign
currency instruments or how foreign currency options, futures, or forward
foreign currency contracts will be valued for purposes of the regulated
investment company diversification requirements applicable to the Portfolio. The
Fund may request a private letter ruling from the Internal Revenue Service on
some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (I.E.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts," and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also, certain
foreign exchange gains or losses derived with respect to foreign fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gain. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the
affected Portfolio would not be able to make any ordinary dividend
distributions.
The NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the DIVERSIFIED INCOME
PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING MARKETS PORTFOLIO may be
subject to taxes in foreign countries in which they invest. In addition, if the
European Growth Portfolio were deemed to be a resident of the United Kingdom for
United Kingdom tax purposes or if the Portfolio were treated as being engaged in
a trading activity through an agent in the United Kingdom, there is a risk that
the United Kingdom would attempt to tax all or a portion of the Portfolio's
gains or income. In light of the terms and conditions of the Investment
Management and Sub-Advisory Agreements, it is believed that any such risk is
minimal.
If any of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO, the GLOBAL EQUITY PORTFOLIO and the EMERGING
MARKETS PORTFOLIO invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the
Portfolio level which could not be eliminated by distributions to shareholders.
The Taxpayer Relief Act of 1997 establishes a mark-to-market regime which allows
taxpayers investing in PFIC's to avoid most, if not all, of the difficulties
posed by the PFIC rules. In any event, it is not anticipated that any taxes on a
Portfolio with respect to investments in PFIC's would be significant.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The annualized current yield of the MONEY MARKET PORTFOLIO, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining, for a stated seven-day period,
the net change, exclusive of capital changes and including the value of
additional shares purchased with dividends and any dividends declared therefrom,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge which
reflects deductions from shareholder accounts (such as management fees), and
dividing the difference by the value of the account at the beginning of the base
period to obtain the base period return, and then multiplying the base period
return by (365/7).
59
<PAGE>
The MONEY MARKET PORTFOLIO's annualized effective yield, as may be quoted
from time to time in advertisements and other communications to shareholders and
potential investors, is computed by determining (for the same stated seven-day
period as for the current yield), the net change, exclusive of capital changes
and including the value of additional shares purchased with dividends and any
dividends declared therefrom, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
The yields quoted in any advertisement or other communication should not be
considered a representation of the yields of the MONEY MARKET PORTFOLIO in the
future since the yield is not fixed. Actual yields will depend not only on the
type, quality and maturities of the investments held by the MONEY MARKET
PORTFOLIO and changes in interest rates on such investments, but also on changes
in the Portfolio's expenses during the period.
Yield information may be useful in reviewing the performance of the MONEY
MARKET PORTFOLIO and for providing a basis for comparison with other investment
alternatives. However unlike bank deposits or other investments which typically
pay a fixed yield for a stated period of time, the MONEY MARKET PORTFOLIO's
yield fluctuates. Furthermore, the quoted yield does not reflect charges which
may be imposed on the Contracts by the applicable Account and therefore is not
equivalent to total return under a Contract (for a description of such charges,
see the Prospectus for the Contracts).
The current yield of the MONEY MARKET PORTFOLIO for the seven days ending
December 31, 1997 was 5.19%. The effective annual yield on 5.19% is 5.32%,
assuming daily compounding.
As discussed in the Prospectus, from time to time the Fund may quote the
"yield" of each of the NORTH AMERICAN GOVERNMENT SECURITIES PORTFOLIO, the
DIVERSIFIED INCOME PORTFOLIO and the BALANCED GROWTH PORTFOLIO in advertising
and sales literature. Yield is calculated for any 30-day period as follows: the
amount of interest and/or dividend income for each security in the Portfolio is
determined in accordance with regulatory requirements; the total for the entire
portfolio constitutes the Portfolio's gross income for the period. Expenses
accrued during the period are subtracted to arrive at "net investment income."
The resulting amount is divided by the product of the net asset value per share
on the last day of the period multiplied by the average number of Portfolio
shares outstanding during the period that were entitled to dividends. This
amount is added to 1 and raised to the sixth power. 1 is then subtracted from
the result and the difference is multiplied by 2 to arrive at the annualized
yield. For the 30-day period ended December 31, 1997, the yield of the NORTH
AMERICAN GOVERNMENT SECURITIES PORTFOLIO, calculated pursuant to this formula,
was 3.89%, the yield of the DIVERSIFIED INCOME PORTFOLIO, calculated pursuant to
this formula, was 7.46%, and the yield of the BALANCED GROWTH PORTFOLIO,
calculated pursuant to this formula, was 1.80%.
As discussed in the Prospectus, from time to time the Fund may quote the
"total return" of each Portfolio in advertising and sales literature. A
Portfolio's "average annual total return" represents an annualization of the
Portfolio's total return over a particular period and is computed by finding the
annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Portfolio's
operations, if shorter than any of the foregoing. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
However, average annual total return does not reflect the deduction of any
charges which may be imposed on the Contracts by the applicable Account which,
if quoted, would reduce the performance quoted. The formula for computing the
average annual total return involves a percentage obtained by dividing the
ending redeemable value by the amount of the initial investment, taking a root
of the quotient (where the root is equivalent to the number of years in the
period) and subtracting 1 from the result. As noted above, until December 31,
1995 the Investment Manager assumed all operating expenses of each Portfolio
then in existence (except for any brokerage fees and a portion of organizational
expenses) and waived the compensation provided for each Portfolio in its
Investment Mangement Agreement with the Fund. The Investment
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<PAGE>
Manager had undertaken, until the earlier of December 31, 1996 or the attainment
by the respective Portfolio of $50 million of net assets, to continue to assume
such expenses and waive such compensation for each Portfolio then in existence
(other than the DIVIDEND GROWTH PORTFOLIO, whose assets exceeded $50 million on
December 31, 1995) to the extent that such expenses and compensation on an
annualized basis exceeded 0.50% of the average daily net assets of each
respective Portfolio. The average annual total returns for each Portfolio other
than the MID-CAP GROWTH PORTFOLIO for the period from November 9, 1994
(commencement of operations) through December 31, 1997 and for the fiscal year
ended December 31, 1997 were:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
FOR
PERIOD FROM
COMMENCEMENT
OF
AVERAGE ANNUAL OPERATIONS
TOTAL RETURN FOR THROUGH
PERIOD FROM AVERAGE ANNUAL DECEMBER 31,
COMMENCEMENT OF TOTAL RETURN FOR 1997
OPERATIONS FISCAL YEAR WITHOUT FEE
THROUGH ENDED WAIVER AND
DECEMBER 31, DECEMBER 31, EXPENSE
PORTFOLIO 1997 1997 ASSUMPTION
- --------------------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
Money Market Portfolio..... 5.46% 5.21% 4.79%
North American Government
Securities Portfolio...... 5.50 5.91 5.23
Diversified Income
Portfolio................. 8.14 8.32 N/A
Balanced Growth
Portfolio................. 17.37 17.87 N/A
Utilities Portfolio........ 19.88 26.45 N/A
Dividend Growth
Portfolio................. 28.49 26.12 N/A
Value-Added Market
Portfolio................. 22.13 26.12 N/A
Growth Portfolio........... 19.15 23.07 N/A
American Value Portfolio... 26.33 31.93 N/A
Global Equity Portfolio.... 10.62 8.66 N/A
Developing Growth
Portfolio................. 24.17 13.77 N/A
Emerging Markets
Portfolio................. 5.74 1.27 5.41
</TABLE>
The Fund quotes the "total return" of a Portfolio that has been in operation
for less than one year on a non-annualized basis. The Fund may compute the
aggregate total return of the MID-CAP GROWTH PORTFOLIO, which commenced
operations on January 21, 1997, for specified periods by determining the
aggregate percentage rate that will result in the ending value of a hypothetical
$1,000 investment made at the beginning of the period. For the purpose of this
calculation, it is assumed that all dividends and distributions are reinvested.
The formula for computing aggregate total return involves a percentage obtained
by dividing the ending value by the initial $1,000 investment and subtracting 1
from the result. Based on the foregoing calculation, the total return of the
MID-CAP GROWTH PORTFOLIO for the period January 21, 1997 through December 31,
1997 was 15.84%. The Investment Manager has undertaken to assume all operating
expenses of the MID-CAP GROWTH PORTFOLIO until the earlier of July 31, 1998 or
the attainment by the Portfolio of $50 million of net assets. Without the waiver
of fees and assumption of expenses by the Investment Manager, the total return
of the MID-CAP GROWTH PORTFOLIO for that period would have been 15.24%.
In addition to the foregoing, the Fund may advertise the total return of the
Portfolios over different periods of time by means of aggregate, average,
year-by-year or other types of total return figures. Such calculations similarly
do not reflect the deduction of any charges which may be imposed on the
Contracts by an Account. The Fund may also compute the aggregate total returns
of the Portfolios for specified periods by determining the aggregate percentage
rate which will result in the ending value of a hypothetical $1,000 investment
made at the beginning of the period. For the purpose of this calculation, it is
assumed that all dividends and distributions are reinvested. The formula for
computing aggregate total return involves a percentage obtained by dividing the
ending value (without the reduction for any charges imposed on the Contracts by
the applicable Account) by the initial $1,000 investment and subtracting 1 from
the result. Based on the foregoing calculation, the total returns for each
Portfolio other
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<PAGE>
than the MID-CAP GROWTH PORTFOLIO for the one year period ended December 31,
1997 and for the period from November 9, 1994 through December 31, 1997 were:
<TABLE>
<CAPTION>
TOTAL RETURN
FROM COMMENCEMENT TOTAL RETURN
OF OPERATIONS FOR FISCAL
THROUGH YEAR ENDED
PORTFOLIO DECEMBER 31, 1997 DECEMBER 31, 1997
- ----------------------------------------------------------------- -------------------------- -------------------
<S> <C> <C>
Money Market Portfolio........................................... 18.18% 5.21%
North American Government Securities Portfolio................... 18.31 5.91
Diversified Income Portfolio..................................... 27.88 8.32
Balanced Growth Portfolio........................................ 65.42 17.87
Utilities Portfolio.............................................. 76.79 26.45
Dividend Growth Portfolio........................................ 119.90 26.12
Value-Added Market Portfolio..................................... 87.43 26.12
Growth Portfolio................................................. 73.43 23.07
American Value Portfolio......................................... 108.48 31.93
Global Equity Portfolio.......................................... 37.33 8.66
Developing Growth Portfolio...................................... 97.45 13.77
Emerging Markets Portfolio....................................... 19.18 1.27
</TABLE>
The Fund may also advertise the growth of hypothetical investments of
$10,000, $50,000 and $100,000 in shares of a Portfolio by adding 1 to the
Portfolio's aggregate total return to date (expressed as a decimal) and
multiplying by $10,000, $50,000 or $100,000, as the case may be. Investments of
$10,000, $50,000 and $100,000 in each Portfolio of the Fund at inception
(January 21, 1997 in the case of the MID-CAP GROWTH PORTFOLIO and November 9,
1994 in the case of each of the other Portfolios) would have grown to the
following respective amounts at December 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT AT COMMENCEMENT
OF OPERATIONS OF
-----------------------------------
PORTFOLIO $10,000 $50,000 $100,000
- ---------------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
Money Market Portfolio...................................................... $ 11,818 $ 59,090 $ 118,180
North American Government Securities Portfolio.............................. 11,831 59,155 118,310
Diversified Income Portfolio................................................ 12,788 63,940 127,880
Balanced Growth Portfolio................................................... 16,542 82,710 165,420
Utilities Portfolio......................................................... 17,679 88,395 176,790
Dividend Growth Portfolio................................................... 21,990 109,950 219,900
Value-Added Market Portfolio................................................ 18,743 93,715 187,430
Growth Portfolio............................................................ 17,343 86,715 173,430
American Value Portfolio.................................................... 20,848 104,240 208,480
Mid-Cap Growth Portfolio.................................................... 11,584 57,920 115,840
Global Equity Portfolio..................................................... 13,733 68,665 137,330
Developing Growth Portfolio................................................. 19,745 98,725 197,450
Emerging Markets Portfolio.................................................. 11,918 59,590 119,180
</TABLE>
The Fund from time to time may also advertise the performance of the
Portfolios relative to certain performance rankings and indexes compiled by
independent organizations.
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of separate Portfolios and to divide or combine
the shares of any Portfolio into a greater or lesser number of shares of that
Portfolio without thereby changing the proportionate beneficial interests in
that Portfolio. As discussed in the Prospectus, the shares of beneficial
interest of the Fund are divided into thirteen separate Portfolios, and the
shares of each Portfolio have equal rights and privileges with all other shares
of that Portfolio. Each share of a Portfolio represents an equal proportional
interest in that Portfolio with each other share. Upon liquidation of the Fund
or any Portfolio, shareholders of a Portfolio
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<PAGE>
are entitled to share pro rata in the net assets of that Portfolio available for
distribution to shareholders. Shares have no preemptive or conversion rights.
The right of redemption is described above and in the Prospectus. Shares of each
Portfolio are fully paid and non-assessable by the Fund. The Trustees are
authorized to classify unissued shares of the Fund by assigning them to a
Portfolio for issuance.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares and additional classes of shares within any series,
as described in the Prospectus. Such additional offerings would not affect the
interests of the current shareholders in the existing Portfolios. All
consideration received by the Fund for shares of any additional Portfolios, and
all assets in which such consideration is invested, would belong to that
Portfolio (subject only to the rights of creditors of the Fund) and would be
subject to the liabilities related thereto. Pursuant to the Act, shareholders of
any additional Portfolio would normally have to approve the adoption of any
management contract relating to such Portfolio and of any changes in the
investment policies related thereto.
Shares of each Portfolio entitle their holders to one vote per share (with
proportionate voting for fractional shares). Shareholders have the right to vote
on the election of Trustees of the Fund and on any and all matters on which by
law or the provisions of the Fund's By-Laws they may be entitled to vote. To the
extent required by law, Hartford Life Insurance Company and Hartford Life and
Annuity Insurance Company, which are the only shareholders of the Fund, will
vote the shares of the Fund held in the Account in accordance with instructions
from Contract Owners, as more fully described under the caption "Voting Rights"
in the Prospectus for the Contracts. Shareholders of all Portfolios vote for a
single set of Trustees. The Trustees themselves have the power to alter the
number and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
has been elected by the shareholders of the Fund. Under certain circumstances
the Trustees may be removed by action of the Trustees. Under certain
circumstances the shareholders may call a meeting to remove Trustees and the
Fund is required to provide assistance in communicating with shareholders about
such a meeting.
On any matters affecting only one Portfolio, only the shareholders of that
Portfolio are entitled to vote. On matters relating to all the Portfolios but
affecting the Portfolios differently, separate votes by Portfolio are required.
Approval of an Investment Management Agreement and a change in fundamental
policies would be regarded as matters requiring separate voting by each
Portfolio.
With respect to the submission to shareholder vote of a matter requiring
separate voting by Portfolio, the matter shall have been effectively acted upon
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio votes for the approval of the matter, notwithstanding that:
(1) the matter has not been approved by a majority of the outstanding voting
securities of any other Portfolio; or (2) the matter has not been approved by a
majority of the outstanding voting securities of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence, or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to the Fund's property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
The Trust shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders.
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<PAGE>
CUSTODIANS AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
Custodian of the assets of each Portfolio of the Fund other than the EMERGING
MARKETS PORTFOLIO and grouping (1) of the DIVERSIFIED INCOME PORTFOLIO. The
Chase Manhattan Bank, One Chase Plaza, New York, New York 10005 is the Custodian
of the assets of the EMERGING MARKETS PORTFOLIO and grouping (1) of the
DIVERSIFIED INCOME PORTFOLIO. The Custodians have contracted with various
foreign banks and depositories to hold portfolio securities of non-U.S. issuers
on behalf of various Portfolios. All of a Portfolio's cash balances with the
Custodian in excess of $100,000 are unprotected by Federal deposit insurance.
Such balances may, at times, be substantial.
Dean Witter Trust FSB, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311 is the Transfer Agent of the Fund's shares and Dividend
Disbursing Agent for payment of dividends and distributions on Fund shares. Dean
Witter Trust FSB is an affiliate of Dean Witter InterCapital Inc., the Fund's
Investment Manager. As Transfer Agent and Dividend Disbursing Agent, Dean Witter
Trust FSB's responsibilities include maintaining shareholder accounts;
reinvesting dividends; processing account registration changes; handling
purchase and redemption transactions; tabulating proxies; and maintaining
shareholder records and lists. For these services Dean Witter Trust FSB receives
a fee from each Portfolio of the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
serves as the independent accountants of the Fund. The independent accountants
are responsible for auditing the annual financial statements of the Fund.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Statements showing the portfolio of each Portfolio and other information
will be furnished, at least semi-annually, to Contract Owners, and annually such
statements will be audited by independent accountants whose selection must be
approved annually by the Fund's Trustees. The Fund's fiscal year ends on
December 31.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- --------------------------------------------------------------------------------
The annual financial statements of the Fund for the year ended December 31,
1997, which are included in this Statement of Additional Information and
incorporated by reference in the Prospectus, have been so included and
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
64
<PAGE>
MONEY MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD ON
AMOUNT IN DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER (85.1%)
AUTOMOTIVE - FINANCE (10.9%)
$ 4,200 Chrysler Financial Corp........................... 5.66-5.74% 02/02/98-03/02/98 $ 4,169,859
900 Ford Motor Credit Co.............................. 5.80 01/16/98 897,844
4,150 General Motors Acceptance Corp.................... 5.71-5.84 01/20/98-04/16/98 4,114,115
-----------
9,181,818
-----------
BANK HOLDING COMPANIES (7.7%)
1,500 BankAmerica Corp.................................. 5.69 01/14/98 1,496,994
3,550 Bankers Trust New York Corp....................... 5.72-5.75 01/08/98-02/19/98 3,531,448
1,500 Morgan (J.P.) & Co. Inc........................... 5.80 04/23/98 1,473,447
-----------
6,501,889
-----------
BANKS - COMMERCIAL (18.7%)
4,525 Abbey National North America Corp................. 5.67-5.72 01/22/98-03/03/98 4,502,466
2,430 ABN-AMRO North American Finance Inc............... 5.69-5.85 02/05/98-04/20/98 2,411,826
1,000 Barclays U.S. Funding Corp........................ 5.81 03/12/98 988,897
1,000 Deutsche Bank Financial Inc....................... 5.64 01/16/98 997,685
1,500 Dresdner U.S. Finance Inc......................... 5.81 02/06/98 1,491,375
1,320 KfW International Finance Inc..................... 5.67 03/26/98 1,302,998
1,500 National Australia Funding (DE) Inc............... 5.65 01/09/98 1,498,150
1,000 Rabobank USA Financial Corp....................... 5.76 04/30/98 981,423
1,500 WestPac Capital Corp.............................. 5.72 01/12/98 1,497,443
-----------
15,672,263
-----------
BROKERAGE (1.3%)
1,090 Goldman Sachs Group L.P........................... 5.80 03/09/98 1,078,396
-----------
FINANCE - COMMERCIAL (3.0%)
2,600 CIT Group Holdings, Inc........................... 5.71-5.81 02/23/98-06/19/98 2,556,629
-----------
FINANCE - CONSUMER (24.0%)
3,555 American Express Credit Corp...................... 6.45 01/02/98 3,554,363
3,270 American General Finance Corp..................... 5.62-5.76 01/07/98-01/26/98 3,261,609
4,200 Avco Financial Services, Inc...................... 5.68-5.82 02/25/98-04/08/98 4,155,515
4,300 Beneficial Corp................................... 5.64-5.83 01/05/98-02/27/98 4,281,695
2,500 Household Finance Corp............................ 5.75-5.81 02/12/98-04/24/98 2,466,536
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
65
<PAGE>
MONEY MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD ON
AMOUNT IN DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,500 Norwest Financial Inc............................. 5.63-5.78% 01/13/98-03/16/98 $ 2,480,671
-----------
20,200,389
-----------
FINANCE - CORPORATE (2.4%)
2,000 Ciesco, L.P....................................... 5.79 04/09/98 1,969,076
-----------
FINANCE - DIVERSIFIED (4.6%)
3,886 General Electric Capital Corp..................... 5.66-5.78 1/2/98-3/31/98 3,868,538
-----------
INDUSTRIALS (1.7%)
1,470 Caterpillar Financial Services Corp............... 5.65 02/04/98 1,462,295
-----------
OFFICE EQUIPMENT (1.2%)
1,000 IBM Credit Corp................................... 5.70 02/09/98 993,966
-----------
RETAIL (5.1%)
4,300 Sears Roebuck Acceptance Corp..................... 5.62-5.84 01/06/98-02/24/98 4,285,214
-----------
UTILITIES - FINANCE (4.5%)
3,795 National Rural Utilities Cooperative Finance
Corp............................................ 5.60-5.79 02/03/98-04/14/98 3,751,723
-----------
TOTAL COMMERCIAL PAPER
(AMORTIZED COST $71,522,196)..................................................... 71,522,196
-----------
BANKERS' ACCEPTANCES (6.6%)
3,623 BankBoston, N.A................................... 5.73-5.86 01/20/98-05/27/98 3,572,925
2,000 First Union National Bank......................... 5.78 06/15/98 1,948,483
-----------
TOTAL BANKERS' ACCEPTANCES
(AMORTIZED COST $5,521,408)...................................................... 5,521,408
-----------
CERTIFICATES OF DEPOSIT (3.6%)
1,035 Chase Manhattan Bank (USA)........................ 5.64 01/21/98 1,035,000
2,000 Union Bank of California, N.A..................... 5.82 04/14/98 2,000,000
-----------
TOTAL CERTIFICATES OF DEPOSIT
(AMORTIZED COST $3,035,000)...................................................... 3,035,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
66
<PAGE>
MONEY MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
ANNUALIZED
PRINCIPAL YIELD ON
AMOUNT IN DATE OF MATURITY
THOUSANDS PURCHASE DATE VALUE
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM BANK NOTES (4.1%)
$ 2,000 F.C.C. National Bank.............................. 5.79% 06/17/98 $ 2,000,000
1,500 La Salle National Bank............................ 5.82 03/10/98 1,500,000
-----------
TOTAL SHORT-TERM BANK NOTES
(AMORTIZED COST $3,500,000)...................................................... 3,500,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(AMORTIZED COST $83,578,604) (A)........................................................... 99.4 % 83,578,604
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 0.6 466,790
------ ------------
NET ASSETS................................................................................. 100.0 % $ 84,045,394
------ ------------
------ ------------
</TABLE>
- ---------------------
(a) Cost is the same for federal income tax purposes.
SEE NOTES TO FINANCIAL STATEMENTS
67
<PAGE>
NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (17.7%)
$ 250 U.S. Treasury Note................................ 5.50 % 11/15/98 $ 249,692
200 U.S. Treasury Note................................ 5.50 02/28/99 199,724
150 U.S. Treasury Note................................ 5.50 04/15/00 149,432
100 U.S. Treasury Note................................ 6.00 08/15/99 100,491
200 U.S. Treasury Note................................ 6.375 05/15/99 201,844
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $902,588)......................................................... 901,183
----------
MORTGAGE-BACKED SECURITIES (61.3%)
86 Federal Home Loan Mortgage Corp................... 5.50 11/01/00 84,001
55 Federal Home Loan Mortgage Corp................... 6.00 11/01/99 54,660
19 Federal Home Loan Mortgage Corp................... 7.00 07/01/00 18,889
296 Federal Home Loan Mortgage Corp................... 7.00 09/01/17 298,649
83 Federal Home Loan Mortgage Corp................... 7.50 05/01/11 85,194
159 Federal Home Loan Mortgage Corp................... 7.50 06/01/11 162,769
128 Federal Home Loan Mortgage Corp................... 7.50 08/01/11 131,282
247 Federal Home Loan Mortgage Corp................... 8.00 12/01/26 255,869
263 Federal National Mortgage Assoc................... 5.851 04/01/27 272,445
74 Federal National Mortgage Assoc................... 6.00 09/01/00 72,903
169 Federal National Mortgage Assoc................... 6.092 05/01/27 172,716
200 Federal National Mortgage Assoc................... 6.294 12/01/26 206,668
72 Federal National Mortgage Assoc................... 6.50 07/01/02 72,304
231 Federal National Mortgage Assoc................... 6.892 05/01/27 237,281
79 Federal National Mortgage Assoc................... 7.00 06/01/02 79,949
71 Federal National Mortgage Assoc................... 7.00 10/01/02 72,098
124 Federal National Mortgage Assoc................... 7.00 01/01/03 125,706
246 Federal National Mortgage Assoc................... 7.75 01/01/22 255,410
61 Federal National Mortgage Assoc................... 7.811 09/01/26 62,466
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
68
<PAGE>
NORTH AMERICAN GOVERNMENT SECURITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 55 Federal National Mortgage Assoc................... 8.075% 07/01/24 $ 57,841
117 Government National Mortgage Assoc................ 7.00 02/20/23 119,168
71 Government National Mortgage Assoc................ 7.00 01/20/26 72,503
77 Government National Mortgage Assoc................ 7.375 06/20/25 79,276
71 Government National Mortgage Assoc................ 7.375 05/20/26 73,038
----------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $3,082,223)....................................................... 3,123,085
----------
SHORT-TERM INVESTMENTS (20.1%)
U.S. GOVERNMENT AGENCIES (a) (15.1%)
200 Federal Farm Credit Bank.......................... 5.65-5.70 01/14/98-02/10/98 198,955
570 Federal Home Loan Mortgage Corp................... 5.61-5.70 01/05/98-01/14/98 569,453
----------
TOTAL U.S. GOVERNMENT AGENCIES
(IDENTIFIED COST $768,408)......................................................... 768,408
----------
REPURCHASE AGREEMENT (5.0%)
252 The Bank of New York (dated 12/31/97; proceeds
$252,339) (b) (IDENTIFIED COST $252,285)........ 3.875 01/02/98 252,285
----------
TOTAL SHORT-TERM INVESTMENTS
(AMORTIZED COST $1,020,693)........................................................ 1,020,693
----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $5,005,504) (C)............................................................ 99.1 % 5,044,961
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.............................................. 0.9 46,486
------ -----------
NET ASSETS.................................................................................. 100.0 % $ 5,091,447
------ -----------
------ -----------
</TABLE>
- ---------------------
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $251,641 U.S. Treasury Note 5.875% due 02/28/99 valued at
$257,331.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $46,378 and the
aggregate gross unrealized depreciation is $6,921, resulting in net
unrealized appreciation of $39,457.
SEE NOTES TO FINANCIAL STATEMENTS
69
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GOVERNMENT & CORPORATE BONDS (95.6%)
DENMARK (e) (2.1%)
GOVERNMENT OBLIGATIONS
DKr 5,800 Denmark Treasury Note................................................. 9.00% 11/15/98 $ 879,624
3,000 Denmark Treasury Note................................................. 6.00 12/10/99 450,160
-----------
TOTAL DENMARK..................................................................................... 1,329,784
-----------
ITALY (e) (3.7%)
GOVERNMENT OBLIGATIONS
ITL 75M Italy Treasury Bond................................................... 10.50 04/01/00 47,285
3,900M Italy Treasury Bond................................................... 5.50 09/15/00 2,247,095
-----------
TOTAL ITALY....................................................................................... 2,294,380
-----------
SPAIN (e) (2.0%)
GOVERNMENT OBLIGATION
ESP 180M Spain Treasury Bond................................................... 6.75 04/15/00 1,234,606
-----------
SWEDEN (e) (2.6%)
GOVERNMENT OBLIGATIONS
SEK 2,700 Sweden Treasury Bond.................................................. 11.00 01/21/99 360,328
9,100 Sweden Treasury Bond.................................................. 10.25 05/05/00 1,265,936
-----------
TOTAL SWEDEN...................................................................................... 1,626,264
-----------
UNITED STATES (85.2%)
AEROSPACE (0.3%)
$ 200 Sabreliner Corp. (Series B)........................................... 12.50 04/15/03 209,500
-----------
AUTOMOTIVE (0.2%)
200 APS, Inc.............................................................. 11.875 01/15/06 106,000
-----------
BROADCAST MEDIA (1.5%)
2 Australis Media Ltd................................................... 15.75++ 05/15/03 654
200 Echostar DBS Corp..................................................... 12.50 07/01/02 217,000
100 Paxson Communications Corp............................................ 11.625 10/01/02 107,250
200 Spanish Broadcasting System, Inc...................................... 12.50 06/15/02 230,000
550 TCI Satellite Entertainment Corp. - 144A*............................. 12.25++ 02/15/07 369,875
-----------
924,779
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
70
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
BUSINESS SERVICES (2.2%)
$ 500 Anacomp, Inc. (Series B).............................................. 10.875% 04/01/04 $ 525,000
500 Comforce Operating Inc. - 144A*....................................... 12.00 12/01/07 506,250
300 Xerox Credit Corp..................................................... 15.00 06/26/98 313,041
-----------
1,344,291
-----------
CABLE & TELECOMMUNICATIONS (9.4%)
200 Adelphia Communications, Inc. (Series B).............................. 9.875 03/01/07 211,000
425 Advanced Radio Telecommunication...................................... 14.00 02/15/07 408,000
300 American Communications Services, Inc. - 144A*........................ 13.75 07/15/07 357,000
500 Clearnet Communications, Inc. (Canada)................................ 14.75++ 12/15/05 398,125
294 Falcon Holdings Group, L.P. (Series B)................................ 11.00+ 09/15/03 317,045
150 Frontiervision L.P. /Capital.......................................... 11.00 10/15/06 166,500
400 Hyperion Telecommunication, Inc. (Series B)........................... 13.00++ 04/15/03 290,000
400 In-Flight Phone Corp. (Series B) (a).................................. 14.00++ 05/15/02 56,000
200 IXC Communications, Inc. (Series B)................................... 12.50 10/01/05 230,000
500 McCaw International Ltd............................................... 13.00++ 04/15/07 290,000
200 Metronet Communications Corp. (Units)++ - 144A*....................... 12.00 08/15/07 230,500
500 Nextel Communications - 144A*......................................... 10.65++ 09/15/07 313,125
150 NextLink Communications, LLC.......................................... 12.50 04/15/06 171,000
200 Orbcomm Global L.P. /Capital (Series B)............................... 14.00 08/15/04 217,000
300 Paging Network, Inc................................................... 10.125 08/01/07 312,000
300 Peoples Telephone Co., Inc............................................ 12.25 07/15/02 315,000
500 Price Communications Cellular Holdings - 144A*........................ 13.50++ 08/01/07 315,000
300 Primus Telecommunications Group....................................... 11.75 08/01/04 325,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
71
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250 USA Mobile Communications Holdings, Inc............................... 14.00% 11/01/04 $ 278,750
500 Winstar Communications, Inc........................................... 14.00++ 10/15/05 400,000
250 Winstar Equipment Corp................................................ 12.50 03/15/04 280,625
-----------
5,882,170
-----------
CONSUMER PRODUCTS (1.2%)
300 North Atlantic Trading................................................ 11.00 06/15/04 313,500
500 Renaissance Cosmetics, Inc............................................ 11.75 02/15/04 460,000
-----------
773,500
-----------
ELECTRICAL & ALARM SYSTEMS (0.5%)
400 Mosler, Inc........................................................... 11.00 04/15/03 308,000
-----------
ENTERTAINMENT/GAMING & LODGING (4.7%)
250 Fitzgerald Gaming Corp. - 144A*....................................... 12.25 12/15/04 253,750
500 Lady Luck Gaming Finance Corp......................................... 11.875 03/01/01 512,500
200 Motels of America, Inc. (Series B).................................... 12.00 04/15/04 194,500
250 Players International, Inc............................................ 10.875 04/15/05 269,375
500 Plitt Theaters, Inc................................................... 10.875 06/15/04 540,000
300 Riviera Holdings Corp. - 144A*........................................ 10.00 08/15/04 297,750
500 Stuart Entertainment, Inc. (Series B)................................. 12.50 11/15/04 410,000
400 Walt Disney Co........................................................ 15.00 12/14/98 434,100
-----------
2,911,975
-----------
FINANCE (0.2%)
250 Cityscape Financial Corp. (Series A).................................. 12.75 06/01/04 120,000
-----------
FOODS & BEVERAGES (2.2%)
500 Envirodyne Industries, Inc............................................ 10.25 12/01/01 492,500
250 PepsiCo, Inc.......................................................... 15.00 08/06/98 263,373
250 Sparkling Spring Water - 144A*........................................ 11.50 11/15/07 257,500
100 Specialty Foods Acquisition Corp. (Series B).......................... 11.25 08/15/03 95,000
600 Specialty Foods Acquisition Corp. (Series B).......................... 13.00++ 08/15/05 267,000
-----------
1,375,373
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
72
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTHCARE (1.5%)
$ 200 Imagyn Medical Technologies........................................... 12.50% 04/01/04 $ 189,500
300 Unilab Corp........................................................... 11.00 04/01/06 306,000
500 Unison Healthcare Corp. - 144A*....................................... 12.25 11/01/06 450,000
-----------
945,500
-----------
MANUFACTURING (1.2%)
300 International Semi - Tech Microelectronics............................ 11.50++ 08/15/03 102,000
600 Uniroyal Technology Corp.............................................. 11.75 06/01/03 624,000
-----------
726,000
-----------
MANUFACTURING - DIVERSIFIED (1.0%)
200 Interlake Corp........................................................ 12.125 03/01/02 207,000
200 J.B. Poindexter & Co., Inc............................................ 12.50 05/15/04 204,000
325 Jordan Industries, Inc. (Series B).................................... 11.75++ 04/01/09 195,000
-----------
606,000
-----------
PUBLISHING (0.7%)
250 American Media Operations, Inc........................................ 11.625 11/15/04 271,250
200 United States Banknote Corp. (Series B)............................... 10.375 06/01/02 198,000
-----------
469,250
-----------
RESTAURANTS (0.9%)
1 American Restaurant Group Holdings, Inc............................... 13.00 09/15/98 1,355
100 Carrols Corp.......................................................... 11.50 08/15/03 106,000
200 FRD Acquisition Corp. (Series B)...................................... 12.50 07/15/04 218,000
250 Friendly Ice Cream.................................................... 10.50 12/01/07 253,125
-----------
578,480
-----------
RETAIL (0.4%)
400 County Seat Stores Co. (b)............................................ 12.00 10/01/02 220,000
-----------
RETAIL - FOOD CHAINS (2.3%)
250 Big V Supermarkets, Inc. (Series B)................................... 11.00 02/15/04 261,875
250 Mrs Fields Original Cookies - 144A*................................... 10.125 12/01/04 251,875
250 Pantry Inc. - 144A*................................................... 10.25 10/15/07 256,875
200 Pathmark Stores, Inc.................................................. 9.625 05/01/03 184,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
73
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Pueblo Xtra International, Inc. (Series C)............................ 9.50% 08/01/03 $ 480,000
-----------
1,434,625
-----------
TEXTILES - APPAREL MANUFACTURERS (0.1%)
150 U.S. Leather, Inc. (b)................................................ 10.25 07/31/03 70,500
-----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (54.7%)
949 Federal Home Loan Mortgage Corp. (1.6%)............................... 7.00 06/01/04 962,488
-----------
Federal National Mortgage Assoc. (11.1%)
904 ...................................................................... 6.00 02/01/11-03/01/11 889,745
2,001 ...................................................................... 6.50 04/01/12-03/01/27 1,989,532
3,582 ...................................................................... 7.00 07/01/25-05/01/27 3,607,270
439 ...................................................................... 8.00 06/01/26 454,225
-----------
6,940,772
-----------
Government National Mortgage Assoc. (11.1%)
3,784 ...................................................................... 6.50 01/15/24-04/15/26 3,745,332
931 ...................................................................... 7.00 01/15/26-04/15/26 938,254
1,276 ...................................................................... 7.50 02/15/26-07/15/26 1,307,721
895 ...................................................................... 8.00 02/15/26-06/15/26 927,658
-----------
6,918,965
-----------
6,000 Resolution Funding Corp. (e) (5.6%)................................... 0.00 01/15/05-10/15/07 3,493,080
-----------
U.S. Treasury Notes (e) (25.3%)
7,450 ...................................................................... 5.75 11/15/00-11/30/02 7,463,206
3,100 ...................................................................... 6.00 06/30/99-08/15/00 3,121,588
1,000 ...................................................................... 6.25 08/31/02 1,020,870
4,100 ...................................................................... 6.375 05/15/00 4,161,951
-----------
15,767,615
-----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS........................................................ 34,082,920
-----------
TOTAL UNITED STATES............................................................................... 53,088,863
-----------
TOTAL GOVERNMENT & CORPORATE BONDS
(IDENTIFIED COST $59,266,721)..................................................................... 59,573,897
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
74
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (c) (0.4%)
BROADCAST MEDIA (0.0%)
2,150 Price Communications Corp. ............................................................ $ 18,409
-----------
CABLE & TELECOMMUNICATIONS (0.0%)
700 Nextel Communications, Inc. (Series A)................................................. 18,025
-----------
ENTERTAINMENT/GAMING & LODGING (0.0%)
500 Cobblestone Holdings, Inc. - 144A*..................................................... 17,500
-----------
HEALTHCARE (0.1%)
10,000 Unigene Laboratories, Inc.............................................................. 25,625
20,000 Unilab Corp............................................................................ 37,500
-----------
63,125
-----------
MANUFACTURING - DIVERSIFIED (0.2%)
3,000 Thermadyne Holdings Corp. (d).......................................................... 84,750
-----------
TEXTILES (0.1%)
20,000 Ithaca Industries, Inc................................................................. 65,000
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $283,574)............................................................. 266,809
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- ---------- ----------
<C> <S> <C> <C>
WARRANTS (c) (0.1%)
CABLE & TELECOMMUNICATIONS (0.1%)
400 Hyperion Telecommunication, Inc. (Series B) - 144A*........................ 04/01/01 36,000
500 McCaw International Ltd. - 144A*........................................... 04/15/07 5
300 Primus Telecommunications Group............................................ 08/01/04 3,691
300 UIH Australia/Pacific, Inc................................................. 05/15/06 3
-----------
39,699
-----------
ENTERTAINMENT/GAMING & LODGING (0.0%)
787 Fitzgeralds Gaming Corp.................................................... 12/19/98 3,542
100 Fitzgeralds South Inc. - 144A*............................................. 03/15/99 1
-----------
3,543
-----------
HEALTHCARE (0.0%)
200 Imagyn Medical Technologies - 144A*........................................ 04/10/04 2
-----------
TOTAL WARRANTS
(IDENTIFIED COST $9,304)............................................................... 43,244
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
75
<PAGE>
DIVERSIFIED INCOME
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT
$ 856 The Bank of New York (dated 12/31/97; proceeds $856,056) (f)
(IDENTIFIED COST $855,871)................................................... 3.875 01/02/98 $ 855,871
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $60,415,470) (g).......................................................... 97.5 % 60,739,821
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 2.5 1,547,180
------ ------------
NET ASSETS................................................................................. 100.0 % $ 62,287,001
------ ------------
------ ------------
</TABLE>
- ---------------------
M In millions.
* Resale is restricted to qualified institutional investors.
++ Consists of one or more class of securities traded together as a unit;
bonds with attached stocks/warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future specified date.
(a) Non-income producing security; issuer in bankruptcy.
(b) Non-income producing security; issuer in default.
(c) Non-income producing securities.
(d) Acquired through exchange offer.
(e) Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
(f) Collateralized by $694,571 U.S. Treasury Bond 7.875% due 02/15/21 valued at
$872,989.
(g) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,497,780 and the
aggregate gross unrealized depreciation is $1,173,429, resulting in net
unrealized appreciation of $324,351.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS EXCHANGE DELIVERY APPRECIATION/
TO DELIVER FOR DATE (DEPRECIATION)
- -----------------------------------------------------------
<S> <C> <C> <C>
Y 120,000,000 $ 942,729 02/04/98 $ 18,372
Y 100,793,000 $ 780,132 03/17/98 (939)
DEM 5,000,000 $2,811,990 04/06/98 15,591
NLG 902,000 $ 450,212 04/06/98 2,377
NLG 3,155,000 $1,602,670 06/15/98 30,167
--------------
Net unrealized appreciation.......... $ 65,568
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
76
<PAGE>
BALANCED
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (64.3%)
AEROSPACE (1.9%)
27,400 Boeing Co............................................................................... $ 1,340,887
-----------
AIR TRANSPORT (4.4%)
3,600 AMR Corp.*.............................................................................. 462,600
14,100 Delta Air Lines, Inc.................................................................... 1,677,900
11,200 UAL Corp.*.............................................................................. 1,036,000
-----------
3,176,500
-----------
AUTO PARTS - AFTER MARKET (2.9%)
24,600 Lear Corp.*............................................................................. 1,168,500
14,100 Magna International Inc. (Class A) (Canada)............................................. 885,656
-----------
2,054,156
-----------
BANKS - MONEY CENTER (0.3%)
1,900 Citicorp................................................................................ 240,231
-----------
BANKS - REGIONAL (2.3%)
4,900 Wells Fargo & Co........................................................................ 1,663,244
-----------
BEVERAGES - SOFT DRINKS (1.3%)
25,100 PepsiCo, Inc............................................................................ 914,581
-----------
BROKERAGE (1.7%)
17,000 Merrill Lynch & Co., Inc................................................................ 1,239,937
-----------
CABLE & TELECOMMUNICATIONS (1.6%)
27,700 Cox Communications, Inc. (Class A)*..................................................... 1,109,731
-----------
COMMERCIAL SERVICES (1.2%)
23,100 Corrections Corp. of America*........................................................... 856,144
-----------
COMMUNICATIONS EQUIPMENT (4.8%)
22,600 3Com Corp.*............................................................................. 788,175
20,170 Ascend Communications, Inc.*............................................................ 495,426
38,150 Cisco Systems, Inc.*.................................................................... 2,126,862
-----------
3,410,463
-----------
COMPUTER SERVICES (2.0%)
16,800 Computer Sciences Corp.*................................................................ 1,402,800
-----------
COMPUTER SOFTWARE (2.7%)
14,900 Microsoft Corp.*........................................................................ 1,924,894
-----------
DRUGS (2.7%)
10,400 Johnson & Johnson....................................................................... 685,100
10,300 Warner-Lambert Co....................................................................... 1,277,200
-----------
1,962,300
-----------
ELECTRICAL EQUIPMENT (1.1%)
11,000 Honeywell, Inc.......................................................................... 753,500
-----------
ENTERTAINMENT (5.9%)
52,955 CBS Corp................................................................................ 1,558,863
32,200 Mirage Resorts, Inc.*................................................................... 732,550
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
31,600 Time Warner, Inc........................................................................ $ 1,959,200
-----------
4,250,613
-----------
FINANCIAL - MISCELLANEOUS (4.3%)
17,100 Associates First Capital Corp. (Class A)*............................................... 1,216,238
22,100 Fannie Mae.............................................................................. 1,261,081
5,800 Golden West Financial Corp.............................................................. 567,313
-----------
3,044,632
-----------
FOODS (1.1%)
16,400 Kellogg Co.............................................................................. 813,850
-----------
HEALTH EQUIPMENT & SERVICES (1.0%)
14,400 United Healthcare Corp.................................................................. 715,500
-----------
HEALTHCARE - DRUGS (2.2%)
22,400 Lilly (Eli) & Co........................................................................ 1,559,600
-----------
INSURANCE BROKERS (1.5%)
13,900 Marsh & McLennan Companies, Inc......................................................... 1,036,419
-----------
OIL - DOMESTIC (0.6%)
4,700 Amoco Corp.............................................................................. 400,088
-----------
RAILROADS (1.6%)
12,334 Burlington Northern Santa Fe Corp....................................................... 1,146,291
-----------
RESTAURANTS (0.1%)
2,450 Tricon Global Restaurants, Inc.*........................................................ 71,203
-----------
RETAIL - SPECIALTY (4.7%)
32,350 Home Depot, Inc......................................................................... 1,904,606
37,300 Tandy Corp.............................................................................. 1,438,381
-----------
3,342,987
-----------
SEMICONDUCTORS (3.2%)
32,600 Intel Corp.............................................................................. 2,288,113
-----------
SOAP & HOUSEHOLD PRODUCTS (2.4%)
21,700 Procter & Gamble Co..................................................................... 1,731,931
-----------
TELECOMMUNICATIONS EQUIPMENT (0.9%)
8,000 Lucent Technologies Inc................................................................. 639,000
-----------
TOBACCO (1.8%)
28,200 Philip Morris Companies, Inc............................................................ 1,277,813
-----------
UTILITIES - TELEPHONE (2.1%)
26,800 BellSouth Corp.......................................................................... 1,509,175
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $37,374,272)........................................................... 45,876,583
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
77
<PAGE>
BALANCED
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS (5.9%)
AUTO PARTS (0.6%)
$ 400 Raytheon Co.
6.45% due 08/15/02.................................................................... $ 403,076
-----------
BANKS (0.9%)
200 NationsBank Corp.
7.50% due 09/15/06.................................................................... 213,574
325 Norwest Corp.
6.80% due 05/15/02.................................................................... 332,322
110 Wells Fargo & Co.
6.875% due 04/01/06................................................................... 112,544
-----------
658,440
-----------
BANKS - MONEY CENTER (0.2%)
145 Citicorp
6.375% due 01/15/06................................................................... 143,991
-----------
BROKERAGE (0.2%)
150 Merrill Lynch & Co., Inc.
6.00% due 01/15/01.................................................................... 149,271
-----------
ENTERTAINMENT (0.3%)
180 Walt Disney Co. (Series B)
6.75% due 03/30/06.................................................................... 184,932
-----------
FINANCIAL (0.9%)
100 Abbey National PLC (United Kingdom)
6.69% due 10/17/05.................................................................... 101,443
100 BHP Finance U.S.A. Ltd.
6.69% due 03/01/06.................................................................... 100,448
400 Bear Stearns Co., Inc.
6.50% due 08/01/02.................................................................... 401,496
-----------
603,387
-----------
HEALTHCARE - DRUGS (0.1%)
45 Lilly (Eli) & Co.
8.375% due 12/01/06................................................................... 51,448
-----------
INDUSTRIALS (1.8%)
100 General American Transportation Corp.
6.75% due 03/01/06.................................................................... 100,571
500 IBM Corp.
7.00% due 10/30/25.................................................................... 517,715
150 Lockheed Martin Corp.
7.25% due 05/15/06.................................................................... 157,484
15 Mead Corp.
7.125% due 08/01/25................................................................... 14,854
40 Monsanto Co.
8.875% due 12/15/09................................................................... 48,495
200 Praxair, Inc.
6.90% due 11/01/06.................................................................... 205,890
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 15 Texas Utilities Electric Co.
7.875% due 04/01/24................................................................... $ 15,807
200 Willamette Industries, Inc.
7.85% due 07/01/26.................................................................... 225,294
-----------
1,286,110
-----------
TELECOMMUNICATIONS (0.7%)
400 MCI Communication Corp.
6.95% due 08/15/06.................................................................... 408,652
120 Northern Telecom Capital
7.40% due 06/15/06.................................................................... 127,999
-----------
536,651
-----------
UTILITIES - ELECTRIC (0.2%)
150 Union Electric Co.
6.75% due 05/01/08.................................................................... 153,392
-----------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $4,046,641)............................................................ 4,170,698
-----------
ASSET-BACKED SECURITIES (2.8%)
400 Delta Funding Home Equity Loan Trust
6.77% due 11/25/19.................................................................... 402,688
400 EQCC Home Equity Loan Trust
6.45% due 09/15/12.................................................................... 400,562
400 GE Capital Mortgage Services, Inc.
6.79% due 06/25/17.................................................................... 401,562
400 Green Tree Financial Corp.
6.42% due 05/15/29.................................................................... 399,812
400 Oakwood Mortgage Investors, Inc.
6.45% due 11/15/27.................................................................... 400,938
-----------
TOTAL ASSET-BACKED SECURITIES
(IDENTIFIED COST $1,996,500)............................................................ 2,005,562
-----------
GOVERNMENT OBLIGATIONS (17.2%)
500 Province of Ontario (Canada)
6.00% due 02/21/06.................................................................... 490,970
1,305 U.S. Treasury Bond
7.50% due 11/15/24.................................................................... 1,561,302
1,065 U.S. Treasury Bond
6.00% due 02/15/26.................................................................... 1,063,946
795 U.S. Treasury Note
5.00% due 01/31/98.................................................................... 794,563
765 U.S. Treasury Note
5.125% due 04/30/98................................................................... 764,212
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
78
<PAGE>
BALANCED
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 530 U.S. Treasury Note
6.00% due 09/30/98.................................................................... $ 531,516
500 U.S. Treasury Note
5.875% due 10/31/98................................................................... 500,825
300 U.S. Treasury Note
6.375% due 05/15/99................................................................... 302,766
175 U.S. Treasury Note
7.75% due 11/30/99.................................................................... 181,513
750 U.S. Treasury Note
7.75% due 01/31/00.................................................................... 780,165
300 U.S. Treasury Note
6.25% due 08/31/00.................................................................... 304,065
200 U.S. Treasury Note
6.625% due 06/30/01................................................................... 205,618
1,725 U.S. Treasury Note
6.625% due 04/30/02................................................................... 1,782,460
80 U.S. Treasury Note
7.875% due 11/15/04................................................................... 89,449
2,575 U.S. Treasury Note
5.875% due 11/15/05................................................................... 2,588,519
440 U.S. Treasury Strip
0.00% due 05/15/02.................................................................... 343,842
-----------
TOTAL GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $12,008,915)........................................................... 12,285,731
-----------
MORTGAGE-BACKED SECURITIES (7.0%)
U.S. GOVERNMENT AGENCIES (7.0%)
950 Federal Home Loan Mortgage Corp. 7.00% due 08/01/12..................................... 964,745
180 Federal Home Loan Mortgage Corp. 7.00% due 12/01/25..................................... 181,299
300 Federal Home Loan Mortgage Corp. 7.00% due 04/01/26..................................... 302,516
760 Federal Home Loan Mortgage Corp. 7.00% due 12/01/27..................................... 766,888
578 Federal National Mortgage Assoc. 6.00% due 04/01/04..................................... 571,045
569 Federal National Mortgage Assoc. 7.50% due 08/01/12..................................... 584,237
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
$ 1,028 Federal National Mortgage Assoc. 6.50% due 10/01/17..................................... $ 1,015,422
592 Government National Mortgage Assoc. 7.50% due 08/15/27.................................. 606,699
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(IDENTIFIED COST $4,952,274)............................................................ 4,992,851
-----------
SHORT-TERM INVESTMENT (4.6%)
REPURCHASE AGREEMENT
3,276 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $3,277,072) (a)
(IDENTIFIED COST $3,276,366).......................................................... 3,276,366
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $63,654,968) (B).......................................................... 101.8 % 72,607,791
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.8) (1,284,355)
------ ------------
NET ASSETS................................................................................. 100.0 % $ 71,323,436
------ ------------
------ ------------
</TABLE>
- ---------------------
* Non-income producing security.
(a) Collateralized by $1,859,195 U.S. Treasury Note 5.875% due 02/15/00 valued
at $1,907,417 and $1,409,145 U.S. Treasury Note 6.00% due 09/30/98 valued
at $1,434,477.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $9,877,438 and the
aggregate gross unrealized depreciation is $924,615, resulting in net
unrealized appreciation of $8,952,823.
SEE NOTES TO FINANCIAL STATEMENTS
79
<PAGE>
UTILITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (87.2%)
NATURAL GAS (17.5%)
20,000 AGL Resources, Inc...................................................................... $ 408,750
5,500 Anadarko Petroleum Corp................................................................. 333,781
11,000 Cabot Oil & Gas Corp.................................................................... 213,812
10,000 Clayton Williams Energy, Inc.*.......................................................... 140,000
6,000 Consolidated Natural Gas Co............................................................. 363,000
7,000 Eastern Enterprises..................................................................... 315,000
6,311 El Paso Natural Gas Co.................................................................. 419,682
11,912 Enron Corp.............................................................................. 495,093
6,000 Ente Nazionale Idrocarburi SpA (ADR) (Italy)............................................ 342,375
8,000 Exxon Corp.............................................................................. 489,500
11,000 Indiana Energy Inc...................................................................... 362,313
12,000 KeySpan Energy Corp..................................................................... 441,750
9,000 KN Energy, Inc.......................................................................... 486,000
20,000 Mallon Resources Corp.*................................................................. 162,500
13,000 MCN Corp................................................................................ 524,875
10,500 New Jersey Resources.................................................................... 420,656
10,000 North Carolina Natural Gas Corp......................................................... 347,500
11,750 Northwest Natural Gas Co................................................................ 364,250
10,000 Pacific Enterprises..................................................................... 376,250
6,000 Pioneer Natural Resources Co............................................................ 173,625
12,000 Questar Corp............................................................................ 535,500
7,000 Reading & Bates Corp.*.................................................................. 293,125
7,000 Royal Dutch Petroleum Co. (ADR) (Netherlands)........................................... 379,312
6,000 South Jersey Industries, Inc............................................................ 181,875
10,000 Washington Gas Light Co................................................................. 309,375
-----------
8,879,899
-----------
REAL ESTATE INVESTMENT TRUST (0.2%)
5,000 Nationwide Health Properties, Inc....................................................... 127,500
-----------
TELECOMMUNICATIONS (32.5%)
9,000 360 DEG. Communications Co.*............................................................ 181,687
10,000 Airtouch Communications, Inc.*.......................................................... 415,625
7,000 Alcatel Alsthom (ADR) (France).......................................................... 177,187
7,500 Alltel Corp............................................................................. 307,969
4,000 Ameritech Corp.......................................................................... 322,000
8,000 AT&T Corp............................................................................... 490,000
15,000 BCE, Inc. (Canada)...................................................................... 499,687
5,572 Bell Atlantic Corp...................................................................... 507,052
5,000 BellSouth Corp.......................................................................... 281,562
8,000 Brooks Fiber Properties, Inc.*.......................................................... 440,000
6,500 Century Telephone Enterprises, Inc...................................................... 323,781
15,000 Cincinnati Bell, Inc.................................................................... 465,000
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
7,800 Colt Telecom Group PLC (ADR)*........................................................... $ 327,600
10,000 Deutsche Telekom AG (ADR)............................................................... 186,250
4,500 Ericsson (L.M.) Telephone Co. (Class B) (ADR) (Sweden).................................. 167,906
9,900 Esat Telecom Group PLC (ADR)*........................................................... 133,031
6,200 France Telecom S.A. (ADR)*.............................................................. 223,200
20,000 General Communication, Inc. (Class A)*.................................................. 132,500
14,000 Grupo Iusacell S.A. de C.V. (Series L) (ADR) (Mexico)*.................................. 303,625
5,500 GTE Corp................................................................................ 287,375
6,000 Harris Corp............................................................................. 275,250
10,000 ICG Communications, Inc.*............................................................... 272,500
14,000 LCI International, Inc.*................................................................ 430,500
12,000 Loral Space & Communications Ltd.*...................................................... 257,250
4,896 Lucent Technologies Inc................................................................. 391,068
10,500 MCI Communications Corp................................................................. 449,531
13,000 Nextel Communications, Inc. (Series A)*................................................. 334,750
13,300 Nextlink Communications, Inc. (Class A)*................................................ 283,456
5,000 Philips Electronics NV (ADR) (Netherlands).............................................. 302,500
10,000 Portugal Telecom S.A. (ADR) (Portugal).................................................. 470,000
20,000 Primus Telecommunications Group, Inc.*.................................................. 323,750
5,000 Qwest Communications International Inc.*................................................ 296,250
6,000 RCN Corp.*.............................................................................. 205,500
7,000 Royal PTT Nederland NV (ADR) (Netherlands).............................................. 290,500
10,000 RSL Communications, Ltd. (Class A)*..................................................... 221,250
6,194 SBC Communications, Inc................................................................. 453,711
8,000 Southern New England Telecommunications Corp............................................ 402,500
7,000 Sprint Corp............................................................................. 410,375
15,000 Tel-Save Holdings, Inc.*................................................................ 296,250
10,000 Tele Danmark AS (ADR) (Denmark)......................................................... 308,125
2,500 Telecomunicacoes Brasileiras S/A-Telebras (ADR)......................................... 291,094
5,000 Telefonica Espana S.A. (ADR) (Spain).................................................... 455,313
9,000 Telephone & Data Systems, Inc........................................................... 419,063
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
80
<PAGE>
UTILITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
6,000 Teleport Communications Group Inc.*..................................................... $ 329,250
10,000 Teligent, Inc. (Class A)*............................................................... 242,500
5,000 Telstra Corp., Ltd. (ADR)*.............................................................. 208,750
5,000 U.S. West Communications Group, Inc..................................................... 225,625
10,000 U.S. West Media Group, Inc.*............................................................ 288,750
7,000 United States Cellular Corp.*........................................................... 217,000
7,000 Vanguard Cellular Systems, Inc. (Class A)*.............................................. 89,250
5,000 Vodafone Group PLC (ADR) (United Kingdom)............................................... 362,500
17,000 WorldCom, Inc.*......................................................................... 514,250
-----------
16,491,398
-----------
UTILITIES - ELECTRIC (36.1%)
14,000 AES Corp.*.............................................................................. 652,750
11,000 Allegheny Energy, Inc................................................................... 357,500
10,000 American Electric Power Co.............................................................. 516,250
5,000 Boston Edison Co........................................................................ 189,375
9,000 Calenergy, Inc.*........................................................................ 258,750
13,000 Carolina Power & Light Co............................................................... 551,688
10,000 Central & South West Corp............................................................... 270,625
12,000 Central Louisiana Electric.............................................................. 388,500
11,500 CINergy Corp............................................................................ 440,594
10,000 CMS Energy Corp......................................................................... 440,625
12,000 Consolidated Edison Co. of New York, Inc................................................ 492,000
10,000 Dominion Resources, Inc................................................................. 425,625
12,500 DQE, Inc................................................................................ 439,062
13,355 Duke Power Co........................................................................... 739,533
11,000 Edison International.................................................................... 299,063
6,500 Enersis S.A. (ADR) (Chile).............................................................. 188,500
8,000 Enova Corp.............................................................................. 216,500
9,500 Entergy Corp............................................................................ 284,406
15,000 FPL Group, Inc.......................................................................... 887,813
14,000 GPU, Inc................................................................................ 589,750
15,000 Houston Industries, Inc................................................................. 400,312
6,500 Illinova Corp........................................................................... 175,094
12,000 IPALCO Enterprises, Inc................................................................. 503,250
10,000 Kansas City Power & Light Co............................................................ 295,625
15,000 LG&E Energy Corp........................................................................ 371,250
10,000 Nevada Power Co......................................................................... 265,625
11,000 New Century Energies, Inc............................................................... 527,312
8,000 New England Electric System............................................................. 342,000
12,000 NIPSCO Industries, Inc.................................................................. 593,250
16,000 Northwestern Public Service Co.......................................................... 368,000
12,000 OGE Energy Corp......................................................................... 656,250
11,000 PacifiCorp.............................................................................. 300,438
7,500 Peco Energy Co.......................................................................... 181,875
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
7,500 PG & E Corp............................................................................. $ 228,281
9,500 Pinnacle West Capital Corp.............................................................. 402,562
12,500 Public Service Company of New Mexico.................................................... 296,094
6,000 Public Service Enterprise Group, Inc.................................................... 190,125
15,000 SCANA Corp.............................................................................. 449,063
15,000 Sierra Pacific Resources................................................................ 562,500
15,000 Southern Co............................................................................. 388,125
15,000 Teco Energy, Inc........................................................................ 421,875
9,000 TNP Enterprises, Inc.................................................................... 299,250
9,000 Tucson Electric Power Co.*.............................................................. 163,125
10,000 Utilicorp United, Inc................................................................... 388,125
11,000 Western Resources, Inc.................................................................. 473,000
15,000 Wisconsin Energy Corp................................................................... 431,250
-----------
18,302,565
-----------
WATER (0.9%)
17,000 American Water Works Company, Inc....................................................... 464,313
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $33,546,444)........................................................... 44,265,675
-----------
PREFERRED STOCKS (0.7%)
UTILITIES - ELECTRIC
6,000 Alabama Power Capital Trust I (Series Q) $1.84.......................................... 151,125
1,000 Duquesne Capital LP (Series A) $2.09*................................................... 26,000
2,500 Public Service Electric & Gas Co. (Series B) $2.00...................................... 64,687
5,000 Virginia Power Capital $2.01............................................................ 127,500
-----------
TOTAL PREFERRED STOCKS
(IDENTIFIED COST $363,687).............................................................. 369,312
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
CORPORATE BONDS (3.7%)
TELECOMMUNICATIONS (1.3%)
$ 100 Southwestern Bell Telephone Co. 7.25% due 07/15/25...................................... 102,095
500 WorldCom, Inc.
7.75% due 04/01/07.................................................................... 534,050
-----------
636,145
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
81
<PAGE>
UTILITIES
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES - ELECTRIC (2.4%)
$ 100 Florida Power & Light Co. 7.05% due 12/01/26............................................ $ 101,281
1,000 Southern Caliornia Edison Co. 7.25% due 03/01/26........................................ 1,023,470
100 Western Resources
6.875% due 08/01/04................................................................... 101,724
-----------
1,226,475
-----------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $1,836,484)............................................................ 1,862,620
-----------
U.S. GOVERNMENT AGENCY (0.1%)
25 Tennessee Valley Authority (Series 95-A) 8.00% due 03/31/45 (IDENTIFIED COST $25,000)... 26,438
-----------
SHORT-TERM INVESTMENTS (8.2%)
COMMERCIAL PAPER (a) (3.9%)
AUTOMOTIVE - FINANCE
2,000 Ford Motor Credit Co. 5.95% due 01/07/98 (AMORTIZED COST $1,998,017).................... 1,998,017
-----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (4.3%)
$ 2,174 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $2,173,990) (b)
(IDENTIFIED COST $2,173,522).......................................................... $ 2,173,522
-----------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $4,171,539)............................................................ 4,171,539
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $39,943,154) (c).......................................................... 99.9 % 50,695,584
OTHER ASSETS IN EXCESS OF LIABILITIES...................................................... 0.1 70,361
------ ------------
NET ASSETS................................................................................. 100.0 % $ 50,765,945
------ ------------
------ ------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $1,737,350 U.S. Treasury Note 6.375% due 04/30/99 valued
at $1,771,757 and $421,757 U.S. Treasury Note 6.625% due 07/31/01 valued at
$445,235.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $11,231,957 and the
aggregate gross unrealized depreciation is $479,527, resulting in net
unrealized appreciation of $10,752,430.
SEE NOTES TO FINANCIAL STATEMENTS
82
<PAGE>
DIVIDEND GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (98.7%)
AEROSPACE (2.7%)
193,000 United Technologies Corp............................................................... $ 14,052,812
------------
AUTOMOTIVE (5.4%)
390,000 Chrysler Corp.......................................................................... 13,723,125
296,000 Ford Motor Co.......................................................................... 14,411,500
------------
28,134,625
------------
BANKS (5.4%)
252,000 Banc One Corp.......................................................................... 13,686,750
193,000 BankAmerica Corp....................................................................... 14,089,000
------------
27,775,750
------------
BEVERAGES - SOFT DRINKS (2.8%)
394,000 PepsiCo, Inc........................................................................... 14,356,375
------------
CHEMICALS (5.5%)
142,000 Dow Chemical Co........................................................................ 14,413,000
243,000 PPG Industries, Inc.................................................................... 13,881,375
------------
28,294,375
------------
COMPUTERS (2.7%)
135,000 International Business Machines Corp................................................... 14,115,937
------------
CONGLOMERATES (5.4%)
161,000 Minnesota Mining & Manufacturing Co.................................................... 13,212,062
369,000 Tenneco, Inc........................................................................... 14,575,500
------------
27,787,562
------------
DRUGS (2.6%)
208,000 Abbott Laboratories.................................................................... 13,637,000
------------
ELECTRIC - MAJOR (2.7%)
191,000 General Electric Co.................................................................... 14,014,625
------------
FOODS (2.7%)
267,000 Quaker Oats Company (The).............................................................. 14,084,250
------------
HEALTHCARE - DIVERSIFIED (2.7%)
186,000 American Home Products Corp............................................................ 14,229,000
------------
INSURANCE (2.8%)
189,000 Lincoln National Corp.................................................................. 14,765,625
------------
MACHINERY - AGRICULTURAL (2.8%)
251,000 Deere & Co............................................................................. 14,636,437
------------
MANUFACTURING - CONSUMER &
INDUSTRIAL PRODUCTS (2.8%)
264,000 Whirlpool Corp......................................................................... 14,520,000
------------
MANUFACTURING - DIVERSIFIED INDUSTRIES (2.7%)
203,000 Honeywell, Inc......................................................................... 13,905,500
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
METALS & MINING (2.7%)
221,000 Phelps Dodge Corp...................................................................... $ 13,757,250
------------
NATURAL GAS (2.8%)
349,000 Enron Corp............................................................................. 14,505,313
------------
OFFICE EQUIPMENT & SUPPLIES (2.7%)
158,000 Pitney Bowes, Inc...................................................................... 14,210,125
------------
OIL INTEGRATED - DOMESTIC (5.7%)
184,000 Atlantic Richfield Co.................................................................. 14,743,000
430,000 USX-Marathon Group..................................................................... 14,512,500
------------
29,255,500
------------
OIL INTEGRATED - INTERNATIONAL (5.3%)
223,000 Exxon Corp............................................................................. 13,644,813
194,000 Mobil Corp............................................................................. 14,004,375
------------
27,649,188
------------
PAPER & FOREST PRODUCTS (2.8%)
292,000 Weyerhaeuser Co........................................................................ 14,326,250
------------
PHOTOGRAPHY (2.8%)
241,000 Eastman Kodak Co....................................................................... 14,655,813
------------
RAILROADS (2.7%)
261,000 CSX Corp............................................................................... 14,094,000
------------
RESTAURANTS (0.2%)
33,600 Tricon Global Restaurants, Inc.*....................................................... 976,500
------------
RETAIL - DEPARTMENT STORES (2.8%)
278,000 May Department Stores Co............................................................... 14,647,125
------------
RETAIL - FOOD CHAINS (2.8%)
698,000 American Stores Co..................................................................... 14,352,625
------------
TELECOMMUNICATIONS (5.4%)
155,000 Bell Atlantic Corp..................................................................... 14,105,000
241,000 Sprint Corp............................................................................ 14,128,625
------------
28,233,625
------------
TOBACCO (2.7%)
311,000 Philip Morris Companies, Inc........................................................... 14,092,188
------------
UTILITIES - ELECTRIC (5.6%)
340,000 GPU, Inc............................................................................... 14,322,500
470,000 Unicom Corp............................................................................ 14,452,500
------------
28,775,000
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $439,470,235)......................................................... 511,840,375
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
83
<PAGE>
DIVIDEND GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT
$ 5,476 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $5,477,278) (a)
(IDENTIFIED COST $5,476,099)......................................................... $ 5,476,099
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $444,946,334) (b)........................................................ 99.8 % 517,316,474
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 0.2 1,102,631
------ -------------
NET ASSETS................................................................................ 100.0 % $ 518,419,105
------ -------------
------ -------------
</TABLE>
- ---------------------
* Non-income producing security.
(a) Collateralized by $5,712,670 U.S. Treasury Bill 0.0% due 06/04/98 valued at
$5,585,621.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $77,895,834 and the
aggregate gross unrealized depreciation is $5,525,694, resulting in net
unrealized appreciation of $72,370,140.
SEE NOTES TO FINANCIAL STATEMENTS
84
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.7%)
ADVERTISING/MARKETING SERVICES (0.6%)
6,200 Cognizant Corp......................................................................... $ 276,287
5,100 Interpublic Group of Companies, Inc.................................................... 254,044
6,600 Omnicom Group, Inc..................................................................... 279,675
------------
810,006
------------
AEROSPACE & DEFENSE (0.7%)
5,300 Boeing Co.............................................................................. 259,369
3,000 General Dynamics Corp.................................................................. 259,312
2,700 Lockheed Martin Corp................................................................... 265,950
2,400 Northrop Grumman Corp.................................................................. 276,000
------------
1,060,631
------------
AGRICULTURE RELATED (0.4%)
12,000 Archer-Daniels-Midland Co.............................................................. 260,250
2,700 Pioneer Hi-Bred International, Inc..................................................... 289,575
------------
549,825
------------
AIR FREIGHT (0.2%)
4,400 Federal Express Corp.*................................................................. 268,675
------------
AIRLINES (0.8%)
2,100 AMR Corp.*............................................................................. 269,850
2,500 Delta Air Lines, Inc................................................................... 297,500
11,550 Southwest Airlines Co.................................................................. 284,419
4,900 US Airways Group Inc.*................................................................. 306,250
------------
1,158,019
------------
ALUMINUM (0.5%)
9,700 Alcan Aluminum Ltd. (Canada)........................................................... 267,962
3,600 Aluminum Co. of America................................................................ 253,350
4,400 Reynolds Metals Co..................................................................... 264,000
------------
785,312
------------
AUTO PARTS - AFTER MARKET (1.5%)
10,400 Cooper Tire & Rubber Co................................................................ 253,500
5,400 Dana Corp.............................................................................. 256,500
7,100 Echlin, Inc............................................................................ 256,931
7,600 Genuine Parts Co....................................................................... 257,925
4,300 Goodyear Tire & Rubber Co.............................................................. 273,587
8,700 ITT Industries, Inc.................................................................... 272,962
5,900 Snap-On, Inc........................................................................... 257,387
4,800 TRW, Inc............................................................................... 256,200
------------
2,084,992
------------
AUTOMOBILES (0.6%)
7,300 Chrysler Corp.......................................................................... 256,869
5,500 Ford Motor Co.......................................................................... 267,781
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4,400 General Motors Corp.................................................................... $ 266,750
------------
791,400
------------
BANKS - MONEY CENTER (1.5%)
3,500 BankAmerica Corp....................................................................... 255,500
2,200 Bankers Trust New York Corp............................................................ 247,362
2,300 Chase Manhattan Corp................................................................... 251,850
2,100 Citicorp............................................................................... 265,519
3,200 First Chicago NBD Corp................................................................. 267,200
5,000 First Union Corp....................................................................... 256,250
2,300 Morgan (J.P.) & Co., Inc............................................................... 259,612
4,400 NationsBank Corp....................................................................... 267,575
------------
2,070,868
------------
BANKS - REGIONAL (4.3%)
4,500 Banc One Corp.......................................................................... 244,406
5,000 Bank of New York Co., Inc.............................................................. 289,062
2,900 BankBoston Corp........................................................................ 272,419
3,800 Barnett Banks, Inc..................................................................... 273,125
4,100 BB&T Corp.............................................................................. 262,656
3,100 Comerica, Inc.......................................................................... 279,775
3,600 CoreStates Financial Corp.............................................................. 288,225
3,575 Fifth Third Bancorp.................................................................... 291,809
3,600 Fleet Financial Group, Inc............................................................. 269,775
7,400 Huntington Bancshares, Inc............................................................. 265,475
3,800 KeyCorp................................................................................ 269,087
4,800 Mellon Bank Corp....................................................................... 291,000
4,100 National City Corp..................................................................... 269,575
8,000 Norwest Corp........................................................................... 309,000
5,200 PNC Bank Corp.......................................................................... 296,725
2,400 Republic New York Corp................................................................. 274,050
4,400 State Street Corp...................................................................... 256,025
3,500 SunTrust Banks, Inc.................................................................... 249,812
8,000 Synovus Financial Corp................................................................. 262,000
2,700 U.S. Bancorp........................................................................... 302,231
3,400 Wachovia Corp.......................................................................... 275,825
800 Wells Fargo & Co....................................................................... 271,550
------------
6,063,607
------------
BEVERAGES - ALCOHOLIC (0.8%)
5,800 Anheuser-Busch Companies, Inc.......................................................... 255,200
5,100 Brown-Forman Corp. (Class B)........................................................... 281,775
8,200 Coors (Adolph) Co. (Class B)........................................................... 271,625
8,400 Seagram Co. Ltd. (Canada).............................................................. 271,425
------------
1,080,025
------------
BEVERAGES - SOFT DRINKS (0.6%)
4,200 Coca Cola Co........................................................................... 279,825
7,000 PepsiCo, Inc........................................................................... 255,062
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
85
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10,000 Whitman Corp........................................................................... $ 260,625
------------
795,512
------------
BIOTECHNOLOGY (0.2%)
5,400 Amgen Inc.*............................................................................ 292,275
------------
BROADCAST MEDIA (1.0%)
9,700 CBS Corp............................................................................... 285,544
3,800 Clear Channel Communications, Inc.*.................................................... 301,862
9,400 Comcast Corp. (Class A Special)........................................................ 296,100
10,300 Tele-Communications, Inc. (Class A)*................................................... 287,112
10,100 U.S. West Media Group, Inc.*........................................................... 291,637
------------
1,462,255
------------
BUILDING MATERIALS (0.5%)
3,600 Armstrong World Industries, Inc........................................................ 269,100
5,100 Masco Corp............................................................................. 259,462
7,600 Owens-Corning.......................................................................... 259,350
------------
787,912
------------
CHEMICALS (1.3%)
3,200 Air Products & Chemicals, Inc.......................................................... 263,200
2,800 Dow Chemical Co........................................................................ 284,200
4,300 Du Pont (E.I.) De Nemours & Co., Inc................................................... 258,269
4,500 Eastman Chemical Co.................................................................... 268,031
5,800 Praxair, Inc........................................................................... 261,000
2,700 Rohm & Haas Co......................................................................... 258,525
6,200 Union Carbide Corp..................................................................... 266,212
------------
1,859,437
------------
CHEMICALS - DIVERSIFIED (0.9%)
14,700 Engelhard Corp......................................................................... 255,412
4,000 FMC Corp.*............................................................................. 269,250
6,200 Goodrich (B.F.) Co..................................................................... 256,912
6,100 Monsanto Co............................................................................ 256,200
4,400 PPG Industries, Inc.................................................................... 251,350
------------
1,289,124
------------
CHEMICALS - SPECIALTY (1.5%)
4,700 Ecolab, Inc............................................................................ 260,556
3,400 Grace (W. R.) & Co..................................................................... 273,487
5,800 Great Lakes Chemical Corp.............................................................. 260,275
5,200 Hercules, Inc.......................................................................... 260,325
5,000 International Flavors & Fragrances Inc................................................. 257,500
7,900 Morton International, Inc.............................................................. 271,562
6,600 Nalco Chemical Co...................................................................... 261,112
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
7,000 Sigma-Aldrich Corp..................................................................... $ 276,500
------------
2,121,317
------------
COMMERCIAL & CONSUMER SERVICES (1.0%)
6,400 Block (H.&R.), Inc..................................................................... 286,800
9,100 Cendant Corp.*......................................................................... 312,812
8,600 Dun & Bradstreet Corp.................................................................. 266,062
19,700 Laidlaw, Inc. (Canada)................................................................. 268,412
7,500 Service Corp. International............................................................ 277,031
------------
1,411,117
------------
COMMUNICATIONS EQUIPMENT (1.7%)
11,100 Andrew Corp.*.......................................................................... 265,706
11,500 DSC Communications Corp.*.............................................................. 274,562
5,800 Harris Corp............................................................................ 266,075
3,100 Lucent Technologies Inc................................................................ 247,612
4,600 Motorola, Inc.......................................................................... 262,487
16,500 NextLevel Systems, Inc.*............................................................... 294,937
3,100 Northern Telecom Ltd. (Canada)......................................................... 275,900
15,100 Scientific-Atlanta, Inc................................................................ 252,925
4,800 Tellabs, Inc.*......................................................................... 252,900
------------
2,393,104
------------
COMPUTER - NETWORKING (0.8%)
7,100 3Com Corp.*............................................................................ 247,612
10,500 Bay Networks, Inc.*.................................................................... 268,406
19,000 Cabletron Systems, Inc.*............................................................... 285,000
5,100 Cisco Systems, Inc.*................................................................... 284,325
------------
1,085,343
------------
COMPUTER SOFTWARE & SERVICES (2.2%)
6,800 Adobe Systems, Inc..................................................................... 279,650
7,100 Autodesk, Inc.......................................................................... 260,925
5,850 Computer Associates International, Inc................................................. 309,319
3,200 Computer Sciences Corp.*............................................................... 267,200
5,800 HBO & Co............................................................................... 278,037
2,100 Microsoft Corp.*....................................................................... 271,294
34,900 Novell, Inc.*.......................................................................... 259,569
11,900 Oracle Corp.*.......................................................................... 264,775
6,000 Parametric Technology Corp.*........................................................... 283,500
4,600 Shared Medical Systems Corp............................................................ 303,600
21,100 Unisys Corp.*.......................................................................... 292,762
------------
3,070,631
------------
COMPUTERS - PERIPHERAL EQUIPMENT (0.4%)
10,600 EMC Corp.*............................................................................. 290,837
13,400 Seagate Technology, Inc.*.............................................................. 257,950
------------
548,787
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
86
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTERS - SYSTEMS (1.7%)
19,200 Apple Computer, Inc.*.................................................................. $ 250,800
4,800 COMPAQ Computer Corp................................................................... 270,900
14,000 Data General Corp.*.................................................................... 244,125
3,300 Dell Computer Corp.*................................................................... 277,200
7,000 Digital Equipment Corp.*............................................................... 259,000
4,200 Hewlett-Packard Co..................................................................... 262,500
2,600 International Business Machines Corp................................................... 271,862
21,500 Silicon Graphics, Inc.*................................................................ 267,406
7,000 Sun Microsystems, Inc.*................................................................ 279,125
------------
2,382,918
------------
CONSUMER - NONCYCLICAL (0.4%)
6,800 American Greetings Corp. (Class A)..................................................... 266,050
11,300 Jostens, Inc........................................................................... 260,606
------------
526,656
------------
CONTAINERS - METAL & GLASS (0.6%)
7,600 Ball Corp.............................................................................. 268,375
5,200 Crown Cork & Seal Co., Inc............................................................. 260,650
7,800 Owens-Illinois, Inc.*.................................................................. 295,912
------------
824,937
------------
CONTAINERS - PAPER (0.7%)
6,500 Bemis Company, Inc..................................................................... 286,406
24,900 Stone Container Corp................................................................... 259,894
5,100 Temple-Inland, Inc..................................................................... 266,794
4,800 Union Camp Corp........................................................................ 257,700
------------
1,070,794
------------
DATA PROCESSING (0.8%)
4,900 Automatic Data Processing, Inc......................................................... 300,737
6,300 Ceridian Corp.*........................................................................ 288,619
7,700 Equifax, Inc........................................................................... 272,869
9,800 First Data Corp........................................................................ 286,650
------------
1,148,875
------------
DISTRIBUTORS - FOOD & HEALTH (0.7%)
3,400 Cardinal Health, Inc................................................................... 255,425
12,600 Fleming Companies, Inc................................................................. 169,312
6,700 Supervalu, Inc......................................................................... 280,562
6,400 Sysco Corp............................................................................. 291,600
------------
996,899
------------
ELECTRICAL EQUIPMENT (1.5%)
6,500 AMP, Inc............................................................................... 273,000
4,500 Emerson Electric Co.................................................................... 253,969
3,600 General Electric Co.................................................................... 264,150
6,200 General Signal Corp.................................................................... 261,562
3,800 Honeywell, Inc......................................................................... 260,300
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
6,000 Raychem Corp........................................................................... $ 258,375
5,200 Rockwell International Corp............................................................ 271,700
5,500 Thomas & Betts Corp.................................................................... 259,875
------------
2,102,931
------------
ELECTRONIC COMPONENTS (0.2%)
2,700 Grainger (W.W.), Inc................................................................... 262,406
------------
ELECTRONICS - DEFENSE (0.2%)
5,101 Raytheon Co. (Class B)................................................................. 257,578
------------
ELECTRONICS - INSTRUMENTATION (0.5%)
13,000 EG & G, Inc............................................................................ 270,562
3,600 Perkin-Elmer Corp...................................................................... 255,825
6,600 Tektronix, Inc......................................................................... 261,937
------------
788,324
------------
ELECTRONICS - SEMICONDUCTORS (1.1%)
14,500 Advanced Micro Devices, Inc.*.......................................................... 260,094
3,500 Intel Corp............................................................................. 245,656
13,000 LSI Logic Corp.*....................................................................... 256,750
10,100 Micron Technology, Inc.*............................................................... 262,600
10,000 National Semiconductor Corp.*.......................................................... 259,375
6,000 Texas Instruments, Inc................................................................. 270,000
------------
1,554,475
------------
ENGINEERING & CONSTRUCTION (0.6%)
7,100 Fluor Corp............................................................................. 265,362
9,500 Foster Wheeler Corp.................................................................... 257,094
7,700 McDermott International, Inc........................................................... 282,012
------------
804,468
------------
ENTERTAINMENT (0.8%)
5,000 King World Productions Inc.*........................................................... 288,750
4,500 Time Warner, Inc....................................................................... 279,000
7,400 Viacom, Inc. (Class B)*................................................................ 306,637
3,000 Walt Disney Co......................................................................... 297,187
------------
1,171,574
------------
FACILITIES & ENVIRONMENTAL SERVICES (0.2%)
10,400 Safety-Kleen Corp...................................................................... 285,350
------------
FINANCE - CONSUMER (1.2%)
3,400 Beneficial Corp........................................................................ 282,625
6,700 Countrywide Credit Industries, Inc..................................................... 287,262
10,300 Green Tree Financial Corp.............................................................. 269,731
2,100 Household International, Inc........................................................... 267,881
10,000 MBNA Corp.............................................................................. 273,125
6,100 Providian Financial Corp............................................................... 275,644
------------
1,656,268
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
87
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
FINANCE - DIVERSIFIED (1.6%)
2,900 American Express Co.................................................................... $ 258,825
4,800 American General Corp.................................................................. 259,500
5,100 Fannie Mae............................................................................. 291,019
6,600 Federal Home Loan Mortgage Corp........................................................ 276,787
4,000 MBIA Inc............................................................................... 267,250
4,400 MGIC Investment Corp................................................................... 292,600
5,400 Morgan Stanley, Dean Witter, Discover & Co. (Note 3)................................... 319,275
6,450 SunAmerica, Inc........................................................................ 275,737
------------
2,240,993
------------
FOODS (2.3%)
4,800 Campbell Soup Co....................................................................... 279,000
7,600 ConAgra, Inc........................................................................... 249,375
2,500 CPC International Inc.................................................................. 269,375
3,400 General Mills, Inc..................................................................... 243,525
5,300 Heinz (H.J.) Co........................................................................ 269,306
4,500 Hershey Foods Corp..................................................................... 278,719
5,800 Kellogg Co............................................................................. 287,825
5,100 Quaker Oats Company (The).............................................................. 269,025
2,700 Ralston-Ralston Purina Group........................................................... 250,931
4,800 Sara Lee Corp.......................................................................... 270,300
4,400 Unilever N.V. (ADR) (Netherlands)...................................................... 274,725
3,400 Wrigley (Wm.) Jr. Co. (Class A)........................................................ 270,512
------------
3,212,618
------------
FOOTWEAR (0.4%)
6,500 Nike, Inc. (Class B)................................................................... 255,125
9,200 Reebok International Ltd. (United Kingdom)*............................................ 265,075
------------
520,200
------------
GAMING, LOTTERY, & PARI-MUTUEL COMPANIES (0.4%)
14,100 Harrah's Entertainment, Inc.*.......................................................... 266,137
11,900 Mirage Resorts, Inc.*.................................................................. 270,725
------------
536,862
------------
GOLD & PRECIOUS METALS MINING (1.0%)
14,800 Barrick Gold Corp. (Canada)............................................................ 275,650
47,000 Battle Mountain Gold Co................................................................ 276,125
44,800 Echo Bay Mines Ltd. (Canada)........................................................... 109,200
28,700 Homestake Mining Co.................................................................... 254,712
8,700 Newmont Mining Corp.................................................................... 255,562
21,500 Placer Dome Inc. (Canada).............................................................. 272,781
------------
1,444,030
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
HARDWARE & TOOLS (0.4%)
6,600 Black & Decker Corp.................................................................... $ 257,812
5,800 Stanley Works.......................................................................... 273,687
------------
531,499
------------
HEALTHCARE - DIVERSIFIED (1.3%)
3,900 Abbott Laboratories.................................................................... 255,694
7,800 Allergan, Inc.......................................................................... 261,787
3,400 American Home Products Corp............................................................ 260,100
3,100 Bristol-Myers Squibb Co................................................................ 293,337
4,100 Johnson & Johnson...................................................................... 270,087
6,900 Mallinckrodt Group, Inc................................................................ 262,200
2,300 Warner-Lambert Co...................................................................... 285,200
------------
1,888,405
------------
HEALTHCARE - DRUGS (1.0%)
4,200 Lilly (Eli) & Co....................................................................... 292,425
2,700 Merck & Co., Inc....................................................................... 286,875
4,000 Pfizer, Inc............................................................................ 298,250
7,400 Pharmacia & Upjohn, Inc................................................................ 271,025
4,400 Schering-Plough Corp................................................................... 273,350
------------
1,421,925
------------
HEALTHCARE - HMOS (0.4%)
13,700 Humana, Inc.*.......................................................................... 284,275
5,500 United Healthcare Corp................................................................. 273,281
------------
557,556
------------
HEALTHCARE - LONG TERM (0.4%)
9,600 Healthsouth Corp.*..................................................................... 266,400
7,500 Manor Care, Inc........................................................................ 262,500
------------
528,900
------------
HEALTHCARE - SPECIALIZED SERVICES (0.2%)
9,000 ALZA Corp. (Class A)*.................................................................. 286,312
------------
HEAVY DUTY TRUCKS & PARTS (0.5%)
4,600 Cummins Engine Co., Inc................................................................ 271,687
10,400 Navistar International Corp.*.......................................................... 258,050
4,700 PACCAR, Inc............................................................................ 246,750
------------
776,487
------------
HOME BUILDING (0.8%)
4,500 Centex Corp............................................................................ 283,219
6,900 Fleetwood Enterprises, Inc............................................................. 292,819
11,500 Kaufman & Broad Home Corp.............................................................. 258,031
6,300 Pulte Corp............................................................................. 263,419
------------
1,097,488
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
88
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
HOSPITAL MANAGEMENT (0.4%)
8,800 Columbia/HCA Healthcare Corp........................................................... $ 260,700
9,000 Tenet Healthcare Corp.*................................................................ 298,125
------------
558,825
------------
HOUSEHOLD FURNISHINGS & APPLIANCES (0.4%)
7,300 Maytag Corp............................................................................ 272,381
5,000 Whirlpool Corp......................................................................... 275,000
------------
547,381
------------
HOUSEHOLD PRODUCTS - NON-DURABLE (0.9%)
3,400 Clorox Co.............................................................................. 268,812
3,900 Colgate-Palmolive Co................................................................... 286,650
6,800 Fort James Corp........................................................................ 260,100
5,000 Kimberly-Clark Corp.................................................................... 246,562
3,300 Procter & Gamble Co.................................................................... 263,381
------------
1,325,505
------------
HOUSEWARES (0.7%)
7,600 Fortune Brands, Inc.................................................................... 281,675
6,000 Newell Co.............................................................................. 255,000
10,150 Rubbermaid, Inc........................................................................ 253,750
9,600 Tupperware Corp........................................................................ 267,600
------------
1,058,025
------------
INSURANCE BROKERS (0.4%)
4,500 Aon Corp............................................................................... 263,812
3,600 Marsh & McLennan Companies, Inc........................................................ 268,425
------------
532,237
------------
INVESTMENT BANKING/BROKERAGE (0.4%)
3,800 Merrill Lynch & Co., Inc............................................................... 277,162
7,350 Schwab (Charles) Corp.................................................................. 308,241
------------
585,403
------------
LEISURE TIME - PRODUCTS (0.6%)
8,500 Brunswick Corp......................................................................... 257,656
9,300 Hasbro, Inc............................................................................ 292,950
7,400 Mattel, Inc............................................................................ 275,650
------------
826,256
------------
LIFE & HEALTH INSURANCE (1.1%)
3,900 Aetna, Inc............................................................................. 275,194
6,000 Conseco, Inc........................................................................... 272,625
3,400 Jefferson-Pilot Corp................................................................... 264,775
6,000 Torchmark Corp......................................................................... 252,375
2,500 Transamerica Corp...................................................................... 266,250
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
5,100 UNUM Corp.............................................................................. $ 277,312
------------
1,608,531
------------
LODGING - HOTELS (0.5%)
8,700 Hilton Hotels Corp..................................................................... 258,825
3,500 ITT Corp.*............................................................................. 290,062
3,500 Marriot International, Inc............................................................. 242,375
------------
791,262
------------
MACHINERY - DIVERSIFIED (1.9%)
4,400 Case Corp.............................................................................. 265,925
5,700 Caterpillar Inc........................................................................ 276,806
10,500 Cincinnati Milacron, Inc............................................................... 272,344
5,300 Cooper Industries, Inc................................................................. 259,700
4,600 Deere & Co............................................................................. 268,237
7,200 Dover Corp............................................................................. 260,100
7,200 Harnischfeger Industries, Inc.......................................................... 254,250
6,600 Ingersoll-Rand Co...................................................................... 267,300
2,400 NACCO Industries, Inc. (Class A)....................................................... 257,250
7,400 Timken Co.............................................................................. 254,375
------------
2,636,287
------------
MANUFACTURING - DIVERSIFIED (2.6%)
5,500 Aeroquip-Vickers, Inc.................................................................. 269,844
7,000 AlliedSignal, Inc...................................................................... 272,562
7,100 Corning, Inc........................................................................... 263,588
6,100 Crane Co............................................................................... 264,588
2,900 Eaton Corp............................................................................. 258,825
4,700 Illinois Tool Works Inc................................................................ 282,588
5,500 Johnson Controls, Inc.................................................................. 262,625
3,100 Minnesota Mining & Manufacturing Co.................................................... 254,394
5,200 National Service Industries, Inc....................................................... 257,725
6,700 Tenneco, Inc........................................................................... 264,650
4,300 Textron Inc............................................................................ 268,750
6,500 Thermo Electron Corp.*................................................................. 289,250
5,800 Tyco International Ltd................................................................. 261,363
3,700 United Technologies Corp............................................................... 269,406
------------
3,740,158
------------
MANUFACTURING - SPECIALIZED (0.9%)
6,000 Avery Dennison Corp.................................................................... 268,500
5,400 Briggs & Stratton Corp................................................................. 262,238
7,300 Millipore Corp......................................................................... 247,744
12,500 Pall Corp.............................................................................. 258,594
5,550 Parker-Hannifin Corp................................................................... 254,606
------------
1,291,682
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
89
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
MEDICAL PRODUCTS & SUPPLIES (1.9%)
9,000 Bard (C.R.), Inc....................................................................... $ 281,813
6,700 Bausch & Lomb, Inc..................................................................... 265,488
5,300 Baxter International, Inc.............................................................. 267,319
5,000 Becton, Dickinson & Co................................................................. 250,000
11,500 Biomet, Inc............................................................................ 293,250
5,500 Boston Scientific Corp.*............................................................... 252,313
4,800 Guidant Corp........................................................................... 298,800
5,400 Medtronic, Inc......................................................................... 282,488
8,700 St. Jude Medical, Inc.*................................................................ 265,350
9,500 United States Surgical Corp............................................................ 278,469
------------
2,735,290
------------
METALS & MINING (0.9%)
11,400 ASARCO, Inc............................................................................ 255,788
17,000 Cyprus Amax Minerals Co................................................................ 261,375
16,500 Freeport-McMoran Copper & Gold, Inc. (Class B)......................................... 259,875
14,900 Inco Ltd. (Canada)..................................................................... 253,300
4,100 Phelps Dodge Corp...................................................................... 255,225
------------
1,285,563
------------
MULTI-LINE INSURANCE (1.1%)
2,350 American International Group, Inc...................................................... 255,563
1,500 CIGNA Corp............................................................................. 259,594
3,000 Hartford Financial Services Group Inc. (Note 3)........................................ 280,688
3,400 Lincoln National Corp.................................................................. 265,625
2,400 Loews Corp............................................................................. 254,700
5,500 Travelers Group, Inc................................................................... 296,313
------------
1,612,483
------------
OFFICE EQUIPMENT & SUPPLIES (0.4%)
18,100 Moore Corp. Ltd. (Canada).............................................................. 273,763
3,000 Pitney Bowes, Inc...................................................................... 269,813
------------
543,576
------------
OIL & GAS - EXPLORATION & PRODUCTION (0.2%)
2,800 Burlington Northern Santa Fe Corp...................................................... 260,225
------------
OIL & GAS - REFINING & MARKETING (0.2%)
5,000 Ashland, Inc........................................................................... 268,438
------------
OIL & GAS DRILLING (1.3%)
5,900 Baker Hughes, Inc...................................................................... 257,388
6,300 Dresser Industries, Inc................................................................ 264,206
5,400 Halliburton Co......................................................................... 280,463
4,000 Helmerich & Payne, Inc................................................................. 271,500
9,200 Rowan Companies, Inc.*................................................................. 280,600
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3,400 Schlumberger, Ltd...................................................................... $ 273,700
3,800 Western Atlas, Inc.*................................................................... 281,200
------------
1,909,057
------------
OIL - EXPLORATION & PRODUCTION (0.8%)
4,400 Anardarko Petroleum Corp............................................................... 267,025
7,500 Apache Corp............................................................................ 262,969
6,600 Burlington Resources, Inc.............................................................. 295,763
11,100 Oryx Energy Co.*....................................................................... 283,050
------------
1,108,807
------------
OIL INTEGRATED - DOMESTIC (1.9%)
4,700 Amerada Hess Corp...................................................................... 257,913
3,300 Atlantic Richfield Co.................................................................. 264,413
4,200 Kerr-McGee Corp........................................................................ 265,913
9,600 Occidental Petroleum Corp.............................................................. 281,400
3,800 Pennzoil Co............................................................................ 253,888
5,400 Phillips Petroleum Co.................................................................. 262,575
6,300 Sun Co., Inc........................................................................... 264,994
11,000 Union Pacific Resources Group, Inc..................................................... 266,750
6,800 Unocal Corp............................................................................ 263,925
8,300 USX-Marathon Group..................................................................... 280,125
------------
2,661,896
------------
OIL INTEGRATED - INTERNATIONAL (1.1%)
3,100 Amoco Corp............................................................................. 263,888
3,200 Chevron Corp........................................................................... 246,400
4,200 Exxon Corp............................................................................. 256,988
3,600 Mobil Corp............................................................................. 259,875
4,800 Royal Dutch Petroleum Co. (ADR) (Netherlands).......................................... 260,100
4,500 Texaco, Inc............................................................................ 244,688
------------
1,531,939
------------
PAPER & FOREST PRODUCTS (1.8%)
8,200 Boise Cascade Corp..................................................................... 248,050
5,900 Champion International Corp............................................................ 267,344
4,300 Georgia-Pacific Corp................................................................... 261,225
6,000 International Paper Co................................................................. 258,750
13,600 Louisiana-Pacific Corp................................................................. 258,400
9,000 Mead Corp.............................................................................. 252,000
6,200 Potlatch Corp.......................................................................... 266,600
8,200 Westvaco Corp.......................................................................... 257,788
5,300 Weyerhaeuser Co........................................................................ 260,031
8,000 Willamette Industries, Inc............................................................. 257,500
------------
2,587,688
------------
PERSONAL CARE (0.5%)
7,900 Alberto-Culver Co. (Class B)........................................................... 253,294
4,000 Avon Products, Inc..................................................................... 245,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
90
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
2,800 Gillette Co............................................................................ $ 281,225
------------
780,019
------------
PHOTOGRAPHY/IMAGING (0.8%)
4,300 Eastman Kodak Co....................................................................... 261,494
10,000 IKON Office Solutions, Inc............................................................. 281,250
5,100 Polaroid Corp.......................................................................... 248,306
3,700 Xerox Corp............................................................................. 273,106
------------
1,064,156
------------
PROPERTY - CASUALTY INSURANCE (1.5%)
3,100 Allstate Corp.......................................................................... 281,713
3,500 Chubb Corp............................................................................. 264,688
1,900 Cincinnati Financial Corp.............................................................. 266,950
1,200 General Re Corp........................................................................ 254,400
2,300 Progressive Corp....................................................................... 275,713
5,200 Safeco Corp............................................................................ 252,850
3,100 St. Paul Companies, Inc................................................................ 254,394
11,200 USF&G Corp............................................................................. 247,100
------------
2,097,808
------------
PUBLISHING (0.8%)
5,100 Dow Jones & Co., Inc................................................................... 273,806
3,700 McGraw-Hill, Inc....................................................................... 273,800
7,400 Meredith Corp.......................................................................... 264,088
4,800 Times Mirror Co. (Class A)............................................................. 295,200
------------
1,106,894
------------
PUBLISHING - NEWSPAPER (0.8%)
4,600 Gannett Co., Inc....................................................................... 284,338
5,000 Knight-Ridder, Inc..................................................................... 260,000
4,400 New York Times Co. (Class A)........................................................... 290,950
4,600 Tribune Co............................................................................. 286,350
------------
1,121,638
------------
RAILROADS (0.6%)
4,700 CSX Corp............................................................................... 253,800
8,600 Norfolk Southern Corp.................................................................. 264,988
4,200 Union Pacific Corp..................................................................... 262,238
------------
781,026
------------
RESTAURANTS (0.7%)
21,500 Darden Restaurants, Inc................................................................ 268,750
5,400 McDonald's Corp........................................................................ 257,850
9,000 TRICON Global Restaurants, Inc.*....................................................... 261,563
11,200 Wendy's International, Inc............................................................. 269,500
------------
1,057,663
------------
RETAIL - BUILDING SUPPLIES (0.6%)
4,500 Home Depot, Inc........................................................................ 264,938
6,300 Lowe's Companies, Inc.................................................................. 300,431
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
9,800 Sherwin-Williams Co.................................................................... $ 271,950
------------
837,319
------------
RETAIL - COMPUTERS & ELECTRONICS (0.4%)
7,500 Circuit City Stores, Inc............................................................... 266,719
6,800 Tandy Corp............................................................................. 262,225
------------
528,944
------------
RETAIL - DEPARTMENT STORES (1.3%)
8,000 Dillard Department Stores, Inc. (Class A).............................................. 282,000
6,100 Federated Department Stores, Inc.*..................................................... 262,681
4,900 Harcourt General, Inc.................................................................. 268,275
5,100 May Department Stores Co............................................................... 268,706
4,400 Mercantile Stores Co., Inc............................................................. 267,850
4,400 Nordstrom, Inc......................................................................... 264,550
4,400 Penney (J.C.) Co., Inc................................................................. 265,375
------------
1,879,437
------------
RETAIL - DRUG STORES (0.8%)
4,100 CVS Corp............................................................................... 262,656
8,900 Longs Drug Stores Corp................................................................. 285,913
4,400 Rite Aid Corp.......................................................................... 258,225
9,100 Walgreen Co............................................................................ 285,513
------------
1,092,307
------------
RETAIL - FOOD CHAINS (1.2%)
6,300 Albertson's, Inc....................................................................... 298,463
12,600 American Stores Co..................................................................... 259,088
7,500 Giant Food, Inc. (Class A)............................................................. 252,656
8,500 Great Atlantic & Pacific Tea Co., Inc.................................................. 252,344
8,400 Kroger Co.*............................................................................ 310,275
6,700 Winn-Dixie Stores, Inc................................................................. 292,706
------------
1,665,532
------------
RETAIL - GENERAL MERCHANDISE (1.0%)
6,200 Costco Companies, Inc.*................................................................ 276,288
4,200 Dayton-Hudson Corp..................................................................... 283,500
23,000 Kmart Corp.*........................................................................... 265,938
6,200 Sears, Roebuck & Co.................................................................... 280,550
6,600 Wal-Mart Stores, Inc. (Class A)........................................................ 260,288
------------
1,366,564
------------
RETAIL - SPECIALTY (0.8%)
8,900 AutoZone, Inc.*........................................................................ 258,100
11,500 Pep Boys-Manny, Moe & Jack............................................................. 274,563
9,000 Toys 'R' Us, Inc.*..................................................................... 282,938
12,600 Woolworth Corp.*....................................................................... 256,725
------------
1,072,326
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
91
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL - SPECIALTY APPAREL (0.8%)
52,000 Charming Shoppes, Inc.*................................................................ $ 240,500
7,950 Gap, Inc............................................................................... 281,728
10,300 Limited (The), Inc..................................................................... 262,650
8,400 TJX Companies, Inc..................................................................... 288,750
------------
1,073,628
------------
SAVINGS & LOAN COMPANIES (0.6%)
4,300 Ahmanson (H.F.) & Co................................................................... 287,831
2,900 Golden West Financial Corp............................................................. 283,656
4,180 Washington Mutual, Inc................................................................. 266,475
------------
837,962
------------
SEMICONDUCTOR EQUIPMENT (0.4%)
8,700 Applied Materials, Inc.*............................................................... 261,544
6,800 KLA-Tencor Corp.*...................................................................... 262,225
------------
523,769
------------
SPECIALTY PRINTING (0.5%)
7,300 Deluxe Corp............................................................................ 251,850
7,000 Donnelley (R.R.) & Sons Co............................................................. 260,750
12,400 Harland (John H.) Co................................................................... 260,400
------------
773,000
------------
STEEL & IRON (1.3%)
9,900 Allegheny Teledyne Inc................................................................. 256,163
55,000 Armco, Inc............................................................................. 271,563
28,900 Bethlehem Steel Corp.*................................................................. 249,263
15,900 Inland Steel Industries, Inc........................................................... 272,288
5,700 Nucor Corp............................................................................. 275,381
9,500 USX-U.S. Steel Group, Inc.............................................................. 296,875
16,300 Worthington Industries, Inc............................................................ 266,913
------------
1,888,446
------------
TELECOMMUNICATIONS - CELLULAR/WIRELESS (0.2%)
7,000 Airtouch Communications, Inc.*......................................................... 290,938
------------
TELECOMMUNICATIONS - LONG DISTANCE (0.8%)
4,500 AT&T Corp.............................................................................. 275,625
6,700 MCI Communications Corp................................................................ 286,844
4,700 Sprint Corp............................................................................ 275,538
8,300 WorldCom, Inc.*........................................................................ 251,075
------------
1,089,082
------------
TELEPHONES (1.6%)
7,100 ALLTEL Corp............................................................................ 291,544
3,500 Ameritech Corp......................................................................... 281,750
3,200 Bell Atlantic Corp..................................................................... 291,200
5,100 BellSouth Corp......................................................................... 287,194
10,600 Frontier Corp.......................................................................... 255,063
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
5,700 GTE Corp............................................................................... $ 297,825
3,900 SBC Communications, Inc................................................................ 285,675
6,300 U.S. West Communications Group, Inc.................................................... 284,288
------------
2,274,539
------------
TEXTILES - APPAREL (0.7%)
10,300 Fruit of the Loom, Inc. (Class A)*..................................................... 263,938
6,400 Liz Claiborne, Inc..................................................................... 267,600
9,400 Russell Corp........................................................................... 249,688
5,600 VF Corp................................................................................ 257,250
------------
1,038,476
------------
TEXTILES - HOME FURNISHINGS (0.2%)
5,200 Springs Industries, Inc. (Class A)..................................................... 270,400
------------
TOBACCO (0.4%)
6,000 Philip Morris Companies, Inc........................................................... 271,875
7,900 UST, Inc............................................................................... 291,806
------------
563,681
------------
TRUCKERS (0.4%)
5,600 Caliber System, Inc.................................................................... 272,650
8,200 Ryder System, Inc...................................................................... 268,550
------------
541,200
------------
UTILITIES - ELECTRIC (5.2%)
5,200 American Electric Power Co., Inc....................................................... 268,450
8,600 Baltimore Gas & Electric Co............................................................ 292,938
6,700 Carolina Power & Light Co.............................................................. 284,331
10,600 Central & South West Corp.............................................................. 286,863
7,400 CINergy Corp........................................................................... 283,513
7,000 Consolidated Edison Co. of New York, Inc............................................... 287,000
6,400 Dominion Resources, Inc................................................................ 272,400
8,000 DTE Energy Co.......................................................................... 277,500
5,000 Duke Power Co.......................................................................... 276,875
10,000 Edison International................................................................... 271,875
9,800 Entergy Corp........................................................................... 293,388
10,100 FirstEnergy Corp.*..................................................................... 292,900
4,800 FPL Group, Inc......................................................................... 284,100
6,700 GPU, Inc............................................................................... 282,238
11,000 Houston Industries, Inc................................................................ 293,563
26,700 Niagara Mohawk Power Corp.*............................................................ 280,350
4,900 Northern States Power Co............................................................... 285,425
10,600 PacifiCorp............................................................................. 289,513
11,200 PECO Energy Co......................................................................... 271,600
9,500 PG & E Corp............................................................................ 289,156
11,200 PP&L Resources, Inc.................................................................... 268,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
92
<PAGE>
VALUE-ADDED MARKET
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
9,300 Public Service Enterprise Group, Inc................................................... $ 294,694
10,800 Southern Co............................................................................ 279,450
7,000 Texas Utilities Co..................................................................... 290,938
9,500 Unicom Corp............................................................................ 292,125
6,500 Union Electric Co...................................................................... 281,125
------------
7,370,410
------------
UTILITIES - NATURAL GAS (2.1%)
4,200 Coastal Corp........................................................................... 260,138
3,500 Columbia Gas System, Inc............................................................... 274,969
4,400 Consolidated Natural Gas Co............................................................ 266,200
6,500 Eastern Enterprises.................................................................... 292,500
6,500 Enron Corp............................................................................. 270,156
6,400 NICOR, Inc............................................................................. 270,000
7,200 ONEOK, Inc............................................................................. 290,700
7,300 Pacific Enterprises.................................................................... 274,663
6,600 Peoples Energy Corp.................................................................... 259,875
5,800 Sonat, Inc............................................................................. 265,350
10,400 Williams Companies, Inc................................................................ 295,100
------------
3,019,651
------------
WASTE MANAGEMENT (0.4%)
6,900 Browning-Ferris Industries, Inc........................................................ 255,300
9,900 Waste Management Inc................................................................... 272,250
------------
527,550
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $107,331,778)......................................................... 135,258,781
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS (6.7%)
U.S. GOVERNMENT AGENCIES (a) (6.3%)
$ 5,400 Federal Home Loan Mortgage Corp. 6.00% due 01/02/98.................................... 5,399,100
3,500 Federal National Mortgage Assoc. 5.75-5.76% due 01/05/98-01/08/98...................... 3,497,283
------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $8,896,383)............................................................ 8,896,383
------------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (0.4%)
$ 564 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $563,851) (b)
(IDENTIFIED COST $563,729)........................................................... $ 563,729
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $9,460,112)........................................................... 9,460,112
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $116,791,890) (C)........................................................ 102.4 % 144,718,893
LIABILITIES IN EXCESS OF OTHER ASSETS..................................................... (2.4) (3,402,720)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 141,316,173
------ -------------
------ -------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $559,495 U.S. Treasury Note 6.25% due 10/31/01 valued at
$575,004.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $31,397,848 and the
aggregate gross unrealized depreciation is $3,470,845, resulting in net
unrealized appreciation of $27,927,003.
SEE NOTES TO FINANCIAL STATEMENTS
93
<PAGE>
CORE EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (97.4%)
AEROSPACE (2.8%)
23,400 Boeing Co............................................................................... $ 1,145,137
-----------
AIRLINES (6.7%)
3,000 AMR Corp.*.............................................................................. 385,500
12,000 Delta Air Lines, Inc.................................................................... 1,428,000
9,600 UAL Corp.*.............................................................................. 888,000
-----------
2,701,500
-----------
AUTO PARTS - ORIGINAL EQUIPMENT (4.4%)
21,100 Lear Corp.*............................................................................. 1,002,250
12,100 Magna International, Inc. (Class A) (Canada)............................................ 760,031
-----------
1,762,281
-----------
BANKS - MONEY CENTER (0.5%)
1,700 Citicorp................................................................................ 214,944
-----------
BANKS - REGIONAL (3.5%)
4,200 Wells Fargo & Co........................................................................ 1,425,637
-----------
BEVERAGES - SOFT DRINKS (1.9%)
21,400 PepsiCo, Inc............................................................................ 779,762
-----------
BROKERAGE (2.6%)
14,500 Merrill Lynch & Co., Inc................................................................ 1,057,594
-----------
CABLE & TELECOMMUNICATIONS (2.4%)
23,700 Cox Communications, Inc. (Class A)*..................................................... 949,481
-----------
COMMERCIAL SERVICES (1.8%)
19,800 Corrections Corp. of America*........................................................... 733,837
-----------
COMMUNICATIONS - EQUIPMENT/MANUFACTURERS (1.7%)
19,300 3Com Corp.*............................................................................. 673,087
-----------
COMMUNICATIONS EQUIPMENT (5.6%)
17,220 Ascend Communications, Inc.*............................................................ 422,966
32,550 Cisco Systems, Inc.*.................................................................... 1,814,663
-----------
2,237,629
-----------
COMPUTER SERVICES (3.0%)
14,400 Computer Sciences Corp.*................................................................ 1,202,400
-----------
COMPUTER SOFTWARE (4.1%)
12,700 Microsoft Corp.*........................................................................ 1,640,681
-----------
COMPUTERS - SYSTEMS (3.2%)
32,900 Tandy Corp.............................................................................. 1,268,706
-----------
ELECTRICAL EQUIPMENT (4.9%)
45,293 CBS Corp................................................................................ 1,333,313
9,400 Honeywell, Inc.......................................................................... 643,900
-----------
1,977,213
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ENTERTAINMENT/GAMING (1.6%)
27,600 Mirage Resorts, Inc.*................................................................... $ 627,900
-----------
FINANCIAL - MISCELLANEOUS (6.4%)
14,600 Associates First Capital Corp.
(Class A)............................................................................. 1,038,425
18,900 Fannie Mae.............................................................................. 1,078,481
4,900 Golden West Financial Corp.............................................................. 479,281
-----------
2,596,187
-----------
FOODS (1.7%)
14,000 Kellogg Co.............................................................................. 694,750
-----------
HEALTHCARE - DIVERSIFIED (2.7%)
8,800 Warner-Lambert Co....................................................................... 1,091,200
-----------
HEALTHCARE - DRUGS (3.3%)
19,100 Lilly (Eli) & Co........................................................................ 1,329,838
-----------
HEALTHCARE - MISCELLANEOUS (1.5%)
12,400 United Healthcare Corp.................................................................. 616,125
-----------
INSURANCE BROKERS (2.2%)
11,800 Marsh & McLennan Companies, Inc......................................................... 879,838
-----------
MEDIA GROUP (4.2%)
27,000 Time Warner, Inc........................................................................ 1,674,000
-----------
OIL INTEGRATED - INTERNATIONAL (0.8%)
4,000 Amoco Corp.............................................................................. 340,500
-----------
PHARMACEUTICALS (1.5%)
8,900 Johnson & Johnson....................................................................... 586,288
-----------
RAILROADS (2.4%)
10,540 Burlington Northern Santa Fe Corp....................................................... 979,561
-----------
RESTAURANTS (0.2%)
2,130 Tricon Global Restaurants, Inc.*........................................................ 61,903
-----------
RETAIL - SPECIALTY (4.0%)
27,650 Home Depot, Inc......................................................................... 1,627,894
-----------
SEMICONDUCTORS (4.8%)
27,800 Intel Corp.............................................................................. 1,951,213
-----------
SOAP & HOUSEHOLD PRODUCTS (3.7%)
18,600 Procter & Gamble Co..................................................................... 1,484,513
-----------
TELECOMMUNICATIONS (1.4%)
6,900 Lucent Technologies Inc................................................................. 551,138
-----------
TOBACCO (2.7%)
24,100 Philip Morris Companies, Inc............................................................ 1,092,031
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
94
<PAGE>
CORE EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES - TELEPHONE (3.2%)
23,000 BellSouth Corp.......................................................................... $ 1,295,188
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $33,184,925)........................................................... 39,249,956
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENT (4.3%)
REPURCHASE AGREEMENT
$ 1,746 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $1,746,970) (a)
(IDENTIFIED COST $1,746,594).......................................................... 1,746,594
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $34,931,519) (b).......................................................... 101.7 % 40,996,550
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.7) (685,437)
------ ------------
NET ASSETS................................................................................. 100.0 % $ 40,311,113
------ ------------
------ ------------
</TABLE>
- ---------------------
* Non-income producing security.
(a) Collateralized by $461,638 U.S. Treasury Note 6.50% due 08/15/05 valued at
$492,942 and $1,242,922 U.S. Treasury Note 6.375% due 09/30/01 valued at
$1,288,584.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $6,839,795 and the
aggregate gross unrealized depreciation is $774,764, resulting in net
unrealized appreciation of $6,065,031.
SEE NOTES TO FINANCIAL STATEMENTS
95
<PAGE>
AMERICAN VALUE
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (87.8%)
AGRICULTURE RELATED (1.2%)
20,000 Dekalb Genetics Corp. (Class B)........................................................ $ 785,000
26,333 Delta & Pine Land Co................................................................... 803,156
11,000 Pioneer Hi-Bred International, Inc..................................................... 1,179,750
------------
2,767,906
------------
AUTO RELATED (0.1%)
7,000 Budget Group, Inc. (Class A)*.......................................................... 241,937
------------
BANKS (8.3%)
16,200 AmSouth Bancorporation................................................................. 879,862
4,400 City National Corp..................................................................... 162,525
5,900 Comerica, Inc.......................................................................... 532,475
765,000 Credito Italiano SpA (Italy)........................................................... 2,359,602
17,200 Crestar Financial Corp................................................................. 980,400
20,000 First Security Corp.................................................................... 837,500
60,000 Hibernia Corp. (Class A)............................................................... 1,128,750
20,000 Mellon Bank Corp....................................................................... 1,212,500
16,000 Northern Trust Corp.................................................................... 1,116,000
64,000 Norwest Corp........................................................................... 2,472,000
20,000 PNC Bank Corp.......................................................................... 1,141,250
4,000 Southtrust Corp........................................................................ 253,000
7,500 Summit Bancorp......................................................................... 399,375
7,500 Union Planters Corp.................................................................... 509,531
9,000 Wells Fargo & Co....................................................................... 3,054,937
7,500 Westamerica Bancorporation............................................................. 766,875
30,000 Zions Bancorporation................................................................... 1,350,000
------------
19,156,582
------------
BIOTECHNOLOGY (2.1%)
49,000 Centocor, Inc.*........................................................................ 1,629,250
11,000 Dura Pharmaceuticals, Inc.*............................................................ 504,625
30,000 Genzyme Corp. General Division*........................................................ 828,750
19,000 Gilead Sciences, Inc.*................................................................. 726,750
30,000 IDEC Pharmaceuticals Corp.*............................................................ 1,031,250
------------
4,720,625
------------
CABLE/CELLULAR (4.4%)
80,000 Comcast Corp. (Class A Special)........................................................ 2,520,000
17,000 Comcast Corp. (Class A)................................................................ 539,750
30,000 Cox Communications, Inc. (Class A)*.................................................... 1,201,875
30,000 HSN, Inc.*............................................................................. 1,545,000
40,000 Tele-Communications, Inc. (Class A)*................................................... 1,115,000
50,000 Time Warner, Inc....................................................................... 3,100,000
------------
10,021,625
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CAPITAL GOODS (0.6%)
18,000 General Electric Co.................................................................... $ 1,320,750
------------
COMMUNICATIONS EQUIPMENT (0.8%)
20,000 CIENA Corp.*........................................................................... 1,222,500
10,000 Cisco Systems, Inc.*................................................................... 557,500
------------
1,780,000
------------
COMPUTER SERVICES (0.7%)
30,000 Paychex, Inc........................................................................... 1,518,750
------------
COMPUTER SOFTWARE (4.7%)
17,000 BMC Software, Inc.*.................................................................... 1,113,500
5,000 Citrix Systems, Inc.*.................................................................. 380,000
45,000 Computer Associates International, Inc................................................. 2,379,375
25,000 Compuware Corp.*....................................................................... 800,000
33,000 Manugistics Group, Inc.*............................................................... 1,464,375
50,000 PeopleSoft, Inc.*...................................................................... 1,937,500
30,000 Platinum Technology, Inc.*............................................................. 847,500
2,000 SAP AG (Pref.) (Germany)............................................................... 654,616
24,000 Veritas Software Corp.*................................................................ 1,215,000
------------
10,791,866
------------
CONSUMER - NONCYCLICAL (3.5%)
20,000 Alberto-Culver Co. (Class B)........................................................... 641,250
24,000 Clorox Co.............................................................................. 1,897,500
3,200 Coca Cola Co........................................................................... 213,200
30,000 Heinz (H.J.) Co........................................................................ 1,524,375
32,000 Nabisco Holdings Corp. (Class A)....................................................... 1,550,000
6,000 Procter & Gamble Co.................................................................... 478,875
25,600 Quaker Oats Company (The).............................................................. 1,350,400
9,000 Sara Lee Corp.......................................................................... 506,812
------------
8,162,412
------------
CONSUMER BUSINESS SERVICES (2.4%)
38,000 Automatic Data Processing, Inc......................................................... 2,332,250
45,000 Corrections Corp. of America*.......................................................... 1,667,812
35,000 Sysco Corp............................................................................. 1,594,687
------------
5,594,749
------------
CONSUMER PRODUCTS (8.1%)
35,000 Albertson's, Inc....................................................................... 1,658,125
101,250 Arbor Drugs, Inc....................................................................... 1,873,125
33,000 CVS Corp............................................................................... 2,114,062
30,000 Dominick's Supermarkets, Inc.*......................................................... 1,095,000
60,000 Fred Meyer, Inc.*...................................................................... 2,182,500
60,000 Kroger Co.*............................................................................ 2,216,250
35,000 Rite Aid Corp.......................................................................... 2,054,063
38,000 Safeway, Inc.*......................................................................... 2,403,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
96
<PAGE>
AMERICAN VALUE
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
18,000 Sunbeam Corporation, Inc............................................................... $ 758,250
69,000 Walgreen Co............................................................................ 2,164,875
------------
18,519,750
------------
DRUGS (6.2%)
50,000 Biochem Pharma, Inc. (Canada).......................................................... 1,040,625
23,000 Bristol-Myers Squibb Co................................................................ 2,176,375
12,000 Cardinal Health, Inc................................................................... 901,500
30,000 Lilly (Eli) & Co....................................................................... 2,088,750
25,000 Medicis Pharmaceutical Corp. (Class A)*................................................ 1,281,250
550 Novartis AG (Switzerland).............................................................. 891,892
27,000 Pfizer, Inc............................................................................ 2,013,188
35,000 Schering-Plough Corp................................................................... 2,174,375
14,000 Warner-Lambert Co...................................................................... 1,736,000
------------
14,303,955
------------
FINANCIAL - MISCELLANEOUS (6.9%)
15,000 American Express Co.................................................................... 1,338,750
9,000 Associates First Capital Corp. (Class A)............................................... 640,125
11,000 Donaldson, Lufkin & Jenrette, Inc...................................................... 874,500
26,450 Edwards (A.G.), Inc.................................................................... 1,051,388
45,000 Fannie Mae............................................................................. 2,567,813
60,000 Freddie Mac............................................................................ 2,516,250
40,000 Hambrecht & Quist Group*............................................................... 1,460,000
1,100 Legg Mason, Inc........................................................................ 61,531
20,000 Lehman Brothers Holdings, Inc.......................................................... 1,020,000
31,000 Merrill Lynch & Co., Inc............................................................... 2,261,063
30,000 Paine Webber Group, Inc................................................................ 1,036,875
4,000 Price (T. Rowe) Associates, Inc........................................................ 251,500
20,000 Providian Financial Corp............................................................... 903,750
------------
15,983,545
------------
HEALTHCARE PRODUCTS & SERVICES (3.6%)
12,900 Capital Senior Living Corp.*........................................................... 134,644
46,000 HBO & Co............................................................................... 2,205,125
70,500 Health Management Associates, Inc. (Class A)*.......................................... 1,780,125
63,000 Healthsouth Corp.*..................................................................... 1,748,250
30,000 Renal Treatment Centers, Inc.*......................................................... 1,083,750
50,000 Total Renal Care Holdings, Inc.*....................................................... 1,375,000
------------
8,326,894
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE (3.0%)
20,000 Allstate Corp.......................................................................... $ 1,817,500
10,000 Equitable Companies, Inc............................................................... 497,500
6,400 Marsh & McLennan Companies, Inc........................................................ 477,200
18,400 SunAmerica, Inc........................................................................ 786,600
12,500 Torchmark Corp......................................................................... 525,781
50,000 Travelers Group, Inc................................................................... 2,693,750
------------
6,798,331
------------
INTERNET (2.6%)
32,000 America Online, Inc.*.................................................................. 2,854,000
20,000 Check Point Software Technologies Ltd. (Israel)*....................................... 815,000
20,000 CheckFree Holdings Corp.*.............................................................. 540,000
22,000 Excite, Inc.*.......................................................................... 660,000
15,000 Yahoo! Inc.*........................................................................... 1,038,750
------------
5,907,750
------------
MEDIA GROUP (7.6%)
90,000 CBS Corp............................................................................... 2,649,375
35,000 Chancellor Media Corp.*................................................................ 2,611,875
19,400 Clear Channel Communications, Inc.*.................................................... 1,541,088
20,000 Gannett Co., Inc....................................................................... 1,236,250
20,000 Jacor Communications, Inc.*............................................................ 1,062,500
20,000 News Corp., Ltd. (ADR) (Australia)..................................................... 446,250
39,000 Outdoor Systems, Inc.*................................................................. 1,496,625
6,000 Telemundo Group, Inc. (Class A)*....................................................... 245,250
25,600 Tribune Co............................................................................. 1,593,600
16,000 Universal Outdoor Holdings, Inc.*...................................................... 832,000
15,800 Univision Communications, Inc. (Class A)*.............................................. 1,103,038
40,000 Viacom, Inc. (Class B)*................................................................ 1,657,500
12,000 Walt Disney Co......................................................................... 1,188,750
------------
17,664,101
------------
MEDICAL SUPPLIES (2.5%)
26,000 Guidant Corp........................................................................... 1,618,500
25,000 Medtronic, Inc......................................................................... 1,307,813
40,000 Mentor Corp............................................................................ 1,460,000
14,400 Sofamor Danek Group, Inc.*............................................................. 936,900
9,100 Thermo Electron Corp.*................................................................. 404,950
------------
5,728,163
------------
MISCELLANEOUS (1.1%)
72,093 Cendant Corp.*......................................................................... 2,478,197
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
97
<PAGE>
AMERICAN VALUE
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
MULTI-LINE INSURANCE (0.3%)
10,000 Lincoln National Corp.................................................................. $ 781,250
------------
REAL ESTATE INVESTMENT TRUST (0.4%)
20,000 Reckson Associates Realty Corp......................................................... 507,500
13,000 Security Capital Group Inc. (Class B)*................................................. 422,500
------------
930,000
------------
RESTAURANTS (0.3%)
22,500 Cracker Barrel Old Country Store, Inc.................................................. 750,938
------------
RETAIL (7.9%)
20,000 Barnes & Noble, Inc.*.................................................................. 667,500
82,000 Costco Companies, Inc.*................................................................ 3,654,125
35,200 Dayton-Hudson Corp..................................................................... 2,376,000
36,250 Dollar General Corp.................................................................... 1,314,063
48,000 Family Dollar Stores, Inc.............................................................. 1,407,000
32,000 Gap, Inc............................................................................... 1,134,000
20,000 General Nutrition Companies*........................................................... 677,500
40,000 Home Depot, Inc........................................................................ 2,355,000
21,700 Lowe's Companies, Inc.................................................................. 1,034,819
25,000 Mattel, Inc............................................................................ 931,250
40,000 Proffitt's, Inc.*...................................................................... 1,137,500
40,800 Wal-Mart Stores, Inc................................................................... 1,609,050
------------
18,297,807
------------
SAVINGS & LOAN COMPANIES (1.6%)
17,100 Ahmanson (H.F.) & Co................................................................... 1,144,631
37,500 Dime Bancorp, Inc...................................................................... 1,134,375
21,000 Washington Mutual, Inc................................................................. 1,338,750
------------
3,617,756
------------
TELECOMMUNICATIONS (1.5%)
4,000 Intermedia Communications Inc.*........................................................ 242,000
40,000 LCI International, Inc.*............................................................... 1,230,000
36,000 Teleport Communications Group Inc.*.................................................... 1,975,500
------------
3,447,500
------------
TRANSPORTATION (0.8%)
29,000 US Airways Group Inc.*................................................................. 1,812,500
------------
UTILITIES (4.6%)
18,000 Ameritech Corp......................................................................... 1,449,000
20,000 Bell Atlantic Corp..................................................................... 1,820,000
21,000 Consolidated Edison Co. of New York, Inc............................................... 861,000
60,000 DPL, Inc............................................................................... 1,725,000
22,000 GTE Corp............................................................................... 1,149,500
45,000 New York State Electric & Gas Corp..................................................... 1,597,500
30,000 SCANA Corp............................................................................. 898,125
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
25,000 U.S. West Communications Group, Inc.................................................... $ 1,128,125
------------
10,628,250
------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $175,213,751)......................................................... 202,053,889
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS (8.3%)
$ 12,600 U.S. Treasury Bond 6.375%
due 08/15/27......................................................................... 13,293,378
14,400 U.S. Treasury Strip 0.00%
due 11/15/19......................................................................... 3,856,896
7,200 U.S. Treasury Strip 0.00%
due 05/15/20......................................................................... 1,871,928
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $18,181,855).......................................................... 19,022,202
------------
SHORT-TERM INVESTMENT (a) (7.2%)
U.S. GOVERNMENT AGENCY
16,500 Federal Home Loan Mortgage Corp. 6.00% due 01/02/98
(AMORTIZED COST $16,497,250)......................................................... 16,497,250
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST
$209,892,856) (B)......................................................................... 103.3 % 237,573,341
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (3.3) (7,559,707)
------ -------------
NET ASSETS................................................................................ 100.0 % $ 230,013,634
------ -------------
------ -------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $28,829,481 and the
aggregate gross unrealized depreciation is $1,148,996, resulting in net
unrealized appreciation of $27,680,485.
SEE NOTES TO FINANCIAL STATEMENTS
98
<PAGE>
MID-CAP GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (83.8%)
AEROSPACE (0.3%)
3,100 Wyman-Gordon Co.*....................................................................... $ 60,837
-----------
AGRICULTURE RELATED (2.6%)
2,300 Dekalb Genetics Corp. (Class B)......................................................... 90,275
3,733 Delta & Pine Land Co.................................................................... 113,856
2,000 Monsanto Co............................................................................. 84,000
1,900 Pioneer Hi-Bred International, Inc...................................................... 203,775
-----------
491,906
-----------
APPAREL & FOOTWEAR (0.5%)
2,200 Jones Apparel Group, Inc.*.............................................................. 94,600
-----------
AUTO RELATED (1.1%)
6,000 Budget Group, Inc. (Class A)*........................................................... 207,375
-----------
BANKS (9.3%)
2,300 AmSouth Bancorporation.................................................................. 124,919
2,000 Bay View Capital Corp................................................................... 72,500
2,300 City National Corp...................................................................... 84,956
1,300 Compass Bancshares Inc.................................................................. 56,875
2,600 Crestar Financial Corp.................................................................. 148,200
2,000 First American Corp..................................................................... 99,500
1,700 First of America Bank Corp.............................................................. 131,112
4,400 First Security Corp..................................................................... 184,250
200 First Union Corp........................................................................ 10,250
2,300 Golden State Bancorp Inc.*.............................................................. 85,962
4,200 North Fork Bancorporation, Inc.......................................................... 140,962
3,400 Southtrust Corp......................................................................... 215,050
2,200 Union Planters Corp..................................................................... 149,462
1,400 Westamerica Bancorporation.............................................................. 143,150
3,000 Zions Bancorporation.................................................................... 135,000
-----------
1,782,148
-----------
BIOTECHNOLOGY (6.2%)
14,600 Alkermes, Inc.*......................................................................... 286,525
12,300 BioChem Pharma, Inc. (Canada)*.......................................................... 255,994
5,600 Centocor, Inc.*......................................................................... 186,200
4,600 Gilead Sciences, Inc.*.................................................................. 175,950
1,800 IDEC Pharmaceuticals Corp.*............................................................. 61,875
2,000 MedImmune, Inc.*........................................................................ 85,750
4,500 Vertex Pharmaceuticals, Inc.*........................................................... 147,937
-----------
1,200,231
-----------
CABLE/CELLULAR (1.1%)
6,500 Comcast Corp. (Class A Special)......................................................... 204,750
-----------
COMMUNICATIONS EQUIPMENT (0.5%)
1,500 CIENA Corp.*............................................................................ 91,687
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE (7.9%)
2,400 Arbor Software Corp.*................................................................... $ 96,900
7,300 BEA Systems, Inc.*...................................................................... 126,381
1,800 Citrix Systems, Inc.*................................................................... 136,800
2,400 Computer Associates International, Inc.................................................. 126,900
4,400 Compuware Corp.*........................................................................ 140,800
3,900 Legato Systems, Inc.*................................................................... 170,625
5,000 Manugistics Group, Inc.*................................................................ 221,875
6,000 PeopleSoft, Inc.*....................................................................... 232,500
6,000 Software AG Systems, Inc.*.............................................................. 87,000
3,750 Veritas Software Corp.*................................................................. 189,844
-----------
1,529,625
-----------
CONSUMER - NONCYCLICAL (0.9%)
1,000 Consolidated Cigar Holdings Inc.*....................................................... 27,562
2,000 Dean Foods Co........................................................................... 119,000
1,000 Lance, Inc.............................................................................. 26,250
-----------
172,812
-----------
CONSUMER BUSINESS SERVICES (5.1%)
9,500 Allied Waste Industries, Inc.*.......................................................... 221,469
7,800 Corporate Express, Inc.*................................................................ 100,425
9,600 Corrections Corp. of America*........................................................... 355,800
4,600 Eastern Environmental Services, Inc.*................................................... 101,200
3,700 U.S.A Waste Services, Inc.*............................................................. 145,225
1,800 US Filter Corp.*........................................................................ 53,887
-----------
978,006
-----------
CONSUMER PRODUCTS (2.6%)
4,500 Arbor Drugs, Inc........................................................................ 83,250
2,200 CVS Corp................................................................................ 140,937
5,300 Dominick's Supermarkets, Inc.*.......................................................... 193,450
2,500 Kroger Co.*............................................................................. 92,344
-----------
509,981
-----------
DRUGS (2.1%)
4,200 Dura Pharmaceuticals, Inc.*............................................................. 192,675
4,200 Medicis Pharmaceutical Corp. (Class A)*................................................. 215,250
-----------
407,925
-----------
ENERGY (2.8%)
1,300 Coflexip S.A. (ADR) (France)............................................................ 72,150
1,600 Cooper Cameron Corp.*................................................................... 97,600
2,100 Falcon Drilling Company, Inc.*.......................................................... 73,631
2,400 Halter Marine Group, Inc.*.............................................................. 69,300
2,300 Marine Drilling Company, Inc.*.......................................................... 47,725
1,400 Rowan Companies, Inc.*.................................................................. 42,700
900 Smith International, Inc.*.............................................................. 55,237
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
99
<PAGE>
MID-CAP GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
1,800 Stolt Comex Seaway, S.A. (United Kingdom)*.............................................. $ 87,300
-----------
545,643
-----------
ENTERTAINMENT (0.6%)
3,000 Electronic Arts, Inc.*.................................................................. 113,438
-----------
ENTERTAINMENT/GAMING & LODGING (0.3%)
1,700 MGM Grand, Inc.*........................................................................ 61,306
-----------
FINANCIAL - MISCELLANEOUS (2.3%)
300 American Express Co..................................................................... 26,775
200 CMAC Investment Corp.................................................................... 12,075
1,750 Edwards (A.G.), Inc..................................................................... 69,563
2,100 Finova Group Inc........................................................................ 104,344
3,800 Morgan Keegan, Inc...................................................................... 96,188
2,100 Paine Webber Group, Inc................................................................. 72,581
1,400 Providian Financial Corp................................................................ 63,263
-----------
444,789
-----------
HEALTHCARE PRODUCTS & SERVICES (6.5%)
5,600 Concentra Managed Care, Inc.*........................................................... 188,300
2,000 Health Care & Retirement Corp.*......................................................... 80,500
6,300 Health Management Associates, Inc. (Class A)*........................................... 159,075
1,000 Healthsouth Corp.*...................................................................... 27,750
3,700 Horizon Health Corp.*................................................................... 84,175
5,800 IDX Systems Corp.*...................................................................... 214,600
3,300 PMR Corp.*.............................................................................. 65,588
5,900 Renal Treatment Centers, Inc.*.......................................................... 213,138
3,800 Tenet Healthcare Corp.*................................................................. 125,875
3,200 Total Renal Care Holdings, Inc.*........................................................ 88,000
-----------
1,247,001
-----------
INSURANCE (1.9%)
500 Executive Risk, Inc..................................................................... 34,906
1,600 Hartford Life, Inc. (Class A)........................................................... 72,500
2,500 HCC Insurance Holdings, Inc............................................................. 53,125
400 Protective Life Corp.................................................................... 23,900
2,800 Provident Companies, Inc................................................................ 108,150
1,400 UNUM Corp............................................................................... 76,125
-----------
368,706
-----------
INTERNET (3.8%)
1,000 America Online, Inc.*................................................................... 89,188
5,200 Check Point Software Technologies Ltd. (Israel)*........................................ 211,900
9,000 CheckFree Holdings Corp.*............................................................... 243,000
2,500 Netscape Communications Corp.*.......................................................... 60,625
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3,600 Security Dynamics Technologies, Inc.*................................................... $ 128,700
-----------
733,413
-----------
MEDIA GROUP (7.0%)
1,500 Applied Graphics Technologies, Inc.*.................................................... 79,125
1,400 Chancellor Media Corp. (Class A)*....................................................... 104,475
4,200 Hearst-Argyle Television, Inc.*......................................................... 123,375
1,800 Heftel Broadcasting Corp. (Class A)*.................................................... 84,150
3,900 Jacor Communications, Inc.*............................................................. 207,188
4,100 Outdoor Systems, Inc.*.................................................................. 157,338
900 TCA Cable TV, Inc....................................................................... 41,400
400 Telemundo Group, Inc. (Class A)*........................................................ 16,350
4,200 TV Azteca, S.A. de C.V (ADR) (Mexico)*.................................................. 94,763
2,900 Universal Outdoor Holdings, Inc.*....................................................... 150,800
1,700 Univision Communications, Inc. (Class A)*............................................... 118,681
4,800 Valassis Communications, Inc.*.......................................................... 177,600
-----------
1,355,245
-----------
MEDICAL SUPPLIES (1.5%)
600 Guidant Corp............................................................................ 37,350
6,100 Mentor Corp............................................................................. 222,650
1,000 North American Scientific, Inc.*........................................................ 22,000
-----------
282,000
-----------
MISCELLANEOUS (0.4%)
2,403 Cendant Corp.*.......................................................................... 82,603
-----------
REAL ESTATE INVESTMENT TRUST (0.3%)
3,300 Catellus Development Corp.*............................................................. 66,000
-----------
RESTAURANTS (2.4%)
8,700 Foodmaker, Inc.*........................................................................ 131,044
9,000 Showbiz Pizza Time, Inc.*............................................................... 207,000
3,000 Starbucks Corp.*........................................................................ 115,125
-----------
453,169
-----------
RETAIL (4.0%)
3,750 99 Cents Only Stores*................................................................... 110,625
3,200 Barnes & Noble, Inc.*................................................................... 106,800
4,000 Borders Group, Inc.*.................................................................... 125,250
500 Costco Companies, Inc.*................................................................. 22,281
2,300 Dollar General Corp..................................................................... 83,375
3,100 General Nutrition Companies*............................................................ 105,013
2,200 Linens 'N Things, Inc.*................................................................. 95,975
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
100
<PAGE>
MID-CAP GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4,200 Proffitt's, Inc.*....................................................................... $ 119,438
-----------
768,757
-----------
SAVINGS & LOAN COMPANIES (0.5%)
1,400 Washington Mutual, Inc.................................................................. 89,250
-----------
SEMICONDUCTORS (0.3%)
1,450 Vitesse Semiconductor Corp.*............................................................ 54,738
-----------
TELECOMMUNICATIONS (4.4%)
4,700 ICG Communications, Inc.*............................................................... 128,075
1,700 Intermedia Communications Inc.*......................................................... 102,850
4,500 LCI International, Inc.*................................................................ 138,375
1,600 Newbridge Networks Corp. (Canada)*...................................................... 55,800
3,600 Pacific Gateway Exchange, Inc.*......................................................... 193,500
4,100 Teleport Communications Group Inc.*..................................................... 224,988
-----------
843,588
-----------
TRANSPORTATION (0.5%)
3,200 Knightsbridge Tankers Ltd............................................................... 89,600
-----------
UTILITIES (4.1%)
4,000 Consolidated Edison Co. of New York, Inc................................................ 164,000
5,000 New York State Electric & Gas Corp...................................................... 177,500
4,000 Pinnacle West Capital Corp.............................................................. 169,500
5,500 SCANA Corp.............................................................................. 164,656
2,500 Texas Utilities Co...................................................................... 103,906
-----------
779,562
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $14,563,975)........................................................... 16,110,691
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS (21.7%)
U.S. GOVERNMENT AGENCY (a) (20.8%)
$ 4,000 Federal Home Loan Banks 5.75% due 01/02/98 (AMORTIZED COST $3,999,361).................. 3,999,361
-----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (0.9%)
$ 180 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $179,676) (b)
(IDENTIFIED COST $179,637)............................................................ $ 179,637
-----------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $4,178,998)............................................................ 4,178,998
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $18,742,973) (C).......................................................... 105.5 % 20,289,689
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (5.5) (1,053,654)
------ ------------
NET ASSETS................................................................................. 100.0 % $ 19,236,035
------ ------------
------ ------------
</TABLE>
- ---------------------
ADR American Depository Receipt
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $131,731 U.S. Treasury Bond 9.25% due 02/15/16 valued at
$183,230.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,953,551 and the
aggregate gross unrealized depreciation is $406,835, resulting in net
unrealized appreciation of $1,546,716.
SEE NOTES TO FINANCIAL STATEMENTS
101
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS (93.9%)
ARGENTINA (0.7%)
BANKING
16,000 Banco de Galicia y Buenos Aires S.A. de C.V. (ADR)..................................... $ 412,000
------------
BREWERY
20,000 Quilmes Industrial S.A. (ADR).......................................................... 273,750
------------
TOTAL ARGENTINA........................................................................ 685,750
------------
AUSTRALIA (1.3%)
BANKING
48,000 Westpac Banking Corp., Ltd............................................................. 306,495
------------
ENERGY
30,000 Woodside Petroleum Ltd................................................................. 211,152
------------
FINANCIAL SERVICES
120,000 Tyndall Australia Ltd.................................................................. 187,344
------------
FOODS & BEVERAGES
100,000 Goodman Fielder Ltd.................................................................... 158,722
------------
TELECOMMUNICATIONS
11,700 Telstra Corp., Ltd. (ADR)*............................................................. 488,475
------------
TOTAL AUSTRALIA........................................................................ 1,352,188
------------
BELGIUM (0.2%)
RETAIL
3,500 G.I.B. Holdings Ltd.................................................................... 169,871
------------
BRAZIL (1.6%)
BREWERY
20,000 Companhia Cervejaria Brahma (ADR)...................................................... 283,750
------------
ELECTRIC
37,500 Companhia Paranaense de Energia - Copel (ADR).......................................... 513,281
------------
TELECOMMUNICATIONS
7,300 Telecomunicacoes Brasileiras S.A. (ADR)................................................ 849,994
------------
TOTAL BRAZIL........................................................................... 1,647,025
------------
CANADA (1.5%)
BANKING
10,000 Royal Bank of Canada................................................................... 528,930
------------
COMPUTERS - SYSTEMS
10,000 Geac Computer Corp., Ltd.*............................................................. 329,532
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
DRUGS
31,500 BioChem Pharma, Inc.*.................................................................. $ 655,594
------------
TOTAL CANADA........................................................................... 1,514,056
------------
CHILE (0.5%)
AIRLINES
25,000 Linea Aerea Nacional Chile S.A. (ADR)*................................................. 340,625
------------
FOOD, BEVERAGE, TOBACCO &
HOUSEHOLD PRODUCTS
10,000 Santa Isabel S.A. (ADR)................................................................ 175,000
------------
TOTAL CHILE............................................................................ 515,625
------------
CHINA (0.4%)
TELECOMMUNICATIONS
12,350 China Telecom Ltd. (ADR)*.............................................................. 414,497
------------
DENMARK (1.0%)
PHARMACEUTICALS
5,000 Novo-Nordisk AS (Series B)............................................................. 715,443
------------
TRANSPORTATION
3,000 Kobenhavns Lufthavne AS................................................................ 361,372
------------
TOTAL DENMARK.......................................................................... 1,076,815
------------
FINLAND (0.3%)
DRUGS & HEALTHCARE
10,080 Orion-yhtymae Oy (B Shares)............................................................ 266,569
------------
MANUFACTURING
3,000 KCI Konecranes International........................................................... 99,170
------------
TOTAL FINLAND.......................................................................... 365,739
------------
FRANCE (5.5%)
AUTOMOTIVE
5,000 Compagnie Generale des Etablissements Michelin (B Shares).............................. 251,536
7,500 Valeo S.A.............................................................................. 508,301
------------
759,837
------------
BANKING
9,000 Banque Nationale de Paris.............................................................. 478,018
------------
COMPUTER SERVICES
1,800 Atos S.A.*............................................................................. 231,911
------------
ELECTRICAL EQUIPMENT
3,300 Alcatel Alsthom........................................................................ 419,143
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
102
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS
16,000 Thomson CSF............................................................................ $ 503,935
------------
ENERGY
3,800 Elf Aquitaine S.A...................................................................... 441,640
------------
FINANCIAL SERVICES
6,000 Compagnie Financiere de Paribas (A Shares)............................................. 521,003
------------
INSURANCE
11,000 AXA-UAP................................................................................ 850,523
------------
LEISURE
2,500 Accor S.A.............................................................................. 464,470
------------
MANUFACTURING - INTERNATIONAL
10,000 Rhone-Poulenc (A Shares)............................................................... 447,617
------------
TELECOMMUNICATIONS
14,300 France Telecom S.A. (ADR)*............................................................. 514,800
------------
TOTAL FRANCE........................................................................... 5,632,897
------------
GERMANY (3.6%)
APPAREL
1,700 Adidas AG.............................................................................. 223,704
------------
AUTOMOTIVE
670 Bayerische Motoren Werke (BMW) AG...................................................... 501,196
1,400 M.A.N. AG.............................................................................. 405,673
330 Volkswagen AG.......................................................................... 185,740
------------
1,092,609
------------
CHEMICALS
9,400 Bayer AG............................................................................... 351,324
3,300 SGL Carbon AG.......................................................................... 425,806
------------
777,130
------------
COMPUTER SOFTWARE
2,300 SAP AG (Pref.)......................................................................... 752,808
------------
ELECTRICAL EQUIPMENT
7,600 Siemens AG............................................................................. 450,167
------------
MANUFACTURING
450 Mannesmann AG.......................................................................... 227,503
------------
MULTI-INDUSTRY
100 Hugo Boss AG (Pref.)................................................................... 127,920
------------
TOTAL GERMANY.......................................................................... 3,651,841
------------
HONG KONG (3.1%)
BANKING
60,000 Guoco Group Ltd........................................................................ 146,761
16,608 HSBC Holdings PLC...................................................................... 409,450
------------
556,211
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CONGLOMERATES
75,000 Hutchison Whampoa, Ltd................................................................. $ 470,487
------------
NATURAL GAS
242,000 Hong Kong & China Gas Co., Ltd......................................................... 468,550
------------
REAL ESTATE
76,000 Cheung Kong (Holdings) Ltd............................................................. 497,851
70,000 New World Development Co., Ltd......................................................... 242,149
31,000 Sun Hung Kai Properties Ltd............................................................ 216,075
------------
956,075
------------
UTILITIES - ELECTRIC
123,000 China Light & Power Co., Ltd........................................................... 682,689
------------
TOTAL HONG KONG........................................................................ 3,134,012
------------
HUNGARY (0.8%)
TELECOMMUNICATIONS
30,000 Magyar Tavkozlesi RT (ADR)*............................................................ 780,000
------------
INDIA (0.4%)
TELECOMMUNICATIONS
25,000 Mahanagar Telephone Nigam (GDR)*....................................................... 386,250
------------
INDONESIA (0.4%)
OIL & GAS EXPLORATION
10,600 Gulf Indonesia Resources Ltd.*......................................................... 233,200
------------
TELECOMMUNICATIONS
20,000 PT Telekomunikasi Indonesia (ADR)...................................................... 221,250
------------
TOTAL INDONESIA........................................................................ 454,450
------------
ISRAEL (0.7%)
RETAIL STORES
50,000 Super-Sol Ltd. (ADR)................................................................... 703,125
------------
ITALY (1.8%)
BANKING
225,000 Banca Commerciale Italiana............................................................. 782,421
------------
ENERGY
5,000 Ente Nazionale Idrocarburi SpA (ADR)................................................... 285,312
------------
MANUFACTURING
16,000 Industrie Natuzzi SpA (ADR)............................................................ 330,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
103
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS
75,000 Telecom Italia SpA..................................................................... $ 479,206
------------
TOTAL ITALY............................................................................ 1,876,939
------------
JAPAN (7.9%)
AUTOMOTIVE
20,000 Honda Motor Co......................................................................... 734,100
45,000 Suzuki Motor Co., Ltd.................................................................. 406,897
------------
1,140,997
------------
BANKING
130,000 Sakura Bank Ltd........................................................................ 371,571
------------
BUILDING & CONSTRUCTION
54,000 Sekisui House Ltd...................................................................... 347,172
------------
BUSINESS SERVICES
5,000 Secom Co............................................................................... 319,540
------------
COMPUTERS
30,000 Fujitsu, Ltd........................................................................... 321,839
------------
ELECTRONICS
7,000 Sony Corp.............................................................................. 622,222
3,000 TDK Corp............................................................................... 226,207
------------
848,429
------------
ELECTRONICS - SEMICONDUCTORS/COMPONENTS
5,000 Rohm Co., Ltd.......................................................................... 509,578
------------
FINANCIAL SERVICES
30,000 Nomura Securities Co., Ltd............................................................. 400,000
------------
INTERNATIONAL TRADE
86,000 Mitsui & Co............................................................................ 508,751
------------
MACHINERY
47,000 Minebea Co., Ltd....................................................................... 504,215
------------
PHARMACEUTICALS
21,000 Eisai Co., Ltd......................................................................... 320,230
8,000 Terumo Corp............................................................................ 117,701
------------
437,931
------------
REAL ESTATE
25,000 Mitsui Fudosan Co., Ltd................................................................ 241,379
------------
RESTAURANTS
23 Yoshinoya D & C Co., Ltd............................................................... 209,732
------------
RETAIL
8,000 Family Mart Co., Ltd................................................................... 286,897
------------
TELECOMMUNICATIONS
60 DDI Corp............................................................................... 158,621
75 Nippon Telegraph & Telephone........................................................... 643,678
------------
802,299
------------
TIRE & RUBBER GOODS
20,000 Bridgestone Corp....................................................................... 433,716
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION
80 East Japan Railway Co.................................................................. $ 361,073
------------
TOTAL JAPAN............................................................................ 8,045,119
------------
MALAYSIA (0.4%)
NATURAL GAS
120,000 Petronas Gas Berhad.................................................................... 273,711
------------
TELECOMMUNICATIONS
90,000 Tenaga Nasional Berhad................................................................. 192,526
------------
TOTAL MALAYSIA......................................................................... 466,237
------------
MEXICO (3.4%)
BEVERAGES
9,000 Coca-Cola Femsa S.A. de C.V. (ADR)..................................................... 522,000
5,000 Panamerican Beverages, Inc. (Class A).................................................. 163,125
16,000 Pepsi-Gemex S.A. de C.V. (ADR)......................................................... 231,000
------------
916,125
------------
BUILDING MATERIALS
70,600 Cemex S.A. de C.V. (B Shares)*......................................................... 374,805
------------
CONGLOMERATES
11,030 DESC S.A. de C.V. (Series C) (ADR)..................................................... 413,625
34,000 Grupo Carso S.A. de C.V. (Series A1)................................................... 226,470
------------
640,095
------------
FINANCIAL SERVICES
500,000 Grupo Financiero Bancomer S.A. de C.V. (Series B)*..................................... 324,981
------------
MEDIA
10,000 Grupo Televisa S.A. de C.V. (GDR)*..................................................... 386,875
------------
PAPER & FOREST PRODUCTS
60,000 Kimberly-Clark de Mexico S.A. de C.V. (A Shares)....................................... 284,297
------------
TELECOMMUNICATIONS
9,100 Telefonos de Mexico S.A. de C.V. (Series L) (ADR)...................................... 510,169
------------
TOTAL MEXICO........................................................................... 3,437,347
------------
NETHERLANDS (3.3%)
BUSINESS & PUBLIC SERVICES
3,750 Randstad Holdings NV................................................................... 141,227
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
104
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CHEMICALS
4,500 Akzo Nobel NV.......................................................................... $ 776,505
------------
ELECTRICAL EQUIPMENT
8,600 Philips Electronics NV................................................................. 516,170
------------
FOOD PROCESSING
4,500 Koninklijke Nutricia Verenigde Bedrijven NV............................................ 136,599
------------
HOUSEHOLD FURNISHINGS & APPLIANCES
8,000 Koninklijke Ahrend Groep NV............................................................ 251,530
------------
INSURANCE
4,600 Aegon NV............................................................................... 409,822
8,000 ING Groep NV........................................................................... 337,216
------------
747,038
------------
PUBLISHING
7,600 Elsevier NV............................................................................ 123,041
9,000 Ver Ned Utigev Ver Bezit NV............................................................ 254,097
------------
377,138
------------
RETAIL
16,500 Koninklijke Ahold NV................................................................... 430,824
------------
TOTAL NETHERLANDS...................................................................... 3,377,031
------------
PERU (0.2%)
BANKING
34,000 Banco Wiese (ADR)...................................................................... 170,000
------------
PHILIPPINES (0.2%)
TELECOMMUNICATIONS
10,000 Philippine Long Distance Telephone Co. (ADR)........................................... 225,000
------------
PORTUGAL (0.6%)
TELECOMMUNICATIONS
8,500 Portugal Telecom S.A. (ADR)............................................................ 399,500
2,400 Telecel-Comunicacoes Pessoais S.A.*.................................................... 255,852
------------
TOTAL PORTUGAL......................................................................... 655,352
------------
SINGAPORE (0.8%)
BANKING
8,500 Development Bank of Singapore, Ltd..................................................... 72,814
48,000 Overseas Union Bank, Ltd............................................................... 184,176
------------
256,990
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES - TELECOMMUNICATIONS
305,000 Singapore Telecommunications, Ltd...................................................... $ 569,720
------------
TOTAL SINGAPORE........................................................................ 826,710
------------
SOUTH AFRICA (0.3%)
COMPUTERS - SYSTEMS
24,444 Dimension Data Holdings Ltd. (GDR)* - 144A**........................................... 311,661
------------
SPAIN (1.7%)
BANKING
11,200 Banco Popular Espanol S.A.............................................................. 782,677
------------
ELECTRIC
8,800 Endesa S.A............................................................................. 156,194
------------
FINANCIAL SERVICES
2,000 Corporacion Financiera Alba............................................................ 210,630
------------
FOODS & BEVERAGES
15,000 Centros Comerciales Pryca S.A.......................................................... 223,425
------------
TELECOMMUNICATIONS
3,800 Telefonica de Espana S.A. (ADR)........................................................ 346,038
------------
TOTAL SPAIN............................................................................ 1,718,964
------------
SWEDEN (0.8%)
AUTO TRUCKS & PARTS
8,800 Scania AB (A Shares)................................................................... 196,934
------------
BUSINESS SERVICES
5,000 Assa Abloy AB (Series B)............................................................... 132,382
6,000 Securitas AB (Series "B" Free)......................................................... 181,552
------------
313,934
------------
MEDICAL SUPPLIES
6,200 Getinge Industrier AB (B Shares)....................................................... 98,492
------------
TELECOMMUNICATION EQUIPMENT
5,100 Ericsson (L.M.) Telephone Co. AB (Series "B" Free)..................................... 191,935
------------
TOTAL SWEDEN........................................................................... 801,295
------------
SWITZERLAND (2.2%)
BUILDING MATERIALS
250 Holderbank Financiere Glarus AG (B Shares)............................................. 203,900
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
105
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CONGLOMERATES
160 ABB AG - Bearer........................................................................ $ 200,889
------------
FOOD PROCESSING
500 Nestle S.A............................................................................. 748,888
------------
PHARMACEUTICALS
294 Novartis AG............................................................................ 476,757
130 Novartis AG - Bearer................................................................... 211,256
40 Roche Holdings AG...................................................................... 396,989
------------
1,085,002
------------
TOTAL SWITZERLAND...................................................................... 2,238,679
------------
UNITED KINGDOM (14.2%)
AEROSPACE
80,543 Rolls-Royce PLC........................................................................ 311,927
------------
AEROSPACE & DEFENSE
16,058 British Aerospace PLC.................................................................. 459,143
8,600 Smiths Industries PLC.................................................................. 120,185
------------
579,328
------------
AUTO PARTS
135,000 LucasVarity PLC........................................................................ 478,332
------------
AUTO PARTS - ORIGINAL EQUIPMENT
56,000 BBA Group PLC.......................................................................... 374,689
------------
BANKING
16,000 Abbey National PLC..................................................................... 287,675
35,630 National Westminster Bank PLC.......................................................... 594,229
------------
881,904
------------
BEVERAGES
24,800 Bass PLC............................................................................... 386,021
------------
BROADCAST MEDIA
6,300 Flextech PLC*.......................................................................... 54,196
------------
BUILDING & CONSTRUCTION
61,679 Blue Circle Industries PLC............................................................. 347,125
------------
BUSINESS SERVICES
24,200 Reuters Holdings PLC................................................................... 265,213
------------
COMPUTER SOFTWARE & SERVICES
18,000 SEMA Group PLC......................................................................... 439,027
------------
ENERGY
144,000 Shell Transport & Trading Co. PLC...................................................... 1,044,173
------------
FOOD PROCESSING
41,000 Devro PLC.............................................................................. 256,083
52,000 Unilever PLC........................................................................... 446,476
------------
702,559
------------
HOUSEHOLD PRODUCTS
26,000 Reckitt & Colman PLC................................................................... 409,198
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE
18,000 Britannic Assurance PLC................................................................ $ 324,821
36,000 Commercial Union PLC................................................................... 503,695
71,110 Royal & Sun Alliance Insurance Group PLC............................................... 718,370
------------
1,546,886
------------
LEISURE
13,722 Granada Group PLC...................................................................... 210,309
74,000 Rank Group PLC......................................................................... 413,417
65,674 Tomkins PLC............................................................................ 314,952
------------
938,678
------------
MANUFACTURING
75,000 Vickers PLC............................................................................ 291,696
------------
MERCHANDISING
34,000 Next PLC............................................................................... 387,741
------------
PHARMACEUTICALS
60,000 British Biotech PLC*................................................................... 104,813
48,998 Glaxo Wellcome PLC..................................................................... 1,162,781
------------
1,267,594
------------
PUBLISHING
50,000 Reed International PLC................................................................. 502,640
------------
RESTAURANTS
25,500 Compass Group PLC...................................................................... 314,760
------------
RETAIL
65,000 Sainsbury (J.) PLC..................................................................... 545,241
------------
TELECOMMUNICATIONS
60,600 British Telecommunications PLC......................................................... 477,872
20,700 Esat Telecom Group PLC (ADR)*.......................................................... 278,156
61,723 Securicor PLC.......................................................................... 290,409
80,607 Vodafone Group PLC..................................................................... 583,169
------------
1,629,606
------------
TRANSPORTATION
32,959 British Airways PLC.................................................................... 304,172
------------
UTILITIES - ELECTRIC
56,000 National Power PLC..................................................................... 553,728
------------
TOTAL UNITED KINGDOM................................................................... 14,556,434
------------
UNITED STATES (34.1%)
AEROSPACE & DEFENSE
13,100 General Motors Corp. (Class H)......................................................... 483,881
12,500 Honeywell, Inc......................................................................... 856,250
7,367 Raytheon Co. (Class A)................................................................. 363,307
------------
1,703,438
------------
ALUMINUM
12,200 Aluminum Co. of America................................................................ 858,575
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
106
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
APPLIANCES & HOUSEHOLD DURABLES
24,400 Maytag Corp............................................................................ $ 910,425
------------
AUTOMOTIVE
24,100 Chrysler Corp.......................................................................... 848,019
18,500 Ford Motor Co.......................................................................... 900,719
------------
1,748,738
------------
BANKS
13,100 First Tennessee National Corp.......................................................... 874,425
------------
BEVERAGES - SOFT DRINKS
24,100 PepsiCo, Inc........................................................................... 878,144
------------
BUILDING MATERIALS
18,300 Champion International Corp............................................................ 829,219
------------
CHEMICALS
8,700 Dow Chemical Co........................................................................ 883,050
28,000 Georgia Gulf Corp...................................................................... 857,500
20,200 Monsanto Co............................................................................ 848,400
------------
2,588,950
------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE
15,450 Cisco Systems, Inc.*................................................................... 861,337
------------
COMPUTERS
18,500 Diebold, Inc........................................................................... 936,563
28,400 Gateway 2000, Inc.*.................................................................... 926,550
13,600 Hewlett-Packard Co..................................................................... 850,000
22,100 Sun Microsystems, Inc.*................................................................ 881,237
------------
3,594,350
------------
FINANCIAL SERVICES
10,000 American Express Co.................................................................... 892,500
16,100 Fannie Mae............................................................................. 918,706
16,100 Travelers Group, Inc................................................................... 867,388
------------
2,678,594
------------
FOODS & BEVERAGES
11,000 General Mills, Inc..................................................................... 787,875
------------
HOUSEHOLD PRODUCTS
12,300 Colgate-Palmolive Co................................................................... 904,050
------------
INSURANCE
4,800 ESG Re Ltd.*........................................................................... 111,600
------------
MEDICAL SERVICES
19,100 HBO & Co............................................................................... 915,606
------------
OIL - DOMESTIC
11,300 Atlantic Richfield Co.................................................................. 905,413
------------
OIL INTEGRATED - INTERNATIONAL
11,100 Chevron Corp........................................................................... 854,700
13,900 Exxon Corp............................................................................. 850,506
11,700 Mobil Corp............................................................................. 844,594
------------
2,549,800
------------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
OIL WELL EQUIPMENT & SERVICE
16,800 Diamond Offshore Drilling, Inc......................................................... $ 808,500
10,100 Schlumberger, Ltd...................................................................... 813,050
------------
1,621,550
------------
PHARMACEUTICALS
12,800 Abbott Laboratories.................................................................... 839,200
11,400 American Home Products Corp............................................................ 872,100
------------
1,711,300
------------
RECREATION
9,300 Walt Disney Co......................................................................... 921,281
------------
RETAIL - SPECIALTY
25,100 Bed Bath & Beyond, Inc.*............................................................... 963,213
34,500 Pep Boys-Manny, Moe & Jack............................................................. 823,688
------------
1,786,901
------------
RETAIL - SPECIALTY APPAREL
22,800 Gap, Inc............................................................................... 807,975
------------
SAVINGS & LOAN ASSOCIATIONS
13,500 Ahmanson (H.F.) & Co................................................................... 903,656
9,300 Golden West Financial Corp............................................................. 909,656
------------
1,813,312
------------
SEMICONDUCTORS
11,600 Intel Corp............................................................................. 814,175
------------
STEEL
17,300 Nucor Corp............................................................................. 835,806
------------
TELECOMMUNICATIONS
38,300 Loral Space & Communications Ltd.*..................................................... 821,056
------------
TOTAL UNITED STATES.................................................................... 34,833,895
------------
TOTAL COMMON AND PREFERRED STOCKS
(IDENTIFIED COST $86,923,718).......................................................... 96,024,804
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS (6.0%)
U.S. GOVERNMENT AGENCY (a) (3.4%)
$ 3,500 Federal Home Loan Banks 5.80% due 01/05/98 (AMORTIZED COST $3,497,745)................. 3,497,745
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
107
<PAGE>
GLOBAL EQUITY
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (2.6%)
$ 2,661 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $2,662,036) (b)
(IDENTIFIED COST $2,661,463)......................................................... $ 2,661,463
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $6,159,208)........................................................... 6,159,208
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $93,082,926) (C)......................................................... 99.9 % 102,184,012
OTHER ASSETS IN EXCESS OF LIABILITIES..................................................... 0.1 45,454
------ -------------
NET ASSETS................................................................................ 100.0 % $ 102,229,466
------ -------------
------ -------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
GDR Global Depository Receipt.
* Non-income producing security.
** Resale is restricted to qualified institutional investors.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $2,026,396 U.S. Treasury Bill 0.00% due 03/26/98 valued
at $2,001,998 and $659,123 U.S. Treasury Note 8.875% due 05/15/00 valued at
$712,695.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $13,384,850 and the
aggregate gross unrealized depreciation is $4,283,764, resulting in net
unrealized appreciation of $9,101,086.
SEE NOTES TO FINANCIAL STATEMENTS
108
<PAGE>
GLOBAL EQUITY
SUMMARY OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Aerospace......................................................................... $ 311,927 0.3 %
Aerospace & Defense............................................................... 2,282,766 2.2
Airlines.......................................................................... 340,625 0.3
Aluminum.......................................................................... 858,575 0.8
Apparel........................................................................... 223,704 0.2
Appliances & Household Durables................................................... 910,425 0.9
Auto Parts........................................................................ 478,332 0.5
Auto Parts - Original Equipment................................................... 374,689 0.4
Auto Trucks & Parts............................................................... 196,934 0.2
Automotive........................................................................ 4,742,181 4.6
Banking........................................................................... 5,527,217 5.4
Banks............................................................................. 874,425 0.9
Beverages......................................................................... 1,302,146 1.3
Beverages - Soft Drinks........................................................... 878,144 0.9
Brewery........................................................................... 557,500 0.5
Broadcast Media................................................................... 54,196 0.1
Building & Construction........................................................... 694,297 0.7
Building Materials................................................................ 1,407,924 1.4
Business & Public Services........................................................ 141,227 0.1
Business Services................................................................. 898,687 0.9
Chemicals......................................................................... 4,142,585 4.1
Communications - Equipment & Software............................................. 861,337 0.8
Computer Services................................................................. 231,911 0.2
Computer Software................................................................. 752,808 0.7
Computer Software & Services...................................................... 439,027 0.4
Computers......................................................................... 3,916,189 3.8
Computers - Systems............................................................... 641,193 0.6
Conglomerates..................................................................... 1,311,471 1.3
Drugs............................................................................. 655,594 0.6
Drugs & Healthcare................................................................ 266,569 0.3
Electric.......................................................................... 669,475 0.7
Electrical Equipment.............................................................. 1,385,480 1.4
Electronics....................................................................... 1,352,364 1.3
Electronics - Semiconductors/Components........................................... 509,578 0.5
Energy............................................................................ 1,982,277 1.9
Financial Services................................................................ 4,322,552 4.2
Food Processing................................................................... 1,588,046 1.6
Food, Beverage, Tobacco & Household Products...................................... 175,000 0.2
Foods & Beverages................................................................. 1,170,022 1.1
Household Furnishings & Appliances................................................ 251,530 0.2
Household Products................................................................ 1,313,248 1.3
Insurance......................................................................... 3,256,047 3.2
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Trade............................................................... $ 508,751 0.5 %
Leisure........................................................................... 1,403,148 1.4
Machinery......................................................................... 504,215 0.5
Manufacturing..................................................................... 948,369 0.9
Manufacturing - International..................................................... 447,617 0.4
Media............................................................................. 386,875 0.4
Medical Services.................................................................. 915,606 0.9
Medical Supplies.................................................................. 98,492 0.1
Merchandising..................................................................... 387,741 0.4
Multi-Industry.................................................................... 127,920 0.1
Natural Gas....................................................................... 742,261 0.7
Oil & Gas Exploration............................................................. 233,200 0.2
Oil - Domestic.................................................................... 905,413 0.9
Oil Integrated - International.................................................... 2,549,800 2.5
Oil Well Equipment & Service...................................................... 1,621,550 1.6
Paper & Forest Products........................................................... 284,297 0.3
Pharmaceuticals................................................................... 5,217,270 5.1
Publishing........................................................................ 879,778 0.9
Real Estate....................................................................... 1,197,454 1.2
Recreation........................................................................ 921,281 0.9
Repurchase Agreement.............................................................. 2,661,463 2.6
Restaurants....................................................................... 524,492 0.5
Retail............................................................................ 1,432,833 1.4
Retail - Specialty................................................................ 1,786,901 1.7
Retail - Specialty Apparel........................................................ 807,975 0.8
Retail Stores..................................................................... 703,125 0.7
Savings & Loan Associations....................................................... 1,813,312 1.8
Semiconductors.................................................................... 814,175 0.8
Steel............................................................................. 835,806 0.8
Telecommunication Equipment....................................................... 191,935 0.2
Telecommunications................................................................ 9,316,518 9.1
Tire & Rubber Goods............................................................... 433,716 0.4
Transportation.................................................................... 1,026,617 1.0
U.S. Government Agency............................................................ 3,497,745 3.4
Utilities - Electric.............................................................. 1,236,417 1.2
Utilities - Telecommunications.................................................... 569,720 0.6
------------ ---
$102,184,012 99.9 %
------------ ---
------------ ---
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stocks..................................................................... $ 95,144,076 93.1 %
Preferred Stocks.................................................................. 880,728 0.8
Short-Term Investments............................................................ 6,159,208 6.0
------------ ---
$102,184,012 99.9 %
------------ ---
------------ ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
109
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (85.3%)
AEROSPACE & DEFENSE (0.9%)
6,000 BE Aerospace, Inc.*..................................................................... $ 160,500
13,000 Citation Corp.*......................................................................... 211,250
11,300 Triumph Group, Inc.*.................................................................... 375,725
-----------
747,475
-----------
AIRLINES (1.3%)
8,800 Alaska Air Group, Inc.*................................................................. 341,000
16,600 Midway Airlines, Corp.*................................................................. 251,075
12,100 Midwest Express Holdings, Inc.*......................................................... 469,631
-----------
1,061,706
-----------
APPAREL (0.8%)
28,800 Braun's Fashions Corp.*................................................................. 288,000
10,350 Quiksilver, Inc.*....................................................................... 296,269
3,900 Tefron Ltd*............................................................................. 89,700
-----------
673,969
-----------
AUTO RELATED (0.5%)
3,400 Delco Remy International, Inc.*......................................................... 42,500
6,700 Group 1 Automotive, Inc.*............................................................... 60,719
7,300 Tower Automotive, Inc.*................................................................. 307,056
-----------
410,275
-----------
BIOTECHNOLOGY (3.3%)
15,000 BioChem Pharma, Inc. (Canada)*.......................................................... 312,187
1,000 ERGO Science Corp.*..................................................................... 15,000
10,000 ESC Medical Systems Ltd.* (Israel)...................................................... 386,250
12,500 Gilead Sciences, Inc.*.................................................................. 478,125
10,100 IDEC Pharmaceuticals Corp.*............................................................. 347,187
18,000 Medco Research, Inc.*................................................................... 252,000
4,000 Protein Design Labs, Inc.*.............................................................. 158,500
12,565 SangStat Medical Corp.*................................................................. 507,312
8,000 Vertex Pharmaceuticals, Inc.*........................................................... 263,000
-----------
2,719,561
-----------
BROADCAST MEDIA (0.3%)
7,500 Metro Networks, Inc.*................................................................... 245,625
-----------
BUSINESS SERVICES (2.7%)
10,000 Billing Information Concepts Corp.*..................................................... 480,000
3,500 Conning Corp.*.......................................................................... 57,750
10,000 Faroudja, Inc.*......................................................................... 101,250
15,500 Hagler Bailly, Inc.*.................................................................... 346,812
11,400 Hypercom Corp.*......................................................................... 161,025
15,400 LCC International, Inc. (Class A)*...................................................... 217,525
7,500 Metzler Group, Inc.*.................................................................... 296,250
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
13,000 Saville Systems Ireland PLC (ADR) (Ireland)*............................................ $ 538,687
-----------
2,199,299
-----------
COMMERCIAL SERVICES (5.1%)
7,500 Abacus Direct Corp.*.................................................................... 307,500
15,700 CheckFree Holdings Corp.*............................................................... 423,900
10,000 Consolidated Graphics, Inc.*............................................................ 466,250
2,000 DBT Online, Inc.*....................................................................... 49,875
20,000 HA-LO Industries, Inc.*................................................................. 520,000
13,000 Iron Mountain, Inc.*.................................................................... 468,000
22,500 Lason, Inc.*............................................................................ 590,625
21,400 LECG, Inc.*............................................................................. 187,250
5,000 Pinnacle Systems, Inc.*................................................................. 121,875
10,950 Steiner Leisure Ltd.*................................................................... 335,344
11,700 U.S. Rentals, Inc.*..................................................................... 274,950
20,000 Vestcom International, Inc.*............................................................ 432,500
-----------
4,178,069
-----------
COMPUTER HARDWARE (1.1%)
14,000 Creative Technology Ltd.* (Singapore)................................................... 306,250
10,000 In Focus Systems, Inc.*................................................................. 303,750
3,300 SCM Microsystems, Inc.*................................................................. 77,962
10,000 Telxon Corp............................................................................. 238,750
-----------
926,712
-----------
COMPUTER SOFTWARE (3.6%)
7,700 Arbor Software Corp.*................................................................... 310,887
26,800 BEA Systems, Inc.*...................................................................... 463,975
30,000 Credit Management Solutions, Inc.*...................................................... 378,750
9,250 Dr Solomon's Group PLC (United Kingdom)*................................................ 293,687
10,000 Netscape Communications Corp.*.......................................................... 242,500
12,000 PeopleSoft, Inc.*....................................................................... 465,000
20,000 Simulation Sciences, Inc.*.............................................................. 322,500
9,800 T-HQ, Inc.*............................................................................. 224,175
7,100 Wind River Systems, Inc.*............................................................... 278,675
-----------
2,980,149
-----------
COMPUTER SOFTWARE & SERVICES (6.2%)
14,000 Affiliated Computer Services, Inc. (Class A)*........................................... 368,375
9,000 BARRA, Inc.*............................................................................ 214,875
22,000 CACI International Inc. (Class A)*...................................................... 433,125
13,900 Concord Communications, Inc.*........................................................... 283,212
2,600 FlexiInternational Software, Inc.*...................................................... 40,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
110
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
19,500 Information Management Resources, Inc.*................................................. $ 731,250
19,900 Intersolv, Inc.*........................................................................ 402,975
11,400 Keane, Inc.*............................................................................ 463,125
33,100 MAPICS, Inc.*........................................................................... 355,825
10,700 MindSpring Enterprises, Inc.*........................................................... 356,444
18,000 ONTRACK Data International, Inc.*....................................................... 441,000
1,700 ProBusiness Services, Inc.*............................................................. 38,250
11,600 Safeguard Scientifics, Inc.*............................................................ 363,950
4,500 Shared Medical Systems Corp............................................................. 297,000
11,000 Sungard Data Systems, Inc.*............................................................. 341,000
-----------
5,130,706
-----------
CONSUMER SERVICES (0.8%)
14,035 Coinmach Laundry Corp.*................................................................. 343,857
18,000 Mac-Gray Corp.*......................................................................... 281,250
-----------
625,107
-----------
DISTRIBUTION (0.8%)
15,000 JLK Direct Distribution Inc. (Class A)*................................................. 420,000
15,000 MicroAge, Inc.*......................................................................... 225,937
-----------
645,937
-----------
DRUGS (2.6%)
16,800 Alpharma Inc. (Class A)................................................................. 365,400
14,773 ArQule, Inc.*........................................................................... 338,856
8,700 Dura Pharmaceuticals, Inc.*............................................................. 399,112
10,000 Medicis Pharmaceutical Corp. (Class A)*................................................. 512,500
10,600 PathoGenesis Corp.*..................................................................... 393,525
12,000 Vivus, Inc.*............................................................................ 127,500
-----------
2,136,893
-----------
EDUCATION (0.9%)
16,000 Education Management Corp.*............................................................. 496,000
9,000 EduTrek International, Inc. (Class A)*.................................................. 227,250
-----------
723,250
-----------
ELECTRICAL EQUIPMENT (1.2%)
16,400 EFTC Corp.*............................................................................. 268,550
5,600 Hadco Corp.*............................................................................ 253,400
6,350 IDX Systems Corp.*...................................................................... 234,950
9,000 National Instruments Corp.*............................................................. 261,000
-----------
1,017,900
-----------
ELECTRONICS (0.5%)
6,500 Pittway Corp. (Class A)................................................................. 452,562
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONICS - SEMICONDUCTORS/COMPONENTS (0.3%)
24,100 Quickturn Design System, Inc.*.......................................................... $ 277,150
-----------
ENTERTAINMENT & LEISURE TIME (2.1%)
10,700 AMF Bowling, Inc.*...................................................................... 267,500
10,400 Cinar Films, Inc. (Class B) (Canada)*................................................... 399,100
10,000 Fairfield Communities, Inc.*............................................................ 441,250
20,700 GameTech International, Inc.*........................................................... 219,937
15,000 Hollywood Park, Inc.*................................................................... 330,000
5,000 Video Lottery Technologies, Inc.*....................................................... 58,125
-----------
1,715,912
-----------
ENVIRONMENTAL (1.6%)
26,800 Allied Waste Industries, Inc.*.......................................................... 624,775
28,000 ITEQ, Inc.*............................................................................. 320,250
16,800 Tetra Technologies, Inc.*............................................................... 353,850
-----------
1,298,875
-----------
FINANCE (0.7%)
8,000 Bank United Corp. (Class A)............................................................. 390,000
5,600 HealthCare Financial Partners*.......................................................... 196,000
-----------
586,000
-----------
FINANCIAL SERVICES (3.6%)
6,165 CMAC Investment Corp.................................................................... 372,212
7,800 Finova Group Inc........................................................................ 387,562
6,500 GreenPoint Financial Corp............................................................... 471,656
4,200 Hambrecht & Quist Group*................................................................ 153,300
7,633 Legg Mason, Inc......................................................................... 426,971
12,000 McDonald & Co. Investments, Inc......................................................... 340,500
18,750 Morgan Keegan, Inc...................................................................... 474,609
11,300 PennFed Financial Services, Inc......................................................... 377,137
-----------
3,003,947
-----------
FOOD DISTRIBUTION (0.5%)
15,000 Triarc Co., Inc.*....................................................................... 408,750
-----------
FOOD WHOLESALERS (1.0%)
5,000 Earthgrains Co.......................................................................... 235,000
13,000 Ralcorp Holdings, Inc.*................................................................. 220,187
11,000 Smithfield Foods, Inc.*................................................................. 358,187
-----------
813,374
-----------
FOREST PRODUCTS, PAPER & PACKING (0.5%)
8,450 Buckeye Technologies Inc.*.............................................................. 390,812
-----------
HEALTHCARE (0.2%)
8,100 Coast Dental Services, Inc.*............................................................ 192,375
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
111
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
HEALTHCARE FACILITIES (1.7%)
20,000 Assisted Living Concepts, Inc.*......................................................... $ 395,000
10,900 CareMatrix Corp.*....................................................................... 313,375
25,000 NovaCare, Inc.*......................................................................... 326,562
13,537 Rehabcare Group, Inc.*.................................................................. 358,731
-----------
1,393,668
-----------
HEALTHCARE MANAGEMENT SERVICES (2.5%)
11,100 Advance Paradigm, Inc.*................................................................. 352,425
18,900 Coventry Corp.*......................................................................... 288,225
20,000 HealthPlan Services Corp................................................................ 420,000
11,333 Total Renal Care Holdings, Inc.*........................................................ 311,658
14,600 Trigon Healthcare, Inc.*................................................................ 381,425
34,300 Vision Twenty-One, Inc.*................................................................ 308,700
-----------
2,062,433
-----------
HOME BUILDING (0.3%)
10,000 Crossmann Communities, Inc.*............................................................ 274,375
-----------
HOTELS/MOTELS (0.4%)
14,500 Prime Hospitality Corp.*................................................................ 295,438
-----------
INSURANCE (1.7%)
7,140 Delphi Financial Group, Inc. (Class A)*................................................. 321,300
3,800 ESG Re Ltd.*............................................................................ 88,350
7,500 Fremont General Corp.................................................................... 410,625
12,000 John Alden Financial Corp............................................................... 288,000
15,500 Presidential Life Corp.................................................................. 313,875
-----------
1,422,150
-----------
MEDIA GROUP (0.9%)
4,800 Jacor Communications, Inc.*............................................................. 255,000
12,997 Outdoor Systems, Inc.*.................................................................. 498,760
-----------
753,760
-----------
MEDICAL EQUIPMENT (2.7%)
10,000 Lincare Holdings, Inc.*................................................................. 570,000
30,000 Orthofix International N.V.*............................................................ 352,500
10,000 Safeskin Corp.*......................................................................... 568,750
14,200 Schick Technologies, Inc.*.............................................................. 269,800
10,000 Steris Corp.*........................................................................... 482,500
-----------
2,243,550
-----------
MEDICAL PRODUCTS & SUPPLIES (0.9%)
23,000 Cyberonics Inc.*........................................................................ 346,438
10,100 Mentor Corp............................................................................. 368,650
4,300 Young Innovations, Inc.*................................................................ 74,175
-----------
789,263
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
MISCELLANEOUS (0.3%)
5,400 Hybrid Networks, Inc.*.................................................................. $ 60,075
4,200 Robbins & Myers, Inc.................................................................... 166,425
-----------
226,500
-----------
OFFICE EQUIPMENT & SUPPLIES (1.3%)
18,000 Mail-Well, Inc.*........................................................................ 729,000
15,700 Viking Office Products, Inc.*........................................................... 342,456
-----------
1,071,456
-----------
OIL & GAS (1.5%)
8,200 New Jersey Resources Corp............................................................... 328,513
10,000 Northern Border Partners, L.P.*......................................................... 340,000
7,000 ONEOK, Inc.............................................................................. 282,625
8,000 Piedmont Natural Gas Co................................................................. 287,500
-----------
1,238,638
-----------
OIL & GAS DRILLING (2.7%)
19,400 Bayard Drilling Technologies, Inc.*..................................................... 315,250
10,260 ENSCO International, Inc................................................................ 343,710
10,000 Falcon Drilling Company, Inc.*.......................................................... 350,625
12,635 Global Marine, Inc.*.................................................................... 309,558
5,160 Helmerich & Payne, Inc.................................................................. 350,235
13,000 Marine Drilling Co., Inc.*.............................................................. 269,750
10,000 Rowan Companies, Inc.*.................................................................. 305,000
-----------
2,244,128
-----------
OIL & GAS EXPLORATION (1.1%)
10,000 Energen Corp............................................................................ 397,500
18,900 Lomak Petroleum, Inc.................................................................... 307,125
13,200 Petsec Energy Ltd (ADR) (Australia)*.................................................... 181,500
-----------
886,125
-----------
OIL EQUIPMENT & SERVICES (1.1%)
6,000 Carbo Ceramics, Inc.*................................................................... 192,000
20,000 Global Industries Ltd.*................................................................. 340,000
4,700 IRI International Corp.*................................................................ 65,800
5,500 Smith International, Inc.*.............................................................. 337,563
-----------
935,363
-----------
OIL RELATED (0.6%)
12,800 Veritas DGC Inc.*....................................................................... 505,600
-----------
PERSONAL PRODUCTS (1.3%)
20,000 Chattem, Inc.*.......................................................................... 292,500
11,800 NBTY, Inc.*............................................................................. 393,825
15,590 Twinlab Corp.*.......................................................................... 385,853
-----------
1,072,178
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
112
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
PUBLISHING (0.7%)
10,000 Petersen Companies, Inc. (Class A)*..................................................... $ 230,000
10,000 Valassis Communications, Inc.*.......................................................... 370,000
-----------
600,000
-----------
REAL ESTATE INVESTMENT TRUST (0.9%)
6,000 Capstone Capital Corp................................................................... 153,375
15,565 Golf Trust of America, Inc.............................................................. 451,385
5,000 OMEGA Healthcare Investors, Inc......................................................... 193,125
-----------
797,885
-----------
RETAIL (1.7%)
17,000 Ames Department Stores Inc.*............................................................ 291,125
11,400 Fred Meyer, Inc.*....................................................................... 414,675
19,625 Fred's, Inc............................................................................. 385,141
13,000 Pier 1 Imports, Inc..................................................................... 294,125
-----------
1,385,066
-----------
RETAIL - SPECIALTY (3.8%)
10,000 Barnes & Noble, Inc.*................................................................... 333,750
6,800 Cole National Corp. (Class A)*.......................................................... 203,575
8,000 CompUSA, Inc.*.......................................................................... 248,000
5,000 Fossil, Inc.*........................................................................... 125,000
17,975 Garden Ridge Corp.*..................................................................... 256,144
11,800 Goody's Family Clothing, Inc.*.......................................................... 320,813
15,900 Guitar Center Inc.*..................................................................... 365,700
10,000 Just For Feet, Inc.*.................................................................... 130,625
7,800 Linens 'N Things, Inc.*................................................................. 340,275
9,300 Schein (Henry), Inc.*................................................................... 325,500
7,000 Wet Seal, Inc. (Class A)*............................................................... 206,500
18,000 White Cap Industries, Inc.*............................................................. 324,000
-----------
3,179,882
-----------
SAVINGS & LOAN ASSOCIATIONS (0.5%)
6,760 Astoria Financial Corp.................................................................. 376,870
-----------
SEMICONDUCTOR CAPITAL EQUIPMENT (0.0%)
1,000 Asyst Technologies, Inc.*............................................................... 21,750
-----------
SEMICONDUCTORS (2.2%)
15,000 DII Group, Inc.*........................................................................ 403,125
5,570 Linear Technology Corp.................................................................. 320,275
9,260 Maxim Integrated Products, Inc.*........................................................ 319,470
10,000 Photronics, Inc.*....................................................................... 242,500
22,000 RF Micro Devices, Inc.*................................................................. 261,250
12,000 Unitrode Corp.*......................................................................... 258,000
-----------
1,804,620
-----------
SHIPBUILDING (0.7%)
20,250 Halter Marine Group, Inc.*.............................................................. 584,719
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATION EQUIPMENT (3.7%)
10,000 ANTEC Corp.*............................................................................ $ 156,250
13,000 Aspect Telecommunications Corp.*........................................................ 271,375
6,000 Bell Canada International Inc.*......................................................... 91,500
25,265 Boston Communications Group, Inc.*...................................................... 271,599
6,600 CrossKeys Systems Corp. (Canada)*....................................................... 84,150
16,750 Davox Corp.*............................................................................ 540,188
18,000 Digital Microwave Corp.*................................................................ 261,000
10,085 Genesys Telecommunications Laboratories, Inc.*.......................................... 316,417
7,500 GeoTel Communications Corp.*............................................................ 117,188
1,000 Innova Corp./ Wash*..................................................................... 14,875
10,000 Pairgain Technologies, Inc.*............................................................ 193,750
12,000 Premisys Communications, Inc.*.......................................................... 310,500
8,000 REMEC, Inc.*............................................................................ 180,000
10,000 SmarTalk Teleservices Inc.*............................................................. 227,500
-----------
3,036,292
-----------
TELECOMMUNICATIONS (2.5%)
10,700 Aliant Communications, Inc.............................................................. 335,713
5,782 CFW Communications Co................................................................... 127,204
9,100 IXC Communications, Inc.*............................................................... 285,513
36,000 Metrocall, Inc.*........................................................................ 177,750
6,000 NEXTLINK Communications, Inc. (Class A)*................................................ 127,875
10,300 NTL Incorporated*....................................................................... 285,825
8,000 Pacific Gateway Exchange, Inc.*......................................................... 430,000
20,000 Primus Telecommunications Group, Inc.*.................................................. 323,750
-----------
2,093,630
-----------
TELECOMMUNICATIONS - WIRELESS (1.3%)
20,000 Centennial Cellular Corp. (Class A)*.................................................... 402,500
17,000 Clearnet Communications Inc. (Class A) (Canada)*........................................ 191,250
9,920 Globalstar Telecommunications Ltd.*..................................................... 487,320
-----------
1,081,070
-----------
TOBACCO (0.4%)
15,900 General Cigar Holdings, Inc.*........................................................... 338,869
-----------
TRANSPORTATION (2.8%)
10,202 Air Express International Corp.......................................................... 307,335
13,000 Aviation Sales Co.*..................................................................... 489,125
6,000 Avis Rent-A-Car, Inc.*.................................................................. 191,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
113
<PAGE>
DEVELOPING GROWTH
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
11,100 Budget Group, Inc. (Class A)*........................................................... $ 383,644
3,400 C.H. Robinson Worldwide, Inc............................................................ 76,075
12,900 Galileo International, Inc.............................................................. 356,363
4,000 Hub Group, Inc. (Class A)*.............................................................. 115,000
2,400 Jevic Transportation, Inc.*............................................................. 37,800
10,000 USFreightways Corp...................................................................... 325,000
-----------
2,281,967
-----------
TOTAL COMMON STOCKS
(IDENTIFIED COST $57,240,338)........................................................... 70,559,635
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS (15.7%)
U.S. GOVERNMENT AGENCY (a) (15.5%)
$ 12,800 Federal Home Loan Mortgage Corp. 6.00% due 01/02/98
(AMORTIZED COST $12,797,867).......................................................... 12,797,867
-----------
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (0.2%)
$ 132 The Bank of New York 3.875% due 01/02/98 (dated 12/31/97; proceeds $131,921) (b)
(IDENTIFIED COST $131,893)............................................................ $ 131,893
-----------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $12,929,760)........................................................... 12,929,760
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $70,170,098) (c).......................................................... 101.0 % 83,489,395
LIABILITIES IN EXCESS OF OTHER ASSETS...................................................... (1.0) (798,983)
------ ------------
NET ASSETS................................................................................. 100.0 % $ 82,690,412
------ ------------
------ ------------
</TABLE>
- ---------------------
ADR American Depository Receipt
* Non-income producing security.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $96,719 U.S. Treasury Bond 9.25% due 02/15/16 valued at
$134,531.
(c) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $15,880,143 and the
aggregate gross unrealized depreciation is $2,560,846, resulting in net
unrealized appreciation of $13,319,297.
SEE NOTES TO FINANCIAL STATEMENTS
114
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON AND PREFERRED STOCKS AND RIGHTS (84.8%)
ARGENTINA (6.9%)
BANKING
4,789 Banco de Galicia y Buenos Aires S.A. de C.V. (ADR)...................................... $ 123,317
4,900 Banco Rio de la Plata S.A. (ADR)........................................................ 68,600
-----------
191,917
-----------
BREWERY
7,580 Quilmes Industrial S.A. (ADR)........................................................... 103,751
-----------
FOOD, BEVERAGE, TOBACCO & HOUSEHOLD PRODUCTS
9,572 Molinos Rio de la Plata S.A. (Class B)*................................................. 22,977
-----------
INVESTMENT COMPANIES
19,926 CEI Citicorp Holdings S.A............................................................... 79,720
-----------
MULTI-INDUSTRY
54,702 Perez Companc S.A. (Class B)............................................................ 390,650
-----------
OIL & GAS
12,575 Yacimentos Petroliferos Fiscales S.A. (ADR)............................................. 429,908
-----------
STEEL
45,185 Siderca S.A. (Class A).................................................................. 125,639
-----------
TELECOMMUNICATIONS
1,980 Telecom Argentina Stet - France Telecom S.A. (Class B) (ADR)............................ 70,785
6,230 Telefonica de Argentina S.A. (ADR)...................................................... 232,068
-----------
302,853
-----------
TOTAL ARGENTINA......................................................................... 1,647,415
-----------
BRAZIL (14.8%)
BREWERY
200,000 Companhia Cervejaria Brahma (Pref.)+*................................................... 134,409
-----------
ELECTRIC
6,290 Companhia Paranaense de Energia - Copel (ADR)+.......................................... 86,094
-----------
FINANCIAL SERVICES
174,000 Itausa Investimentos Itau S.A. (Pref.)+................................................. 135,645
-----------
GAS
1,540,000 Petrobras Distribuidora S.A. (Pref.)+................................................... 26,909
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
METALS & MINING
6,600 Companhia Vale do Rio Doce S.A. (ADR)+.................................................. $ 133,650
7,400 Companhia Vale do Rio Doce S.A. (Pref.)+................................................ 148,862
5,000 Companhia Vale do Rio Doce S.A. (Debentures)............................................ --
-----------
282,512
-----------
OIL & GAS
954,000 Petroleo Brasileiro S.A. (Pref.)+....................................................... 223,113
-----------
TELECOMMUNICATIONS
1,962 Cia Riograndense Telecomunicacoes S.A. (Pref.).......................................... 2,417
950,000 Telecomunicacoes Brasileiras S.A........................................................ 96,617
11,627 Telecomunicacoes Brasileiras S.A. (ADR)+................................................ 1,353,819
13,285 Telecomunicacoes de Sao Paulo S.A.+*.................................................... 3,023
441,518 Telecomunicacoes de Sao Paulo S.A. (Pref.)+*............................................ 117,497
-----------
1,573,373
-----------
TEXTILES
30,000 Empresa Nacional de Comercio Redito e Participacoes S.A.*............................... 23
-----------
UTILITIES - ELECTRIC
4,765 Centrais Electricas Brasileiras S.A. (ADR)+............................................. 119,721
3,500,000 Centrais Electricas Brasileiras S.A. (Pref.)+........................................... 178,763
10,572 Companhia Energetica de Minas Gerais S.A. (Pref.) (ADR)+................................ 459,750
670,000 Light Participacoes S.A................................................................. 201,120
-----------
959,354
-----------
WATER
434,000 Companhia de Saneamento Basico do Estado de Sao Paulo+.................................. 103,056
1,378 Companhia de Saneamento Basico do Estado de Sao Paulo (Rights)*......................... --
-----------
103,056
-----------
TOTAL BRAZIL............................................................................ 3,524,488
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
115
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
CHILE (4.4%)
BANKING
2,100 Banco BHIF (ADR)*....................................................................... $ 33,600
6,100 Banco Santander Chile (ADR)............................................................. 86,162
-----------
119,762
-----------
FOOD, BEVERAGE, TOBACCO &
HOUSEHOLD PRODUCTS
8,140 Embotelladora Andina S.A. (Series A) (ADR).............................................. 169,414
3,540 Embotelladora Andina S.A. (Series B) (ADR).............................................. 68,809
2,600 Vina Concha Y Toro (ADR)................................................................ 65,650
-----------
303,873
-----------
INVESTMENT COMPANIES
3,352 Genesis Chile Fund Ltd.................................................................. 127,376
26,850 The Five Arrows Chile Investment Trust Ltd.............................................. 67,394
-----------
194,770
-----------
TELECOMMUNICATIONS
7,917 Compania de Telecommunicaciones de Chile S.A. (ADR)..................................... 236,520
-----------
UTILITIES - ELECTRIC
5,350 Enersis S.A. (ADR)...................................................................... 155,150
-----------
UTILITIES - GAS
1,800 Chilectra S.A. (ADR) - 144A**........................................................... 48,150
-----------
TOTAL CHILE............................................................................. 1,058,225
-----------
CHINA (1.2%)
AIR TRANSPORT
338,000 China Southern Airlines Co., Ltd. (Class H)*............................................ 87,256
-----------
MACHINERY
172,000 First Tractor Co., Ltd. (Class H)*...................................................... 103,791
-----------
OIL REFINERIES
240,000 Zhenhai Refining & Chemical Co. (Class H)............................................... 99,906
-----------
TOTAL CHINA............................................................................. 290,953
-----------
COLOMBIA (2.4%)
BANKING
41,300 Banco Industrial Colombiano S.A. (ADR).................................................. 578,200
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
EGYPT (1.0%)
BANKING
4,825 Commercial International Bank (GDR)* - 144A**........................................... $ 100,963
2,250 MISR International Bank S.A.E. (GDR)* - 144A**.......................................... 33,019
-----------
133,982
-----------
MANUFACTURING
5,200 Suez Cement Co. (GDR) - 144A**.......................................................... 104,520
-----------
TOTAL EGYPT............................................................................. 238,502
-----------
HONG KONG (1.5%)
APPLIANCES & HOUSEHOLD DURABLES
97,000 Guangdong Kelon Elec Holding (Class H).................................................. 99,538
-----------
ELECTRIC
249,000 Beijing Datang Power Generation Co., Ltd.*.............................................. 114,098
-----------
TELECOMMUNICATIONS
78,000 China Telecom Ltd.*..................................................................... 133,904
-----------
TOTAL HONG KONG......................................................................... 347,540
-----------
HUNGARY (2.9%)
CHEMICALS
1,865 BorsodChem RT (GDR) - 144A**............................................................ 66,208
-----------
OIL - EXPLORATION & PRODUCTION
7,100 MOL Magyar Olaj-es Gazipari RT (GDR) - 144A**........................................... 170,400
-----------
PHARMACEUTICALS
1,985 EGIS RT................................................................................. 124,433
980 Gedeon Richter RT (GDR)* - 144A**....................................................... 110,740
-----------
235,173
-----------
TELECOMMUNICATIONS
8,000 Magyar Tavkozlesi RT (ADR)*............................................................. 208,000
-----------
TOTAL HUNGARY........................................................................... 679,781
-----------
INDIA (5.6%)
BANKING
13,700 State Bank of India (GDR)*.............................................................. 229,475
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
116
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
DIVERSIFIED MANUFACTURING
26,000 Reliance Industries Ltd. (GDR) - 144A**................................................. $ 214,500
-----------
FINANCIAL SERVICES
5,025 Hindalco Industries Ltd. (GDR)*......................................................... 95,475
-----------
INDUSTRIALS
11,700 Mahindra & Mahindra Ltd. (GDR)*......................................................... 117,000
-----------
PHARMACEUTICALS
5,000 Ranbaxy Laboratories Ltd. (GDR)......................................................... 128,750
-----------
TELECOMMUNICATIONS
11,900 Mahanagar Telephone Nigam (GDR)*........................................................ 183,855
12,100 Videsh Sanchar Nigam Ltd. (GDR)*........................................................ 169,702
-----------
353,557
-----------
UTILITIES - ELECTRIC
12,500 BSES Ltd. (GDR)......................................................................... 206,250
-----------
TOTAL INDIA............................................................................. 1,345,007
-----------
KAZAKHSTAN (0.3%)
BANKING
3,360 Kazkommertsbank Co. (GDR) - 144A**...................................................... 67,200
-----------
MEXICO (18.5%)
BUILDING & CONSTRUCTION
5,280 Empresas ICA Sociedad Controladora S.A. de C.V. (ADR)*.................................. 86,790
-----------
BUILDING MATERIALS
19,700 Apasco S.A. de C.V...................................................................... 136,839
72,860 Cemex S.A. de C.V. (B Shares)........................................................... 389,515
-----------
526,354
-----------
CONGLOMERATES
26,801 ALFA S.A. de C.V. (Class A)............................................................. 181,843
19,200 DESC S.A. de C.V. (Series B)............................................................ 183,617
37,600 Grupo Carso S.A. de C.V. (Series A1)*................................................... 251,848
-----------
617,308
-----------
FINANCIAL SERVICES
36,124 Grupo Financiero Inbursa S.A. de C.V. (B Shares)........................................ 147,866
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
FOOD, BEVERAGE, TOBACCO &
HOUSEHOLD PRODUCTS
25,200 Fomento Economico Mexicano S.A. de C.V. (B Shares)...................................... $ 201,612
15,800 Grupo Industrial Bimbo S.A. de C.V. (Series A).......................................... 152,865
19,200 Grupo Modelo S.A. de C.V. (Series C).................................................... 161,469
3,784 Panamerican Beverages, Inc. (Class A)................................................... 123,453
-----------
639,399
-----------
MEDIA GROUP
6,770 Grupo Televisa S.A. de C.V. (GDR)*...................................................... 261,914
-----------
PAPER & FOREST PRODUCTS
83,650 Kimberly-Clark de Mexico S.A. de C.V. (A Shares)........................................ 409,846
-----------
RETAIL
169,000 Cifra S.A. de C.V. (Series C)........................................................... 379,422
9,460 Cifra S.A. de C.V. (Series V)........................................................... 23,351
27,300 Organizacion Soriana S.A. de C.V. (Series B)............................................ 120,212
-----------
522,985
-----------
STEEL & IRON
7,300 Tubos de Acero de Mexico S.A. de C.V. (ADR)*............................................ 157,862
-----------
TELECOMMUNICATIONS
18,270 Telefonos de Mexico S.A. de C.V. (Series L) (ADR)....................................... 1,024,262
-----------
TOTAL MEXICO............................................................................ 4,394,586
-----------
PERU (2.9%)
BREWERY
160,971 Union de Cervecerias Peruanas Backus & Johnston S.A. (T Shares)......................... 147,788
-----------
BUILDING MATERIALS
57,595 Cementos Lima, S.A...................................................................... 125,004
-----------
FINANCIAL SERVICES
7,268 Credicorp Ltd........................................................................... 130,824
-----------
METALS & MINING
8,420 Compania de Minas Buenaventura S.A. (B Shares).......................................... 63,390
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
117
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS
9,267 CPT Telefonica del Peru S.A. (ADR)...................................................... $ 216,037
-----------
TOTAL PERU.............................................................................. 683,043
-----------
PHILIPPINES (0.5%)
TELECOMMUNICATIONS
4,600 Philippine Long Distance Telephone Co................................................... 101,200
-----------
UTILITIES - ELECTRIC
7,383 Manila Electric Co. (B Shares).......................................................... 24,733
-----------
TOTAL PHILIPPINES....................................................................... 125,933
-----------
POLAND (2.1%)
BANKING
9,300 Bank Rozwoju Eksportu S.A............................................................... 192,869
-----------
BREWERY
1,500 Zaklady Piwowarskie w Zywcu S.A......................................................... 126,137
-----------
INVESTMENT COMPANIES
5,288 Polish National Investment Fund*........................................................ 186,282
-----------
TOTAL POLAND............................................................................ 505,288
-----------
RUSSIA (4.8%)
ELECTRIC - MAJOR
5,300 Unified Energy Systems (ADR)............................................................ 159,000
2,680 Unified Energy Systems (BRIDGE) Certificate (ADR) - 144A**.............................. 181,389
-----------
340,389
-----------
GAS
12,400 Gazprom (ADR) - 144A**.................................................................. 294,500
-----------
OIL & GAS
1,000 Lukoil Holding Co. (ADR) - 144A**....................................................... 92,000
28,000 Surgutneftegaz (ADR).................................................................... 283,640
-----------
375,640
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES - ELECTRIC
1,000 AO Tatneft (ADR)........................................................................ $ 141,000
-----------
TOTAL RUSSIA............................................................................ 1,151,529
-----------
SOUTH AFRICA (3.1%)
BANKING
6,840 Nedcor Ltd.............................................................................. 151,875
-----------
FINANCE - DIVERSIFIED
8,820 Johnnies Industrial Corp., Ltd.......................................................... 93,930
-----------
LIFE INSURANCE
4,130 Liberty Life Association of Africa Ltd.................................................. 106,137
-----------
MULTI-INDUSTRY
12,024 Barlow Ltd.............................................................................. 102,095
11,220 Rembrandt Group Ltd..................................................................... 81,889
-----------
183,984
-----------
OIL & GAS
13,173 Sasol Ltd............................................................................... 138,121
-----------
TELECOMMUNICATION EQUIPMENT
65,400 New Africa Investments Ltd. (N Shares).................................................. 62,523
-----------
TOTAL SOUTH AFRICA...................................................................... 736,570
-----------
TAIWAN (3.8%)
COMPUTERS - PERIPHERAL EQUIPMENT
10,100 Asustek Computer Inc. (GDR)............................................................. 167,912
-----------
ELECTRONICS - SEMICONDUCTORS/
COMPONENTS
2,700 Siliconware Precision Industries Co. (GDR).............................................. 34,560
20,000 Taiwan Semiconductor Manufacturing Co. (ADR)............................................ 363,750
-----------
398,310
-----------
INVESTMENT COMPANIES
25,400 ROC Taiwan Fund......................................................................... 206,375
12,000 The Taiwan Index Fund Ltd............................................................... 142,560
-----------
348,935
-----------
TOTAL TAIWAN............................................................................ 915,157
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
118
<PAGE>
EMERGING MARKETS
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
TURKEY (5.0%)
BANKING
1,600,000 Akbank T.A.S............................................................................ $ 141,063
880,000 Turkiye Garanti Bankasi A.S............................................................. 43,575
-----------
184,638
-----------
BUILDING MATERIALS
1,440,000 Cimsa Cimento Sanayi Ve Ticaret A.S..................................................... 78,261
-----------
CEMENT
480,000 Baticim Bati Anadolu Cimento Sanayii A.S................................................ 55,652
-----------
HOUSEWARES
5,246,858 Trakya Cam Sanayii A.S.................................................................. 304,165
-----------
PROPERTY - CASUALTY INSURANCE
3,600,000 Aksigorta A.S........................................................................... 230,435
-----------
TELECOMMUNICATIONS
620,000 Netas Northern Elektrik Telekomunikasyon A.S.*.......................................... 224,638
-----------
TELEVISION
1,400,000 Vestel Elektronik Sanayi ve Ticaret A.S................................................. 114,976
-----------
TOTAL TURKEY............................................................................ 1,192,765
-----------
VENEZUELA (3.0%)
TELECOMMUNICATIONS
16,950 Compania Anonima Nacional Telefonos de Venezuela (ADR)*................................. 705,544
-----------
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
VIETNAM (0.1%)
INVESTMENT COMPANIES
1,800 Lazard Vietnam Fund Ltd................................................................. $ 14,400
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL COMMON AND PREFERRED STOCKS AND RIGHTS
(IDENTIFIED COST $18,976,480) (a).......................................................... 84.8 % 20,202,126
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 15.2 3,612,509
------ ------------
NET ASSETS................................................................................. 100.0 % $ 23,814,635
------ ------------
------ ------------
</TABLE>
- ---------------------
ADR American Depository Receipt.
GDR Global Depository Receipt.
* Non-income producing security.
** Resale is restricted to qualified institutional investors.
+ Some or all of these securities are segregated in connection with open
forward foreign currency contracts.
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $2,743,366 and the
aggregate gross unrealized depreciation is $1,517,720, resulting in net
unrealized appreciation of $1,225,646.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
CONTRACTS TO IN EXCHANGE DELIVERY UNREALIZED
RECEIVE FOR DATE DEPRECIATION
- -------------------------------------------------------------------
<S> <C> <C> <C>
MXN 190,263 $ 23,621 01/02/98 $ (21)
$ 541,000 BRL 649,200 04/29/98 (6,756)
$ 541,000 BRL 649,200 04/30/98 (6,478)
--------------
Total unrealized depreciation................ $ (13,255)
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
119
<PAGE>
EMERGING MARKETS
SUMMARY OF INVESTMENTS DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Air Transport...................................................................... $ 87,256 0.4 %
Appliances & Household Durables.................................................... 99,538 0.4
Banking............................................................................ 1,849,918 7.8
Brewery............................................................................ 512,085 2.1
Building & Construction............................................................ 86,790 0.4
Building Materials................................................................. 729,619 3.1
Cement............................................................................. 55,652 0.2
Chemicals.......................................................................... 66,208 0.3
Computers - Peripheral Equipment................................................... 167,912 0.7
Conglomerates...................................................................... 617,308 2.6
Diversified Manufacturing.......................................................... 214,500 0.9
Electric........................................................................... 200,192 0.9
Electric - Major................................................................... 340,389 1.4
Electronics - Semiconductors/Components............................................ 398,310 1.7
Finance - Diversified.............................................................. 93,930 0.4
Financial Services................................................................. 509,810 2.1
Food, Beverage, Tobacco & Household Products....................................... 966,249 4.1
Gas................................................................................ 321,409 1.3
Housewares......................................................................... 304,165 1.3
Industrials........................................................................ 117,000 0.5
Investment Companies............................................................... 824,107 3.5
Life Insurance..................................................................... 106,137 0.4
Machinery.......................................................................... 103,791 0.4
Manufacturing...................................................................... 104,520 0.4
Media Group........................................................................ 261,914 1.1
<CAPTION>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Metals & Mining.................................................................... $ 345,902 1.5 %
Multi-Industry..................................................................... 574,634 2.4
Oil & Gas.......................................................................... 1,166,782 4.9
Oil - Exploration & Production..................................................... 170,400 0.7
Oil Refineries..................................................................... 99,906 0.4
Paper & Forest Products............................................................ 409,846 1.7
Pharmaceuticals.................................................................... 363,923 1.5
Property - Casualty Insurance...................................................... 230,435 1.0
Retail............................................................................. 522,985 2.2
Steel.............................................................................. 125,639 0.5
Steel & Iron....................................................................... 157,862 0.7
Telecommunication Equipment........................................................ 62,523 0.3
Telecommunications................................................................. 5,079,888 21.3
Television......................................................................... 114,976 0.5
Textiles........................................................................... 23 --
Utilities - Electric............................................................... 1,486,487 6.2
Utilities - Gas.................................................................... 48,150 0.2
Water.............................................................................. 103,056 0.4
----------- ---
$20,202,126 84.8 %
----------- ---
----------- ---
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TYPE OF INVESTMENT VALUE NET ASSETS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stocks...................................................................... $18,774,761 78.8 %
Preferred Stocks................................................................... 1,427,365 6.0
----------- ---
$20,202,126 84.8 %
----------- ---
----------- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
120
<PAGE>
(This page has been left blank intentionally.)
121
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED UTILITIES
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in securities, at value *... $ 83,578,604 $ 5,044,961 $ 60,739,821 $ 72,607,791 $ 50,695,584
Cash.................................... 6,167 33,228 333,005 -- --
Receivable for:
Investments sold.................... -- -- 79,250 -- --
Shares of beneficial interest
sold.............................. 804,184 -- 111,886 41,267 42,841
Dividends........................... -- -- -- 24,087 67,966
Interest............................ 31,937 28,947 924,494 275,979 40,981
Foreign withholding taxes
reclaimed......................... -- -- -- -- 3,985
Compensated forward foreign currency
contracts......................... -- -- 342,773 -- --
Unrealized appreciation on open forward
foreign currency contracts............ -- -- 66,507 -- --
Deferred organizational expenses........ 2,980 2,980 2,980 2,980 2,980
Receivable from affiliate............... -- -- -- -- --
Prepaid expenses and other assets....... 1,364 44 4 -- 6
-------------- --------------- --------------- -------------- --------------
TOTAL ASSETS....................... 84,425,236 5,110,160 62,600,720 72,952,104 50,854,343
-------------- --------------- --------------- -------------- --------------
LIABILITIES:
Payable for:
Investments purchased............... -- -- -- 1,533,294 --
Shares of beneficial interest
repurchased....................... 314,571 207 2,581 20,448 36,178
Compensated forward foreign currency
contracts......................... -- -- 262,184 -- --
Investment management fees.......... 38,681 2,917 21,802 47,126 28,198
Unrealized depreciation on open forward
foreign currency contracts............ -- -- 939 -- --
Accrued expenses and other payables..... 26,590 15,589 26,213 27,800 24,022
-------------- --------------- --------------- -------------- --------------
TOTAL LIABILITIES.................. 379,842 18,713 313,719 1,628,668 88,398
-------------- --------------- --------------- -------------- --------------
NET ASSETS:
Paid-in-capital......................... 84,045,331 5,046,465 61,744,472 60,398,224 39,233,765
Accumulated undistributed net investment
income (loss)......................... 63 15,876 433,907 117,451 81,278
Accumulated undistributed net realized
gain (loss)........................... -- (10,351) (274,507) 1,854,938 698,472
Net unrealized appreciation............. -- 39,457 383,129 8,952,823 10,752,430
-------------- --------------- --------------- -------------- --------------
NET ASSETS......................... $ 84,045,394 $ 5,091,447 $ 62,287,001 $ 71,323,436 $ 50,765,945
-------------- --------------- --------------- -------------- --------------
-------------- --------------- --------------- -------------- --------------
*IDENTIFIED COST................... $ 83,578,604 $ 5,005,504 $ 60,415,470 $ 63,654,968 $ 39,943,154
-------------- --------------- --------------- -------------- --------------
-------------- --------------- --------------- -------------- --------------
SHARES OF BENEFICIAL INTEREST
OUTSTANDING........................ 84,045,331 500,680 6,050,755 4,745,175 3,205,930
-------------- --------------- --------------- -------------- --------------
-------------- --------------- --------------- -------------- --------------
NET ASSET VALUE PER SHARE
(UNLIMITED AUTHORIZED SHARES OF $.01 PAR
VALUE).................................. $1.00 $10.17 $10.29 $15.03 $15.84
-------------- --------------- --------------- -------------- --------------
-------------- --------------- --------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
122
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
DIVIDEND VALUE-ADDED AMERICAN MID-CAP GLOBAL DEVELOPING EMERGING
GROWTH MARKET CORE EQUITY VALUE GROWTH EQUITY GROWTH MARKETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in
securities,
at value *... $517,316,474 $144,718,893 $40,996,550 $237,573,341 $20,289,689 $102,184,012 $83,489,395 $20,202,126
Cash........... -- -- -- 27,749 -- -- -- 3,614,248
Receivable for:
Investments
sold..... -- 2,281,748 -- 1,895,415 349,058 -- 179,690 200
Shares of
beneficial
interest
sold..... 830,093 112,289 48,203 202,810 47,060 105,361 29,000 5,707
Dividends... 1,012,815 178,701 20,989 125,529 5,265 96,513 16,577 68,646
Interest... 589 61 376 303,401 39 287 14 46,126
Foreign
withholding
taxes
reclaimed... -- -- -- 204 -- 45,043 -- --
Compensated
forward
foreign
currency
contracts... -- -- -- -- -- -- -- --
Unrealized
appreciation
on open
forward
foreign
currency
contracts.... -- -- -- -- -- -- -- --
Deferred
organizational
expenses..... 2,980 2,980 2,980 2,980 -- 2,980 2,980 2,980
Receivable from
affiliate.... -- -- -- -- 13,966 -- -- --
Prepaid
expenses and
other
assets....... 3,315 24 -- 794 3,296 312 400 243
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
TOTAL
ASSETS.... 519,166,266 147,294,696 41,069,098 240,132,223 20,708,373 102,434,508 83,718,056 23,940,276
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
LIABILITIES:
Payable for:
Investments
purchased... -- 5,761,269 697,938 9,779,707 1,454,353 -- 643,643 23,600
Shares of
beneficial
interest
repurchased... 415,807 118,818 8,216 167,500 722 73,807 316,323 25,336
Compensated
forward
foreign
currency
contracts... -- -- -- -- -- -- -- --
Investment
management
fees..... 285,630 61,919 30,089 125,547 -- 90,542 36,127 26,480
Unrealized
depreciation
on open
forward
foreign
currency
contracts.... -- -- -- -- -- -- -- 13,255
Accrued
expenses and
other
payables..... 45,724 36,517 21,742 45,835 17,263 40,693 31,551 36,970
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
TOTAL
LIABILITIES... 747,161 5,978,523 757,985 10,118,589 1,472,338 205,042 1,027,644 125,641
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
NET ASSETS:
Paid-in-capital... 419,602,338 111,007,677 32,995,259 174,404,265 17,711,433 93,732,538 69,320,011 23,464,634
Accumulated
undistributed
net
investment
income
(loss)....... 784,586 169,935 -- 166,525 19,748 310,005 36,082 85,508
Accumulated
undistributed
net realized
gain
(loss)....... 25,662,041 2,211,558 1,250,823 27,762,359 (41,862) (911,992) 15,022 (947,778)
Net unrealized
appreciation... 72,370,140 27,927,003 6,065,031 27,680,485 1,546,716 9,098,915 13,319,297 1,212,271
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
NET
ASSETS.... $518,419,105 $141,316,173 $40,311,113 $230,013,634 $19,236,035 $102,229,466 $82,690,412 $23,814,635
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
*IDENTIFIED
COST...... $444,946,334 $116,791,890 $34,931,519 $209,892,856 $18,742,973 $ 93,082,926 $70,170,098 $18,976,480
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
SHARES OF
BENEFICIAL
INTEREST
OUTSTANDING... 26,484,381 8,046,487 2,434,295 11,680,635 1,687,227 7,882,702 4,315,931 2,105,876
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
NET ASSET VALUE
PER SHARE
(UNLIMITED
AUTHORIZED
SHARES OF $.01
PAR VALUE)..... $19.57 $17.56 $16.56 $19.69 $11.40 $12.97 $19.16 $11.31
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
</TABLE>
123
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
NORTH
AMERICAN
MONEY GOVERNMENT DIVERSIFIED
MARKET SECURITIES INCOME BALANCED UTILITIES
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
INCOME
Interest................................ $ 5,223,567 $ 277,812 $ 4,018,833 $ 1,304,270 $ 276,868
Dividends from affiliate (Note 3)....... -- -- -- -- --
Dividends............................... -- -- -- 359,903** 1,165,235**
-------------- ------------ ------------ ------------ ------------
TOTAL INCOME....................... 5,223,567 277,812 4,018,833 1,664,173 1,442,103
-------------- ------------ ------------ ------------ ------------
EXPENSES
Investment management fee............... 463,709 30,048 186,066 422,583 261,168
Professional fees....................... 16,821 13,615 15,345 16,593 14,073
Custodian fees.......................... 13,548 10,250 35,076 21,161 13,151
Shareholder reports and notices......... 12,293 1,202 7,107 11,748 11,382
Trustees' fees and expenses............. 1,869 2 617 632 536
Transfer agent fees and expenses........ 500 500 500 500 500
Organizational expenses................. 1,606 1,606 1,606 1,606 1,606
Other................................... 2,207 1,198 8,702 5,508 2,373
-------------- ------------ ------------ ------------ ------------
TOTAL EXPENSES..................... 512,553 58,421 255,019 480,331 304,789
Less: amounts reimbursed/waived......... -- -- -- -- --
-------------- ------------ ------------ ------------ ------------
NET EXPENSES....................... 512,553 58,421 255,019 480,331 304,789
-------------- ------------ ------------ ------------ ------------
NET INVESTMENT INCOME.............. 4,711,014 219,391 3,763,814 1,183,842 1,137,314
-------------- ------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................... -- (1,271) (1,093,986) 1,883,756 872,891
Foreign exchange transactions....... -- -- 767,173 -- --
-------------- ------------ ------------ ------------ ------------
NET GAIN (LOSS).................... -- (1,271) (326,813) 1,883,756 872,891
-------------- ------------ ------------ ------------ ------------
Net change in unrealized appreciation/
depreciation on:
Investments......................... -- 44,134 445,640 5,626,407 8,023,362
Translation of forward foreign
currency contracts and other
assets and liabilities denominated
in foreign currencies............. -- -- (14,561) -- --
-------------- ------------ ------------ ------------ ------------
NET APPRECIATION (DEPRECIATION).... -- 44,134 431,079 5,626,407 8,023,362
-------------- ------------ ------------ ------------ ------------
NET GAIN (LOSS).................... -- 42,863 104,266 7,510,163 8,896,253
-------------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE)................. $ 4,711,014 $ 262,254 $ 3,868,080 $ 8,694,005 $ 10,033,567
-------------- ------------ ------------ ------------ ------------
-------------- ------------ ------------ ------------ ------------
</TABLE>
- --- For the period January 21, 1997
(commencement of operations) through
* December 31, 1997.
** Net of foreign withholding tax of
$1,619, $15,705, $5,460, $1,268, $3,822,
$154, $102,055, $468 and $26,423,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS
124
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
DIVIDEND VALUE-ADDED AMERICAN MID-CAP GLOBAL DEVELOPING EMERGING
GROWTH MARKET CORE EQUITY VALUE GROWTH* EQUITY GROWTH MARKETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT
INCOME:
INCOME
Interest....... $ 349,892 $ 446,343 $ 43,951 $ 761,291 $ 127,380 $ 571,528 $ 497,037 $ 141,678
Dividends from
affiliate
(Note 3)..... -- 5,660 -- -- -- -- -- --
Dividends...... 10,583,415 1,782,249** 294,480** 1,147,123** 29,310** 1,172,224** 109,186** 401,826**
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
TOTAL
INCOME.... 10,933,307 2,234,252 338,431 1,908,414 156,690 1,743,752 606,223 543,504
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
EXPENSES
Investment
management
fee.......... 2,477,416 540,475 254,398 1,082,276 66,404 852,703 355,267 308,327
Professional
fees......... 19,122 15,584 15,757 18,943 16,538 16,382 15,696 15,306
Custodian
fees......... 28,755 27,195 19,088 45,621 12,571 64,967 31,357 85,020
Shareholder
reports and
notices...... 46,228 21,269 5,080 31,002 2,067 14,143 16,331 2,151
Trustees' fees
and
expenses..... 5,975 1,447 206 2,076 39 1,228 986 831
Transfer agent
fees and
expenses..... 500 500 500 500 500 500 500 500
Organizational
expenses..... 1,606 1,606 1,606 1,606 -- 1,606 1,606 1,606
Other.......... 5,571 13,796 2,303 3,788 688 13,500 3,079 8,796
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
TOTAL
EXPENSES... 2,585,173 621,872 298,938 1,185,812 98,807 965,029 424,822 422,537
Less: amounts
reimbursed/waived... -- -- -- -- (98,807) -- -- --
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET
EXPENSES... 2,585,173 621,872 298,938 1,185,812 -- 965,029 424,822 422,537
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET
INVESTMENT
INCOME.... 8,348,134 1,612,380 39,493 722,602 156,690 778,723 181,401 120,967
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET REALIZED
AND UNREALIZED
GAIN (LOSS):
Net realized
gain (loss)
on:
Investments... 25,772,008 2,211,559 1,290,619 28,077,637 (41,862) 207,794 2,009,657 (600,494)
Foreign
exchange
transactions... -- -- -- -- -- (826) -- 5,739
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET GAIN
(LOSS).... 25,772,008 2,211,559 1,290,619 28,077,637 (41,862) 206,968 2,009,657 (594,755)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Net change in
unrealized
appreciation/
depreciation
on:
Investments... 50,279,373 20,050,469 4,281,360 18,351,924 1,546,716 4,450,608 6,889,489 (143,450)
Translation
of
forward
foreign
currency
contracts
and other
assets
and
liabilities
denominated
in
foreign
currencies... -- -- -- -- -- (2,897) -- (13,180)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET
APPRECIATION
(DEPRECIATION)... 50,279,373 20,050,469 4,281,360 18,351,924 1,546,716 4,447,711 6,889,489 (156,630)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET GAIN
(LOSS).... 76,051,381 22,262,028 5,571,979 46,429,561 1,504,854 4,654,679 8,899,146 (751,385)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE
(DECREASE)..... $84,399,515 $ 23,874,408 $ 5,611,472 $ 47,152,163 $ 1,661,544 $ 5,433,402 $ 9,080,547 $ (630,418)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
</TABLE>
125
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
NORTH AMERICAN
MONEY MARKET GOVERNMENT SECURITIES
------------------------------- ------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................... $ 4,711,014 $ 2,961,002 $ 219,391 $ 158,771
Net realized gain (loss)................ -- -- (1,271) (8,538)
Net change in unrealized appreciation/
depreciation.......................... -- -- 44,134 (11,739)
-------------- -------------- ------------- --------------
NET INCREASE....................... 4,711,014 2,961,002 262,254 138,494
-------------- -------------- ------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................... (4,710,989) (2,960,990) (222,788) (144,983)
Net realized gain....................... -- -- -- --
-------------- -------------- ------------- --------------
TOTAL.............................. (4,710,989) (2,960,990) (222,788) (144,983)
-------------- -------------- ------------- --------------
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST:
Net proceeds from sales................. 120,256,057 78,840,405 1,648,694 3,289,914
Reinvestment of dividends and
distributions......................... 4,710,989 2,960,989 222,788 144,983
Cost of shares repurchased.............. (127,923,366) (36,888,754) (991,209) (544,380)
-------------- -------------- ------------- --------------
NET INCREASE (DECREASE)............ (2,956,320) 44,912,640 880,273 2,890,517
-------------- -------------- ------------- --------------
TOTAL INCREASE (DECREASE).......... (2,956,295) 44,912,652 919,739 2,884,028
NET ASSETS:
Beginning of period..................... 87,001,689 42,089,037 4,171,708 1,287,680
-------------- -------------- ------------- --------------
END OF PERIOD...................... $ 84,045,394 $ 87,001,689 $ 5,091,447 $ 4,171,708
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
UNDISTRIBUTED NET INVESTMENT INCOME..... $ 63 $ 38 $ 15,876 $ 19,273
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
SHARES ISSUED AND REPURCHASED:
Sold.................................... 120,256,057 78,840,405 162,979 326,740
Issued in reinvestment of dividends and
distributions......................... 4,710,989 2,960,989 22,097 14,475
Repurchased............................. (127,923,366) (36,888,754) (98,049) (54,111)
-------------- -------------- ------------- --------------
NET INCREASE (DECREASE)................. (2,956,320) 44,912,640 87,027 287,104
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
126
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
DIVERSIFIED INCOME BALANCED UTILITIES DIVIDEND GROWTH
------------------------ ------------------------ ------------------------ ------------------------
1997 1996 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment
income....... $ 3,763,814 $ 1,632,440 $ 1,183,842 $ 732,777 $ 1,137,314 $ 981,948 $ 8,348,134 $ 3,973,273
Net realized
gain
(loss)....... (326,813) 222,680 1,883,756 165,198 872,891 (34,414) 25,772,008 13,581,202
Net change in
unrealized
appreciation/
depreciation... 431,079 (85,690) 5,626,407 2,556,189 8,023,362 1,420,438 50,279,373 15,794,035
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET
INCREASE... 3,868,080 1,769,430 8,694,005 3,454,164 10,033,567 2,367,972 84,399,515 33,348,510
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income....... (3,642,497) (1,475,700) (1,157,698) (689,333) (1,156,425) (940,692) (8,067,138) (3,704,044)
Net realized
gain......... (92,958) (20,718) (164,839) (141,913) (140,005) (20,650) (13,688,414) (181,533)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL..... (3,735,455) (1,496,418) (1,322,537) (831,246) (1,296,430) (961,342) (21,755,552) (3,885,577)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TRANSACTIONS IN
SHARES OF
BENEFICIAL
INTEREST:
Net proceeds
from sales... 37,352,457 27,898,560 32,245,427 28,026,839 12,711,349 23,406,556 216,990,147 152,508,539
Reinvestment of
dividends and
distributions... 3,735,455 1,496,418 1,322,537 831,246 1,296,430 961,342 21,755,552 3,885,577
Cost of shares
repurchased... (11,052,734) (6,520,785) (8,509,024) (8,899,367) (7,665,054) (8,047,676) (41,071,424) (6,450,410)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET
INCREASE
(DECREASE)... 30,035,178 22,874,193 25,058,940 19,958,718 6,342,725 16,320,222 197,674,275 149,943,706
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL
INCREASE
(DECREASE)... 30,167,803 23,147,205 32,430,408 22,581,636 15,079,862 17,726,852 260,318,238 179,406,639
NET ASSETS:
Beginning of
period....... 32,119,198 8,971,993 38,893,028 16,311,392 35,686,083 17,959,231 258,100,867 78,694,228
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
END OF
PERIOD.... $62,287,001 $32,119,198 $71,323,436 $38,893,028 $50,765,945 $35,686,083 $518,419,105 $258,100,867
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
UNDISTRIBUTED
NET INVESTMENT
INCOME......... $ 433,907 $ 325,346 $ 117,451 $ 91,307 $ 81,278 $ 100,389 $ 784,586 $ 503,590
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
SHARES ISSUED
AND
REPURCHASED:
Sold........... 3,651,731 2,726,316 2,274,595 2,258,138 904,097 1,865,091 11,751,312 10,022,691
Issued in
reinvestment
of dividends
and
distributions... 366,945 146,667 93,933 66,953 95,848 76,796 1,203,410 254,031
Repurchased.... (1,079,349) (639,097) (598,705) (721,662) (551,585) (638,597) (2,163,103) (394,437)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE
(DECREASE)..... 2,939,327 2,233,886 1,769,823 1,603,429 448,360 1,303,290 10,791,619 9,882,285
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
127
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
VALUE-ADDED MARKET CORE EQUITY
---------------------------------- -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................... $ 1,612,380 $ 836,850 $ 39,493 $ 66,185
Net realized gain (loss)................ 2,211,559 214,733 1,290,619 92,662
Net change in unrealized appreciation/
depreciation.......................... 20,050,469 6,697,183 4,281,360 1,698,937
-------------- ----------------- -------------- --------------
NET INCREASE (DECREASE)............ 23,874,408 7,748,766 5,611,472 1,857,784
-------------- ----------------- -------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................... (1,545,598) (781,217) (51,873) (56,282)
Net realized gain....................... (214,735) (24,655) (131,373) (26,347)
Paid-in-capital......................... -- -- -- --
-------------- ----------------- -------------- --------------
TOTAL.............................. (1,760,333) (805,872) (183,246) (82,629)
-------------- ----------------- -------------- --------------
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST:
Net proceeds from sales................. 56,658,607 42,917,521 28,816,261 15,980,007
Reinvestment of dividends and
distributions......................... 1,760,333 805,872 183,246 82,629
Cost of shares repurchased.............. (12,733,322) (1,119,434) (12,331,431) (3,579,392)
-------------- ----------------- -------------- --------------
NET INCREASE....................... 45,685,618 42,603,959 16,668,076 12,483,244
-------------- ----------------- -------------- --------------
TOTAL INCREASE..................... 67,799,693 49,546,853 22,096,302 14,258,399
NET ASSETS:
Beginning of period..................... 73,516,480 23,969,627 18,214,811 3,956,412
-------------- ----------------- -------------- --------------
END OF PERIOD...................... $ 141,316,173 $ 73,516,480 $ 40,311,113 $ 18,214,811
-------------- ----------------- -------------- --------------
-------------- ----------------- -------------- --------------
UNDISTRIBUTED NET INVESTMENT INCOME..... $ 169,935 $ 103,153 -- $ 12,380
-------------- ----------------- -------------- --------------
-------------- ----------------- -------------- --------------
SHARES ISSUED AND REPURCHASED:
Sold.................................... 3,510,750 3,257,040 1,878,945 1,265,283
Issued in reinvestment of dividends and
distributions......................... 110,135 60,960 12,436 6,625
Repurchased............................. (765,113) (85,436) (801,820) (284,554)
-------------- ----------------- -------------- --------------
NET INCREASE............................ 2,855,772 3,232,564 1,089,561 987,354
-------------- ----------------- -------------- --------------
-------------- ----------------- -------------- --------------
</TABLE>
- --- For the period January 21, 1997
(commencement of operations) through
* December 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
128
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
MID-CAP
AMERICAN VALUE GROWTH GLOBAL EQUITY DEVELOPING GROWTH EMERGING MARKETS
---------------------- ---------- ----------------------- ------------------------ ------------------------
1997 1996 1997* 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment
income....... $ 722,602 $ 426,571 $ 156,690 $ 778,723 $ 468,960 $ 181,401 $ 23,712 $ 120,967 $ 162,121
Net realized
gain
(loss)....... 28,077,637 3,030,821 (41,862) 206,968 (692,618) 2,009,657 (1,972,014) (594,755) (216,419)
Net change in
unrealized
appreciation/
depreciation... 18,351,924 6,446,354 1,546,716 4,447,711 4,065,701 6,889,489 4,927,547 (156,630) 1,353,117
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
NET
INCREASE
(DECREASE)... 47,152,163 9,903,746 1,661,544 5,433,402 3,842,043 9,080,547 2,979,245 (630,418) 1,298,819
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
DIVIDENDS AND
DISTRIBUTIONS
FROM:
Net investment
income....... (581,955) (466,925) (136,942) (731,065) (488,553) (145,319) (44,381) (113,623) (149,041)
Net realized
gain......... (3,287,899) (368,284) -- (128,304) (42,086) -- (41,144) -- --
Paid-in-capital... -- -- -- -- -- -- (12,078) -- --
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
TOTAL..... (3,869,854) (835,209) (136,942) (859,369) (530,639) (145,319) (97,603) (113,623) (149,041)
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
TRANSACTIONS IN
SHARES OF
BENEFICIAL
INTEREST:
Net proceeds
from sales... 83,771,943 79,809,158 20,630,739 51,953,057 46,445,852 32,654,294 53,395,835 13,701,773 13,447,515
Reinvestment of
dividends and
distributions... 3,869,854 835,209 136,942 859,369 530,639 145,319 97,603 113,623 149,041
Cost of shares
repurchased... (21,814,303) (7,043,859) (3,056,248) (14,403,393) (8,115,798) (20,164,427) (12,666,934) (6,496,911) (1,598,361)
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
NET
INCREASE... 65,827,494 73,600,508 17,711,433 38,409,033 38,860,693 12,635,186 40,826,504 7,318,485 11,998,195
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
TOTAL
INCREASE... 109,109,803 82,669,045 19,236,035 42,983,066 42,172,097 21,570,414 43,708,146 6,574,444 13,147,973
NET ASSETS:
Beginning of
period....... 120,903,831 38,234,786 -- 59,246,400 17,074,303 61,119,998 17,411,852 17,240,191 4,092,218
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
END OF
PERIOD.... $230,013,634 $120,903,831 $19,236,035 $102,229,466 $59,246,400 $82,690,412 $61,119,998 $23,814,635 $17,240,191
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
UNDISTRIBUTED
NET INVESTMENT
INCOME......... $ 166,525 $ 25,801 $ 19,748 $ 310,005 $ 10,246 $ 36,082 -- $ 85,508 $ 18,607
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
SHARES ISSUED
AND
REPURCHASED:
Sold........... 4,775,976 5,549,567 1,956,099 4,006,028 4,014,156 1,800,018 3,224,490 1,094,065 1,248,927
Issued in
reinvestment
of dividends
and
distributions... 238,084 58,182 12,916 66,503 45,738 9,034 6,038 8,961 13,861
Repurchased.... (1,234,165) (494,896) (281,788) (1,101,520) (702,081) (1,113,498) (770,797) (536,332) (146,135)
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
NET INCREASE... 3,779,895 5,112,853 1,687,227 2,971,011 3,357,813 695,554 2,459,731 566,694 1,116,653
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
----------- --------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
</TABLE>
129
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Select Dimensions Investment Series (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The shares of the Fund will only be sold to
Hartford Life Insurance Company and ITT Hartford Life and Annuity Insurance
Company for allocation to certain of its separate accounts to fund variable
annuity contracts and variable life insurance policies they issue.
The Fund, which consists of 13 separate portfolios ("Portfolios"), was organized
on June 2, 1994 as a Massachusetts business trust and commenced operations on
November 9, 1994, with the exception of Mid-Cap Growth which commenced
operations on January 21, 1997.
The investment objectives of each Portfolio are as follows:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<C> <S>
Money Market Seeks high current income, preservation of capital and liquidity
by investing in short-term money market instruments.
North American Seeks to earn a high level of current income while maintaining
Government relatively low volatility of principal by primarily investing in
Securities investment grade fixed income securities issued or guaranteed by
the U.S., Canadian or Mexican governments.
Diversified Seeks, as a primary objective, to earn a high level of current
Income income and, as a secondary objective, to maximize total return,
but only to the extent consistent with its primary objective, by
equally allocating its assets among three separate groupings of
fixed income securities.
Balanced Seeks to achieve high total return through a combination of income
and capital appreciation by investing in a diversified portfolio
of common stocks and investment grade fixed income securities.
Utilities Seeks to provide current income and long-term growth of income and
capital by investing in equity and fixed income securities of
companies in the public utilities industry.
Dividend Growth Seeks to provide reasonable current income and long-term growth of
income and capital by investing primarily in common stock of
companies with a record of paying dividends and the potential for
increasing dividends.
Value-Added Seeks to achieve a high level of total return on its assets
Market through a combination of capital appreciation and current income
by investing, on an equally-weighted basis, in a diversified
portfolio of common stocks of the companies which are represented
in the Standard & Poor's 500 Composite Stock Price Index.
Core Equity Seeks long-term growth of capital by investing primarily in common
stocks and securities convertible into common stocks issued by
domestic and foreign companies.
American Value Seeks long-term capital growth consistent with an effort to reduce
volatility by investing principally in common stock of companies
in industries which, at the time of the investment, are believed
to be undervalued in the marketplace.
</TABLE>
130
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<C> <S>
Mid-Cap Growth Seeks long-term capital appreciation by investing primarily in
equity securities of "mid-cap" companies (that is, companies whose
equity market capitalization falls within the range of $250
million to $5 billion).
Global Equity Seeks a high level of total return on its assets primarily through
long-term capital growth and, to a lesser extent, from income,
through investments in all types of common stocks and equivalents
(such as convertible securities and warrants), preferred stocks
and bonds and other debt obligations of domestic and foreign
companies and governments and international organizations.
Developing Growth Seeks long-term capital growth by investing primarily in common
stocks of smaller and medium-sized companies that, in the opinion
of the Investment Manager, have the potential for growing more
rapidly than the economy and which may benefit from new products
or services, technological developments or changes in management.
Emerging Markets Seeks long-term capital appreciation by investing primarily in
equity securities of companies in emerging market countries. The
Portfolio may invest up to 35% of its total assets in high risk
fixed income securities that are rated below investment grade or
are unrated.
</TABLE>
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Money Market: Securities are valued at amortized
cost which approximates market value. All remaining Portfolios: (1) an equity
security listed or traded on the New York, American or other domestic or foreign
stock exchange is valued at its latest sale price on that exchange prior to the
time when assets are valued; if there were no sales that day, the security is
valued at the latest bid price (in cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market pursuant to procedures adopted by the Trustees); (2) all other
portfolio securities for which over-the-counter market quotations are readily
available are valued at the latest available bid price prior to the time of
valuation; (3) when market quotations are not readily available, including
circumstances under which it is determined by Dean Witter InterCapital Inc. (the
"Investment Manager"), or (in the case of the North American Government
Securities, Balanced, Core Equity and Emerging Markets Portfolios) by TCW Funds
Management Inc. (the "Sub-Adviser"), that sale or bid prices are not reflective
of a security's market value, portfolio securities are valued at their fair
value as determined in good faith under procedures established by and under the
general supervision of the Trustees (valuation of debt securities for which
market quotations are not readily available may be based upon current market
131
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors); (4) certain of the securities may
be valued by an outside pricing service approved by the Trustees. The pricing
service may utilize a matrix system incorporating security quality, maturity and
coupon as the evaluation model parameters, and/or research and evaluations by
its staff, including review of broker-dealer market price quotations, if
available, in determining what it believes is the fair valuation of the
securities valued by such pricing service; and (5) short-term debt securities
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except certain dividends on foreign securities which are recorded as soon as the
Fund is informed after the ex-dividend date. Interest income is accrued daily
except where collection is not expected. The Money Market Portfolio amortizes
premiums and accretes discounts over the life of the respective securities;
gains and losses realized upon the sale of securities are based on amortized
cost. For all other Portfolios, discounts are accreted over the life of the
respective securities.
C. FOREIGN CURRENCY TRANSLATION -- The books and records of the Portfolios
investing in foreign currency denominated transactions are translated into U.S.
dollars as follows: (1) the foreign currency market value of investment
securities, other assets and liabilities and forward contracts are translated at
the exchange rates prevailing at the end of the period; and (2) purchases,
sales, income and expenses are translated at the exchange rates prevailing on
the respective dates of such transactions. The resultant exchange gains and
losses are included in the Statement of Operations as realized and unrealized
gain/loss on foreign exchange transactions. Pursuant to U.S. Federal income tax
regulations, certain exchange gains/losses included in realized and unrealized
gain/loss are included in or are a reduction of ordinary income for federal
income tax purposes. The Portfolios do not isolate that portion of the results
of operations arising as a result of changes in the foreign exchange rates from
the changes in the market prices of the securities.
D. FORWARD FOREIGN CURRENCY CONTRACTS -- Some of the Portfolios may enter into
forward foreign currency contracts which are valued daily at the appropriate
exchange rates. The resultant unrealized exchange gains and losses are included
in the Statement of Operations as unrealized gain/loss on
132
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
foreign exchange transactions. The Portfolios record realized gains or losses on
delivery of the currency or at the time the forward contract is extinguished
(compensated) by entering into a closing transaction prior to delivery.
E. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply individually
for each Portfolio with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its taxable income to
its shareholders. Accordingly, no federal income tax provision is required.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
G. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of approximately $96,000 ($8,000 for each respective Portfolio) which
have been reimbursed for the full amount thereof, exclusive of amounts waived of
approximately $22,000 ($1,833 for each respective Portfolio, excluding Mid-Cap
Growth). Such expenses have been deferred and are being amortized by the
straight-line method over a period not to exceed five years from the
commencement of operations.
H. EXPENSES -- Direct expenses are charged to the respective Portfolio and
general Fund expenses are allocated on the basis of relative net assets or
equally among the Portfolios.
133
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
following annual rates to each Portfolio's net assets determined at the close of
each business day:
<TABLE>
<CAPTION>
ANNUAL ANNUAL
PORTFOLIO RATE PORTFOLIO RATE
- ------------------------------ ------ ------------------------- ------
<S> <C> <C> <C>
Money Market.................. 0.50% Core Equity ............. 0.85%
North American Government
Securities................... 0.65 American Value .......... 0.625
Diversified Income............ 0.40 Mid-Cap Growth .......... 0.75
Balanced...................... 0.75 Global Equity ........... 1.00
Utilities..................... 0.65 Developing Growth ....... 0.50
Dividend Growth............... 0.625 Emerging Markets ........ 1.25
Value-Added Market............ 0.50
</TABLE>
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between the Sub-Adviser and the Investment
Manager, the Sub-Adviser provides the North American Government Securities,
Balanced, Core Equity and Emerging Markets Portfolios with investment advice and
portfolio management relating to the Portfolios' investments in securities,
subject to the overall supervision of the Investment Manager. As compensation
for its services provided pursuant to the Sub-Advisory Agreement, the Investment
Manager pays the Sub-Adviser monthly compensation equal to 40% of its monthly
compensation.
The Investment Manager has undertaken to reimburse all operating expenses and
waive the compensation provided for in its Investment Management Agreement with
Mid-Cap Growth until such time as the Portfolio has $50 million of net assets or
July 31, 1998, whichever comes first. At December 31, 1997, included in the
Statements of Assets and Liabilities is a receivable from an affiliate of
$13,966, which represents expense reimbursements due to the Portfolio.
134
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Purchases and sales/maturities of portfolio securities, excluding short-term
investments (except for the Money Market Portfolio), for the period ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER
------------------------------- --------------------------------
PURCHASES SALES/MATURITIES PURCHASES SALES/MATURITIES
----------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Money Market............................ $29,904,557 $ 35,057,721 $597,381,525 $ 600,998,450
North American Government Securities.... 1,867,675 1,039,739 -- --
Diversified Income...................... 38,519,168 13,330,987 41,490,988 33,363,192
Balanced................................ 20,508,113 14,842,556 40,076,236 19,280,774
Utilities............................... -- -- 16,421,721 12,875,246
Dividend Growth......................... -- -- 284,258,051 101,093,886
Value-Added Market...................... 118,023 11,319 50,264,069 8,142,553
Core Equity............................. -- -- 31,560,006 15,774,045
American Value.......................... 21,068,109 5,349,731 461,485,447 418,843,643
Mid-Cap Growth.......................... -- -- 22,731,980 8,126,143
Global Equity........................... 369,525 15,479 109,308,318 65,101,923
Developing Growth....................... -- -- 101,532,398 92,308,934
Emerging Markets........................ -- -- 24,090,778 19,226,486
</TABLE>
Included in the aforementioned sales of portfolio securities of Value-Added
Market are sales of Morgan Stanley, Dean Witter, Discover & Co., an affiliate of
the Investment Manager, effective May 31, 1997, of $123,681, as well as a
realized gain of $39,336.
Included in the aforementioned purchases of portfolio securities of Value-Added
Market are purchases of Hartford Financial Services Group, Inc., the parent
company of Hartford Life and ITT Hartford Life and Annuity Insurance Company,
affiliates of the Fund, in the amount of $76,240.
For the period ended December 31, 1997, the following Portfolios incurred
brokerage commissions with Dean Witter Reynolds Inc. ("DWR"), an affiliate of
the Investment Manager, for executed portfolio transactions:
<TABLE>
<CAPTION>
DIVIDEND CORE AMERICAN MID-CAP GLOBAL DEVELOPING
BALANCED UTILITIES GROWTH EQUITY VALUE GROWTH EQUITY GROWTH
- ------------ ----------- ------------- --------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4,707 $ 15,600 $ 148,680 $ 3,655 $ 73,465 $ 9,511 $ 38,917 $ 27,638
------ ----------- ------------- --------- ----------- ----------- ----------- -------
------ ----------- ------------- --------- ----------- ----------- ----------- -------
</TABLE>
For the period May 31, 1997 through December 31, 1997, the following Portfolios
incurred brokerage commissions with Morgan Stanley & Co., Inc., an affiliate of
the Investment Manager since May 31, 1997, for executed portfolio transactions:
<TABLE>
<CAPTION>
DIVIDEND AMERICAN MID-CAP GLOBAL DEVELOPING EMERGING
BALANCED GROWTH CORE EQUITY VALUE GROWTH EQUITY GROWTH MARKETS
- ------------- ----------- ----------- ----------- ----------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 165 $ 11,150 $ 135 $ 27,095 $ 850 $ 3,141 $ 2,758 $ 3,274
----- ----------- ----- ----------- ----- --------- ------ ------
----- ----------- ----- ----------- ----- --------- ------ ------
</TABLE>
135
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
Included at December 31, 1997 in the payable for investments purchased and
receivable for investments sold were $247,974 and $244,924, respectively, for
Mid-Cap Growth and $442,396 and $54,508, respectively, for American Value for
unsettled trades with DWR.
Included at December 31, 1997 in the payable for investments purchased was
$40,160 for Developing Growth, and $362,055 for American Value, for unsettled
trades with Morgan Stanley & Co., Inc. Included in the receivable for
investments sold was $440,616 for American Value, for unsettled trades with
Morgan Stanley & Co., Inc.
Dean Witter Trust FSB, an affiliate of the Investment Manager, is the Fund's
transfer agent.
4. FEDERAL INCOME TAX STATUS
At December 31, 1997 North American Government Securities had a net capital loss
carryover of approximately $10,000 which may be used to offset future capital
gains to the extent provided by regulations which is available through December
31 of the following years:
<TABLE>
<CAPTION>
2003 2004 2005
- --------- --------- ---------
<S> <C> <C>
$ 1,000 $ 7,000 $ 2,000
</TABLE>
During the year ended December 31, 1997, the following Portfolios utilized
approximate net capital loss carryovers: Developing Growth -- $1,121,000 and
Emerging Markets -- $87,000.
Net capital and foreign currency losses incurred after October 31 ("post-October
losses") within the taxable year are deemed to arise on the first business day
of the Portfolios' next taxable year. The following Portfolios incurred and will
elect to defer post-October losses during fiscal 1997: Diversified income --
$454,000; Mid Cap Growth -- $263,000; Global Equity -- $1,317,000; Emerging
Markets -- $975,000.
136
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
At December 31, 1997, the primary reason(s) for significant temporary/permanent
book/tax differences were as follows:
<TABLE>
<CAPTION>
TEMPORARY DIFFERENCES
-------------------------------------------------- PERMANENT DIFFERENCES
LOSS DEFERRALS FROM WASH -----------------------------------
POST-OCTOBER LOSSES SALES FOREIGN CURRENCY GAINS/LOSSES
----------------------- ------------------------- -----------------------------------
<S> <C> <C> <C>
Diversified Income...................... - -
Balanced................................ -
Dividend Growth......................... -
Value Added............................. -
Core Equity............................. -
American Value.......................... - -
Mid Cap Growth.......................... - -
Global Equity........................... - - -
Developing Growth....................... -
Emerging Markets........................ - - -
</TABLE>
Additionally, Diversified Income had temporary differences attributable to the
mark-to-market of open forward foreign currency exchange contracts and
compensated forward foreign currency exchange contracts. Global Equity and
Emerging Markets had permanent differences attributable to tax adjustments on
passive foreign investment companies sold by the Portfolios.
To reflect reclassifications arising from the permanent differences, the
following accounts were (charged) credited.
<TABLE>
<CAPTION>
ACCUMULATED UNDISTRIBUTED NET ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME (LOSS) REALIZED GAIN (LOSS)
---------------------------------- ----------------------------------
<S> <C> <C>
Diversified Income...................... $ (12,756) $ 12,756
American Value.......................... 77 (77)
Global Equity........................... 252,101 (252,101)
Emerging Markets........................ 59,557 (59,557)
</TABLE>
5. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
Some of the Portfolios may enter into forward foreign currency contracts
("forward contracts") to facilitate settlement of foreign currency denominated
portfolio transactions or to manage foreign currency exposure associated with
foreign currency denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Portfolios bear the
risk of an unfavorable change in the foreign exchange rates underlying the
forward contracts. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
137
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, CONTINUED
At December 31, 1997, Emerging Markets had outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions and
Diversified Income and Emerging Markets had outstanding forward contracts used
to manage foreign currency exposure.
At December 31, 1997, Diversified Income's and Emerging Markets' cash balances
consisted principally of interest bearing deposits with Chase Manhattan Bank
N.A., each Portfolio's custodian.
6. OTHER
On November 6, 1997, the Board of Trustees approved the selection of Morgan
Stanley Asset Management Inc. ("MSAM"), an affiliate of the Investment Manager,
to act as sub-adviser to Core Equity. In connection therewith, the Board of
Trustees also agreed that upon approval and execution of a new Sub-Advisory
Agreement, the Investment Management Agreement be amended to reduce the overall
investment management fee from an annual rate of 0.85% of Core Equity's daily
net assets to 0.80% of daily net assets. The new Sub-Advisory Agreement is
subject to shareholder approval at a meeting to be held on February 26, 1998.
On November 6, 1997, the Board of Trustees approved a proposal by the Investment
Manager of Balanced to assume the duties previously performed by the
Sub-Adviser. In connection therewith, the Investment Manager also proposed that
the investment management fee be reduced from 0.75% of the daily net assets of
Balanced to 0.60% of daily net assets. The Board of Trustees also approved,
subject to shareholder approval at a meeting to be held on February 26, 1998, a
change in the investment objective of Balanced from its current investment
objective of high total return through a combination of income and capital
appreciation, to an investment objective of capital growth with reasonable
current income.
138
<PAGE>
(This page has been left blank intentionally.)
139
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
1994 (a) $ 1.00 $ 0.01 -- $ 0.01 $(0.01) -- $(0.01)
1995 1.00 0.06 -- 0.06 (0.06) -- (0.06)
1996 1.00 0.05 -- 0.05 (0.05) -- (0.05)
1997 1.00 0.05 -- 0.05 (0.05) -- (0.05)
NORTH AMERICAN GOVERNMENT SECURITIES
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.53 $ 0.11 0.64 (0.50) -- (0.50)
1996 10.18 0.52 (0.09) 0.43 (0.52) -- (0.52)
1997 10.09 0.48 0.09 0.57 (0.49) -- (0.49)
DIVERSIFIED INCOME
1994 (a) 10.00 0.08 -- 0.08 (0.03) -- (0.03)
1995 10.05 0.57 0.11 0.68 (0.51) -- (0.51)
1996 10.22 0.80 0.13 0.93 (0.82) $(0.01) (0.83)
1997 10.32 0.80 0.02 0.82 (0.83) (0.02) (0.85)
BALANCED
1994 (a) 10.00 0.08 (0.02) 0.06 (0.02) -- (0.02)
1995 10.04 0.40 1.85 2.25 (0.40) -- (0.40)
1996 11.89 0.33 1.25 1.58 (0.33) (0.07) (0.40)
1997 13.07 0.29 2.01 2.30 (0.30) (0.04) (0.34)
UTILITIES
1994 (a) 10.00 0.07 -- 0.07 (0.03) -- (0.03)
1995 10.04 0.45 2.30 2.75 (0.44) -- (0.44)
1996 12.35 0.43 0.60 1.03 (0.43) (0.01) (0.44)
1997 12.94 0.39 2.96 3.35 (0.40) (0.05) (0.45)
DIVIDEND GROWTH
1994 (a) 10.00 0.08 (0.09) (0.01) (0.02) -- (0.02)
1995 9.97 0.36 3.57 3.93 (0.36) -- (0.36)
1996 13.54 0.34 2.94 3.28 (0.35) (0.02) (0.37)
1997 16.45 0.38 3.80 4.18 (0.38) (0.68) (1.06)
VALUE-ADDED MARKET
1994 (a) 10.00 0.06 (0.14) (0.08) (0.02) -- (0.02)
1995 9.90 0.31 2.34 2.65 (0.31) -- (0.31)
1996 12.24 0.23 1.93 2.16 (0.23) (0.01) (0.24)
1997 14.16 0.23 3.43 3.66 (0.23) (0.03) (0.26)
CORE EQUITY
1994 (a) 10.00 0.07 -- 0.07 (0.02) -- (0.02)
1995 10.05 0.26 1.05 1.31 (0.29) -- (0.29)
1996 11.07 0.08 2.52 2.60 (0.08) (0.04) (0.12)
1997 13.55 0.09 3.09 3.18 (0.10) (0.07) (0.17)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
140
<PAGE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
1994 (a) $ 1.00 0.76%(1) $ 1,234 2.50%*(2) 3.33%*(2) -- 5.83%(2) N/A N/A
1995 1.00 6.10 42,089 0.81 5.11 -- 5.92 N/A N/A
1996 1.00 5.07 87,002 0.59 4.94 0.57% 4.96 N/A N/A
1997 1.00 5.21 84,045 0.55 5.08 0.55 5.08 N/A N/A
NORTH AMERICAN
GOVERNMENT
SECURITIES
1994 (a) 10.04 0.61(1) 122 2.50*(2) 1.78*(2) -- 4.28(2) -- N/A
1995 10.18 6.40 1,288 2.50* 3.24* -- 5.74 18% N/A
1996 10.09 4.35 4,172 1.45 4.55 0.50 5.50 48 N/A
1997 10.17 5.91 5,091 1.26 4.75 1.26 4.75 27 N/A
DIVERSIFIED
INCOME
1994 (a) 10.05 0.76(1) 402 2.50*(2) 3.08*(2) -- 5.58(2) -- N/A
1995 10.22 6.96 8,972 1.33 5.95 -- 7.28 33 N/A
1996 10.32 9.54 32,119 0.71 8.26 0.50 8.47 69 N/A
1997 10.29 8.32 62,287 0.55 8.09 0.55 8.09 110 N/A
BALANCED
1994 (a) 10.04 0.60(1) 796 2.50*(2) 2.90*(2) -- 5.40(2) -- --
1995 11.89 22.86 16,311 1.39 2.45 -- 3.84 99 --
1996 13.07 13.54 38,893 0.90 2.35 0.50 2.75 88 $ 0.0580
1997 15.03 17.87 71,323 0.86 2.13 0.86 2.13 64 0.0581
UTILITIES
1994 (a) 10.04 0.65(1) 498 2.50*(2) 2.79*(2) -- 5.29(2) -- --
1995 12.35 28.05 17,959 1.43 3.01 -- 4.44 3 --
1996 12.94 8.48 35,686 0.80 3.16 0.50 3.46 15 0.0500
1997 15.84 26.45 50,766 0.76 2.83 0.76 2.83 34 0.0520
DIVIDEND GROWTH
1994 (a) 9.97 (0.05) (1) 1,378 2.50*(2) 3.28*(2) -- 5.78(2) -- --
1995 13.54 40.13 78,694 0.83 2.80 -- 3.63 4 --
1996 16.45 24.49 258,101 0.67 2.44 0.67 2.44 39 0.0518
1997 19.57 26.12 518,419 0.65 2.11 0.65 2.11 26 0.0545
VALUE-ADDED
MARKET
1994 (a) 9.90 (0.76) (1) 349 2.50*(2) 1.25*(2) -- 3.75(2) -- --
1995 12.24 27.14 23,970 1.46 1.64 -- 3.10 4 --
1996 14.16 17.78 73,516 0.64 1.69 0.56 1.77 4 0.0300
1997 17.56 26.12 141,316 0.58 1.49 0.58 1.49 8 0.0300
CORE EQUITY
1994 (a) 10.05 0.67(1) 316 2.50*(2) 2.32*(2) -- 4.82(2) -- --
1995 11.07 13.29 3,956 2.50* (0.64) * -- 1.86 39 --
1996 13.55 23.56 18,215 1.22 (0.03) 0.50 0.69 47 0.0573
1997 16.56 23.07 40,311 1.01 0.13 1.01 0.13 55 0.0585
</TABLE>
141
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
NET ASSET
VALUE NET NET REALIZED TOTAL FROM DISTRIBUTIONS TOTAL DIVIDENDS
BEGINNING INVESTMENT AND UNREALIZED INVESTMENT DIVIDENDS TO TO AND
YEAR ENDED DECEMBER 31 OF PERIOD INCOME GAIN (LOSS) OPERATIONS SHAREHOLDERS SHAREHOLDERS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.00 $ 0.06 $ 0.01 $ 0.07 $(0.02) -- $(0.02)
1995 10.05 0.21 3.66 3.87 (0.21) -- (0.21)
1996 13.71 0.08 1.68 1.76 (0.10) $(0.07) (0.17)
1997 15.30 0.07 4.73 4.80 (0.06) (0.35) (0.41)
MID-CAP GROWTH
1997 (b) 10.00 0.18 1.39 1.57 (0.17) -- (0.17)
GLOBAL EQUITY
1994 (a) 10.00 0.07 (0.10) (0.03) (0.03) -- (0.03)
1995 9.94 0.29 1.05 1.34 (0.29) -- (0.29)
1996 10.99 0.15 1.10 1.25 (0.17) (0.01) (0.18)
1997 12.06 0.12 0.92 1.04 (0.11) (0.02) (0.13)
DEVELOPING GROWTH
1994 (a) 10.00 0.08 0.08 0.16 (0.03) -- (0.03)
1995 10.13 0.24 4.88 5.12 (0.25) -- (0.25)
1996 15.00 0.02 1.92 1.94 (0.04)++ (0.02) (0.06)
1997 16.88 0.05 2.27 2.32 (0.04) -- (0.04)
EMERGING MARKETS
1994 (a) 10.00 0.06 -- 0.06 (0.02) -- (0.02)
1995 10.04 0.29 (0.33) (0.04) (0.31) -- (0.31)
1996 9.69 0.16 1.51 1.67 (0.16) -- (0.16)
1997 11.20 0.06 0.11 0.17 (0.06) -- (0.06)
</TABLE>
<TABLE>
<C> <S>
- ---------------------
(a) For the period November 9, 1994 (commencement of operations) through December 31, 1994.
(b) For the period January 21, 1997 (commencement of operations) through December 31, 1997.
+ Calculated based on the net asset value as of the last business day of the period.
++ Includes distributions from paid-in-capital of $0.01.
* After application of the Fund's expense limitation.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
142
<PAGE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET
ASSETS
RATIOS TO AVERAGE NET (AFTER EXPENSES WERE
ASSETS
(BEFORE EXPENSES WERE ASSUMED)
NET ASSETS ASSUMED) ------------------------
NET ASSET TOTAL END OF ------------------------- NET PORTFOLIO AVERAGE
YEAR ENDED VALUE END INVESTMENT PERIOD NET INVESTMENT INVESTMENT TURNOVER COMMISSION
DECEMBER 31 OF PERIOD RETURN+ (000'S) EXPENSES INCOME (LOSS) EXPENSES INCOME RATE RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN VALUE
1994 (a) $ 10.05 0.69%(1) $ 823 2.50*%(2) 1.60*%(2) -- 4.10%(2) 10%(1) --
1995 13.71 38.95 38,235 0.96 1.11 -- 2.07 174 --
1996 15.30 12.95 120,904 0.71 0.52 0.69% 0.54 232 $ 0.0557
1997 19.69 31.93 230,014 0.68 0.42 0.68 0.42 262 0.0566
MID-CAP GROWTH
1997 (b) 11.40 15.84(1) 19,236 1.12(2) 0.65(2) -- 1.77(2) 104(1) 0.0546
GLOBAL EQUITY
1994 (a) 9.94 (0.30) (1) 1,194 2.50* (2) 2.20* (2) -- 4.70(2) -- --
1995 10.99 13.76 17,074 1.69 1.09 -- 2.78 74 --
1996 12.06 11.43 59,246 1.25 0.69 0.72 1.22 62 0.0451
1997 12.97 8.66 102,229 1.13 0.91 1.13 0.91 87 0.0283
DEVELOPING
GROWTH
1994 (a) 10.13 1.58(1) 380 2.50* (2) 2.31* (2) -- 4.81(2) 3(1) --
1995 15.00 51.26 17,412 1.24 0.86 -- 2.10 80 --
1996 16.88 12.95 61,120 0.68 (0.04) 0.58 0.06 146 0.0537
1997 19.16 13.77 82,690 0.60 0.26 0.60 0.26 149 0.0555
EMERGING
MARKETS
1994 (a) 10.04 0.57(1) 448 2.50* (2) 2.22* (2) -- 4.72(2) -- --
1995 9.69 (0.57) 4,092 2.50* 0.18* -- 2.68 36 --
1996 11.20 17.69 17,240 2.02 (0.10) 0.50 1.42 46 0.0022
1997 11.31 1.27 23,815 1.71 0.49 1.71 0.49 91 0.0007
</TABLE>
143
<PAGE>
DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER SELECT DIMENSIONS INVESTMENT SERIES
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Money Market Portfolio, North
American Government Securities Portfolio, Diversified Income Portfolio, Balanced
Portfolio, Utilities Portfolio, Dividend Growth Portfolio, Value-Added Market
Portfolio, Core Equity Portfolio, American Value Portfolio, Mid-Cap Growth
Portfolio, Global Equity Portfolio, Developing Growth Portfolio and Emerging
Markets Portfolio (constituting Dean Witter Select Dimensions Investment Series,
hereafter referred to as the "Fund") at December 31, 1997, the results of each
of their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period November 9, 1994 (commencement of operations) through December 31, 1994,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
FEBRUARY 10, 1998
144
<PAGE>
APPENDIX -- RATINGS
- --------------------------------------------------------------------------------
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc.
("Fitch"), Duff and Phelps, Inc. ("Duff"), IBCA Limited and IBCA Inc. ("IBCA")
and Thomson BankWatch, Inc. ("Thomson"):
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
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 of 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.
Issues 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 alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by good fundamental
protection factors. Risk factors are minor. Duff applies the modifiers (+) and
(-) to the rating Duff-1 in recognition of significant quality differences
within the highest tier. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
The rating TBW-1 is the highest short-term rating assigned by Thomson and
indicates a very high degree of likelihood that principal and interest will be
paid on a timely basis. The rating TBW-2 by Thomson is its second highest
rating; while the degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as high as for issues
rated TBW-1.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay interest and repay principal.
Bonds rated AA by S&P are judged by S&P to have a very strong capacity to pay
interest and repay principal, and differ only in small degrees from issues rated
AAA.
145
<PAGE>
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. Aa bonds are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations 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 rated bonds. Moody's applies
numerical modifiers 1, 2 and 3 in the Aa rating category. The modifier 1
indicates a ranking for the security in the higher end of this rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit quality
with negligible risk factors that are only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA are judged by Duff to be of high credit quality
with strong protection factors; risk is modest but may vary slightly from time
to time because of economic conditions. Duff applies modifiers of (+) and (-) to
the AA category.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Ratings and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
Companies rated A are considered by Thomson to possess an exceptionally
strong balance sheet and earnings record, translating into an excellent
reputation and unquestioned access to their natural money markets; if weakness
or vulnerability exists in any aspect of a company's business, it is entirely
mitigated by the strengths of the organization. Companies rated A/B- by Thomson
are judged by Thomson to be financially very solid with a favorable track record
and no readily apparent weakness; their overall risk profiles, while low, are
not quite as favorable as for companies in the highest rating category.
146
