July 25, 1995
SUPPLEMENT TO THE STATEMENT OF ADDITIONAL INFORMATION OF
Pioneer Variable Contracts Trust
dated April 28, 1995
-----------------------------------------------
Effective July 14, 1995, Arthur J. Halleran, Jr. no longer serves as Vice
President of Pioneer Variable Contracts Trust.
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STATEMENT OF ADDITIONAL INFORMATION
February 15, 1995
PIONEER VARIABLE CONTRACTS TRUST
(consisting of seven portfolios)
International Growth Portfolio
Capital Growth Portfolio
Real Estate Growth Portfolio
Equity-Income Portfolio
Balanced Portfolio
America Income Portfolio
Money Market Portfolio
60 State Street
Boston, Massachusetts 02109
This Statement of Additional Information (Part B of the Registration
Statement) is not a Prospectus, but should be read in conjunction with the
Prospectus dated February 15, 1995, of Pioneer Variable Contracts Trust (the
"Trust"). A copy of the Prospectus can be obtained free of charge from your
insurance company.
TABLE OF CONTENTS
Page
1. Investment Policies and Restrictions...................................B-2
2. Management of the Trust................................................B-23
3. Investment Advisers....................................................B-28
4. Principal Underwriter..................................................B-30
5. Custodian..............................................................B-30
6. Independent Public Accountant..........................................B-31
7. Portfolio Transactions.................................................B-31
8. Tax Status.............................................................B-34
9. Description of Shares..................................................B-40
10.Certain Liabilities....................................................B-40
11.Determination of Net Asset Value.......................................B-41
12.Investment Results.....................................................B-43
13.Financial Statements...................................................B-47
APPENDIX A -- Additional General Economic
Information and Information Regarding
Pioneer..................................................1-A
APPENDIX B -- Bond Ratings.............................................1-B
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
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1. INVESTMENT POLICIES AND RESTRICTIONS
The Trust consists of separate portfolios, each of which is an
investment vehicle for variable annuity and variable life insurance contracts
(the "Variable Contracts") offered by the separate accounts (the "Accounts") of
various insurance companies ("Participating Insurance Companies"). As described
in the Prospectus, the portfolios also may be offered to certain qualified
pension and retirement plans (the "Qualified Plans"). The Trust currently
consists of the following seven distinct portfolios: International Growth
Portfolio, Capital Growth Portfolio, Real Estate Growth Portfolio, Equity-Income
Portfolio, Balanced Portfolio, America Income Portfolio and Money Market
Portfolio (each a "Portfolio"). The terms and conditions of the Variable
Contracts and any limitations upon the Portfolios in which the Accounts may be
invested are set forth in a separate prospectus and statement of additional
information relating to the Variable Contracts. The terms and conditions of a
Qualified Plan and any limitations upon the Portfolios in which such Plan may be
invested are set forth in such Plan's governing documents. The Trust reserves
the right to limit the types of Accounts and the types of Qualified Plans that
may invest in any Portfolio.
Qualified Plans and Participating Insurance Companies are the record
holders of shares of beneficial interest in each Portfolio of the Trust. In
accordance with any limitations set forth in their Variable Contracts, contract
holders may direct through their Participating Insurance Companies the
allocation of amounts available for investment among the Trust's Portfolios.
Similarly, in accordance with any limitations set forth in their Qualified
Plans, Qualified Plan participants may direct through their Qualified Plan
administrators the allocation of amounts available for investment among the
Trust's Portfolios. Instructions for any such allocation, or for the purchase or
redemption of shares of a Portfolio, must be made through the investor's
Participating Insurance Company or Qualified Plan administrator, as the case may
be, as the record holder of the Portfolio's shares. The rights of Participating
Insurance Companies and Qualified Plans as record holders of shares of a
Portfolio are different from the rights of contract holders and Qualified Plan
participants. The term "shareholder" in this Statement of Additional Information
refers only to Participating Insurance Companies and Qualified Plans, and not to
contract holders or Qualified Plan participants.
The Trust's Prospectus dated February 15, 1995 (the "Prospectus")
identifies the investment objective and the principal investment policies of
each Portfolio and the risk factors associated with the Portfolio's investments.
Other investment policies of the Portfolios and associated risk factors are set
forth below. This Statement of Additional Information should be read in
conjunction with the Prospectus.
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Lower Quality Debt Obligations
Real Estate Growth Portfolio and Equity-Income Portfolio may each
invest up to 5% of their respective net assets in debt securities which are
rated in the lowest rating categories by Standard & Poor's Ratings Group
("Standard & Poor's") or by Moody's Investors Service, Inc. ("Moody's") (i.e.,
ratings of BB or lower by Standard & Poor's or Ba or lower by Moody's) or, if
unrated by such rating organizations, determined to be of comparable quality by
the applicable Portfolio's Manager. International Growth Portfolio may not
purchase such lower quality debt securities, but up to 5% of its net assets may
be invested in such securities as a result of credit quality downgrades. In
addition, each Portfolio other than America Income and Money Market Portfolios
may invest in medium quality debt securities (i.e., securities rated BBB by
Standard & Poor's or Baa by Moodys, or unrated securities determined by the
Portfolio's Manager to be of comparable quality).
Bonds rated BB or Ba or below or comparable unrated securities are
commonly referred to as "junk bonds" and are considered speculative and may be
questionable as to principal and interest payments. In some cases, such bonds
may be highly speculative, have poor prospects for reaching investment standing
and be in default. As a result, investment in such bonds will entail greater
speculative risks than those associated with investment in investment grade
bonds (i.e., bonds rated BBB or better by Standard & Poor's or Baa or better by
Moody's or, if unrated by such rating organizations, determined to be of
comparable quality by the applicable Portfolio's Manager). See Appendix B to
this Statement of Additional Information for a description of the ratings issued
by Standard & Poor's and Moody's.
The amount of junk bond securities outstanding has proliferated in
conjunction with the increase in merger and acquisition and leveraged buyout
activity. An economic downturn could severely affect the ability of highly
leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. Factors having an adverse impact on the market value
of lower quality securities will have an adverse effect on a Portfolio's net
asset value to the extent that it invests in such securities. In addition, a
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in payment of principal or interest on its portfolio
holdings.
The secondary market for junk bond securities, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities, a factor which may have an adverse effect on a
Portfolio's ability to dispose of a particular security when necessary to meet
its liquidity needs. Under adverse market or economic conditions, the secondary
market for junk bond securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result, a
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Portfolio could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Portfolio's net asset value.
Certain proposed and recently enacted federal laws including the
required divestiture by federally insured savings and loan associations of their
investments in junk bonds and proposals designed to limit the use, or tax and
other advantages, of junk bond securities could adversely affect a Portfolio's
net asset value and investment practices. Such proposals could also adversely
affect the secondary market for junk bond securities, the financial condition of
issuers of these securities and the value of outstanding junk bond securities.
The form of such proposed legislation and the possibility of such legislation
being passed are uncertain.
Since investors generally perceive that there are greater risks
associated with the medium to lower quality debt securities of the type in which
each Portfolio other than America Income and Money Market Portfolios may invest
a portion of its assets, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the debt securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
Medium to lower rated and comparable unrated debt securities tend to
offer higher yields than higher rated securities with the same maturities
because the historical financial condition of the issuers of such securities may
not have been as strong as that of other issuers. Since medium to lower rated
securities generally involve greater risks of loss of income and principal than
higher rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Manager of each Portfolio
that may invest in such securities will attempt to reduce these risks through
portfolio diversification and by analysis of each issuer and its ability to make
timely payments of income and principal, as well as broad economic trends and
corporate developments.
The prices of all debt securities generally fluctuate in response to
the general level of interest rates. Another factor which causes fluctuations in
the prices of debt securities is the supply and demand for similarly rated
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securities. Fluctuations in the prices of portfolio securities subsequent to
their acquisition will not affect any cash income from such securities but will
be reflected in a Portfolio's net asset value.
Certificates of Deposit
Money Market Portfolio may invest in certificates of deposit of large
domestic banks and savings and loan associations (i.e., banks which at the time
of their most recent annual financial statements show total assets in excess of
$1 billion), including foreign branches of such domestic banks, and of smaller
banks as described below. The Portfolio will not invest in certificates of
deposit of foreign banks.
Investment in certificates of deposit issued by foreign branches of
domestic banks involves investment risks that are different in some respects
from those associated with investment in certificates of deposit issued by
domestic banks, including the possible imposition of withholding taxes on
interest income, the possible adoption of foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
certificates of deposit, or other adverse political or economic developments. In
addition, it might be more difficult to obtain and enforce a judgment against a
foreign branch of a domestic bank.
Although the Manager of Money Market Portfolio recognizes that the size
of a bank is important, this fact alone is not necessarily indicative of its
creditworthiness. The Portfolio may invest in certificates of deposit issued by
banks and savings and loan institutions which had at the time of their most
recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Additional Information Regarding GNMA Certificates
As discussed in the Prospectus, America Income Portfolio's investments
in U.S. Government Securities may include mortgage participation certificates
("GNMA Certificates") guaranteed by the Government National Mortgage Association
("GNMA"). Real Estate Growth Portfolio and Balanced Portfolio also may invest in
GNMA Certificates. GNMA Certificates evidence part ownership of a pool of
mortgage loans. Because prepayment rates of individual mortgage pools will vary
widely, it is not possible to predict with certainty the average life of a
particular issue of GNMA Certificates. However, statistics published by the
Farmers' Home Administration ("FHA") are normally used as an indicator of the
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expected average life of GNMA Certificates. These statistics indicate the
average life of single-family dwelling mortgages with 25- to 30-year maturities,
the type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. For this reason, it is customary to treat GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year. The actual life of a particular issue of GNMA Certificates,
however, will depend on the coupon rate of the underlying mortgages, with higher
interest rate mortgages being more prone to prepayment or refinancing.
The coupon rate of interest of GNMA Certificates is lower than the
interest rate paid on the Veterans Administration-guaranteed or FHA-insured
mortgages underlying the GNMA Certificates, but only by the amount of the fees
paid to GNMA and the issuer. For the most common type of mortgage pool,
containing single-family dwelling mortgages, GNMA receives an annual fee of
6/100 of 1% of the outstanding principal for providing its guarantee, and the
issuer is paid an annual fee of 44/100 of 1% for assembling the mortgage pool
and for passing through monthly payments of interest and principal to GNMA
Certificate holders.
The coupon rate by itself, however, does not indicate the yield that
will be earned on GNMA Certificates for the reasons given in the section
"Investment Objective and Policies" in the Prospectus. In quoting yields for
GNMA Certificates, the customary practice is to assume that the GNMA
Certificates will have a 12-year life. Compared on this basis, GNMA Certificates
have historically yielded roughly 25/100 of 1% more than U.S. Government and
U.S. Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
Since the inception of the GNMA mortgage-backed securities program in
1970, the amount of GNMA Certificates outstanding has grown rapidly. The size of
the market and the active participation in the secondary market by securities
dealers and many types of investors make the GNMA Certificates a highly liquid
instrument. Prices of GNMA Certificates are readily available from securities
dealers and depend on, among other things, the level of market interest rates,
the GNMA Certificate's coupon rate and the prepayment experience of the pools of
mortgages backing each GNMA Certificate.
Securities Index Options
Each Portfolio other than Balanced Portfolio, America Income Portfolio
and Money Market Portfolio may purchase call and put options on securities
indices for the purpose of hedging against the risk of unfavorable price
movements adversely affecting the value of the Portfolio's securities or
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securities the Portfolio intends to buy. The Portfolios will not invest in
securities index options for speculative purposes.
Currently, options on stock indices are traded only on national
securities exchanges and over-the-counter, both in the United States and in
foreign countries. However, a Portfolio will not purchase over-the-counter
options. A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some stock index options are
based on a broad market index such as the S&P 500 or the Value Line Composite
Index in the U.S., the Nikkei in Japan or the FTSE 100 in the United Kingdom.
Index options may also be based on a narrower market index.
A Portfolio may purchase put options in order to hedge against an
anticipated decline in securities prices that might adversely affect the value
of securities held by the Portfolio. If a Portfolio purchases a put option on a
securities index, the amount of the payment it would receive upon exercising the
option would depend on the extent of any decline in the level of the securities
index below the exercise price. Such payments would tend to offset a decline in
the value of securities held by the Portfolio. However, if the level of the
securities index increases and remains above the exercise price while the put
option is outstanding, the Portfolio will not be able to profitably exercise the
option and will lose the amount of the premium and any transaction costs. Such
loss may be partially offset by an increase in the value of the securities held
by the Portfolio.
A Portfolio may purchase call options on securities indices in order to
lock in a favorable price on securities that it intends to buy in the future. If
a Portfolio purchases a call option on a securities index, the amount of the
payment it receives upon exercising the option depends on the extent of any
increase in the level of the securities index above the exercise price. Such
payments may offset increases in the price of securities that the Portfolio
intends to purchase. If, however, the level of the securities index declines and
remains below the exercise price while the call option is outstanding, the
Portfolio will not be able to exercise the option profitably and will lose the
amount of the premium and transaction costs. Such loss may be partially offset
by a reduction in the price the Portfolio pays to buy additional securities for
its portfolio.
A Portfolio may sell any securities index option it has purchased or
write a similar offsetting securities index option in order to close out a
position in a securities index option which it has purchased. These closing sale
transactions enable a Portfolio to immediately realize gains or minimize losses
on its options positions. However, there is no assurance that a liquid secondary
market on an options exchange will exist for any particular option, or at any
particular time, and for some options no secondary market may exist. In
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addition, securities index prices may be distorted by interruptions in the
trading of securities of certain companies or of issuers in certain industries,
or by restrictions that may be imposed by an exchange on opening or closing
transactions, or both, which would disrupt trading in options on such indices
and preclude a Portfolio from closing out its options positions. If a Portfolio
is unable to effect a closing sale transaction with respect to options that it
has purchased, it would have to exercise the options in order to realize any
profit.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that can not
be reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions.
In addition to the risks of imperfect correlation between securities
held by a Portfolio and the index underlying the option, the purchase of
securities index options involves the risk that the premium and transaction
costs paid by a Portfolio in purchasing an option will be lost. This could occur
as a result of unanticipated movements in prices of the securities comprising
the securities index on which the option is based.
Forward Foreign Currency Transactions
International Growth Portfolio, Capital Growth Portfolio, Real Estate
Growth Portfolio and Balanced Portfolio each may enter into foreign currency
transactions on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. Each of these
Portfolios also has authority to deal in forward foreign currency exchange
contracts involving currencies of the different countries in which it will
invest as a hedge against possible variations in the foreign exchange rate
between these currencies and the U.S. dollar. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. Each Portfolio's dealings
in forward foreign currency contracts will be limited to hedging either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency contracts with respect to specific receivables or
payables of a Portfolio accruing in connection with the purchase and sale of its
portfolio securities denominated in foreign currencies. Portfolio hedging is the
use of forward foreign currency contracts to offset portfolio security positions
denominated or quoted in such foreign currencies. There is no guarantee that a
Portfolio will be engaged in hedging activities when adverse exchange rate
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movements occur. A Portfolio may not necessarily attempt to hedge all of its
foreign portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by its Manager. No Portfolio will enter into
speculative forward foreign currency contracts.
If a Portfolio enters into a forward contract to purchase foreign
currency, its custodian bank will segregate cash or liquid, high grade debt
securities in a separate account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of such
forward contract. Those assets will be valued at market daily and if the value
of the assets in the separate account declines, additional cash or securities
will be placed in the accounts so that the value of the account will equal the
amount of the Portfolio's commitment with respect to such contracts.
Although the Portfolios have no current intention of doing so, a
Portfolio may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency, if the Portfolio's Manager determines that there is a
pattern of correlation between the two currencies. Cross-hedging may also
include entering into a forward transaction involving two foreign currencies,
using one foreign currency as a proxy for the U.S. dollar to hedge against
variations in the other foreign currency, if the Portfolio's Manager determines
that there is a pattern of correlation between the proxy currency and the U.S.
dollar.
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 a 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 cost to a Portfolio of engaging in foreign currency transactions
varies with such factors as the currency involved, the size of the contract, the
length of the contract period and the market conditions then prevailing. Since
transactions in foreign currency and forward contracts are usually conducted on
a principal basis, no fees or commissions are involved. A Portfolio may close
out a forward position in a currency by selling the forward contract or entering
into an offsetting forward contract.
Options on Foreign Currencies
International Growth Portfolio, Capital Growth Portfolio, Real Estate
Growth Portfolio and Balanced Portfolio each may purchase options on foreign
currencies for hedging purposes in a manner similar to that of transactions in
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forward contracts. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are quoted or denominated will reduce the
U.S. dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such decreases in the
value of portfolio securities, a Portfolio may purchase put options on the
foreign currency. If the value of the currency declines, the Portfolio will have
the right to sell such currency for a fixed amount of U.S. dollars which exceeds
the market value of such currency. This would result in a gain that may offset,
in whole or in part, the negative effect of currency depreciation on the value
of the Portfolio's securities quoted or denominated in that currency.
Conversely, if a rise in the U.S. dollar value of a currency is
projected for those securities to be acquired, thereby increasing the cost of
such securities, a Portfolio may purchase call options on such currency. If the
value of such currency increased, the purchase of such call options would enable
the Portfolio to purchase currency for a fixed amount of U.S. dollars which is
less than the market value of such currency. Such a purchase would result in a
gain that may offset, at least partially, the effect of any currency related
increase in the price of securities the Portfolio intends to acquire. As in the
case of other types of options transactions, however, the benefit a Portfolio
derives from purchasing foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, if currency exchange
rates do not move in the direction or to the extent anticipated, a Portfolio
could sustain losses on transactions in foreign currency options which would
deprive it of a portion or all of the benefits of advantageous changes in such
rates.
A Portfolio may close out its position in a currency option by either
selling the option it has purchased or entering into an offsetting option.
Futures Contracts and Options on Futures Contracts
To hedge against changes in securities prices or currency exchange
rates, International Growth Portfolio, Capital Growth Portfolio and Real Estate
Growth Portfolio may purchase and sell various kinds of futures contracts, and
purchase and write (sell) call and put options on any of such futures contracts.
Balanced Portfolio may only purchase and sell futures contracts and options that
relate to foreign currencies. Each Portfolio may also enter into closing
purchase and sale transactions with respect to such futures contracts and
options. Futures contracts may be based on various securities (such as U.S.
Government securities), securities indices, foreign currencies and other
financial instruments and indices. All futures contracts entered into by the
Portfolios are traded on U.S. exchanges or boards of trade that are licensed and
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regulated by the Commodity Futures Trading Commission (the "CFTC") or on foreign
exchanges.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a
Portfolio can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, a Portfolio, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. Similarly, a
Portfolio can sell futures contracts on a specified currency to protect against
a decline in the value of such currency and a decline in the value of its
portfolio securities which are quoted or denominated in such currency. A
Portfolio can purchase futures contracts on foreign currency to establish the
price in U.S. dollars of a security quoted or denominated in such currency that
the Portfolio has acquired or expects to acquire.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities or currency
will usually be liquidated in this manner, a Portfolio may instead make, or
take, delivery of the underlying securities or currency whenever it appears
economically advantageous to do so. A clearing corporation associated with the
exchange on which futures on securities or currency are traded guarantees that,
if still open, the sale or purchase will be performed on the settlement date.
Each Portfolio will be required, in connection with transactions in
futures contracts and the writing of options on futures, to make margin
deposits, which will be held by the Portfolio's custodian for the benefit of the
futures commission merchant through whom the Portfolio engages in such futures
contracts and options transactions. In the case of futures contracts or options
requiring a Portfolio to purchase securities, the Portfolio must place cash or
liquid, high grade debt securities in a segregated account maintained by the
custodian and marked to market daily to cover such futures contracts and
options.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price, rate of return and currency
exchange rate on portfolio securities and securities that a Portfolio owns or
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proposes to acquire. A Portfolio may, for example, take a "short" position in
the futures market by selling futures contracts in order to hedge against an
anticipated rise in interest rates or a decline in market prices or foreign
currency rates that would adversely affect the value of securities held by the
Portfolio. Such futures contracts may include contracts for the future delivery
of securities held by the Portfolio or securities with characteristics similar
to those securities held by the Portfolio. Similarly, a Portfolio may sell
futures contracts in currency in which its portfolio securities are quoted or
denominated, or in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If, in
the opinion of a Portfolio's Manager, there is a sufficient degree of
correlation between price trends for the securities held by the Portfolio and
futures contracts based on other financial instruments, securities indices or
other indices, the Portfolio may also enter into such futures contracts as part
of its hedging strategy. Although under some circumstances prices of securities
held by a Portfolio may be more or less volatile than prices of such futures
contracts, the Portfolio's Manager will attempt to estimate the extent of this
volatility difference based on historical patterns and compensate for any such
differential by having the Portfolio enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the Portfolio's securities portfolio. When hedging of this
character is successful, any depreciation in the value of securities held by a
Portfolio will be substantially offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the value
of securities held by a Portfolio would be substantially offset by a decline in
the value of the futures position.
On other occasions, a Portfolio may take a "long" position by
purchasing futures contracts. This would be done, for example, when the
Portfolio anticipates the subsequent purchase of particular securities when it
has the necessary cash, but expects the prices or currency exchange rates then
available in the applicable market to be less favorable than prices or rates
that are currently available.
Options on Futures Contracts. International Growth Portfolio, Capital
Growth Portfolio, Real Estate Growth Portfolio and Balanced Portfolio may each
purchase and write options on futures contracts for hedging purposes. The
acquisition of put and call options on futures contracts will give a Portfolio
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the right (but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, a Portfolio obtains
the benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Portfolio's assets. By
writing a call option, a Portfolio becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium which may partially offset an increase in the price of
securities that the Portfolio intends to purchase. However, by writing a put
option, the Portfolio becomes obligated to purchase a futures contract which may
have a value lower than the exercise price. Thus, the loss that a Portfolio may
incur by writing options on futures is potentially unlimited and may exceed the
amount of the premium received. A Portfolio will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. A
Portfolio's ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
Other Considerations. As noted above, International Growth Portfolio,
Capital Growth Portfolio, Real Estate Growth Portfolio and Balanced Portfolio
may each engage in futures and related options transactions only for hedging
purposes. CFTC regulations permit principals of an investment company registered
under the 1940 Act to engage in such transactions for bona fide hedging (as
defined in such regulations) and certain other limited purposes without
registering as commodity pool operators. The Portfolios are not permitted to
engage in speculative futures trading. Each Portfolio will determine that the
price fluctuations in the futures contracts and options on futures contracts
used for hedging purposes are substantially related to price fluctuations in
securities held by the Portfolio or which it expects to purchase. Except as
stated below, each Portfolio's futures transactions will be entered into for
traditional hedging purposes--i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that the Portfolio owns, or futures contracts will be
B-13
<PAGE>
purchased to protect the Portfolio against an increase in the price of
securities (or the currency in which they are quoted or denominated) it intends
to purchase. As evidence of this hedging intent, each Portfolio expects that on
75% or more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Portfolio will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities or assets quoted or denominated in the related currency in
the cash market at the time when the futures or option position is closed out.
However, in particular cases, when it is economically advantageous for a
Portfolio to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Portfolio to elect to comply with a
different test, under which the sum of the amounts of initial margin deposits on
the Portfolio's existing futures contracts and premiums paid for options on
futures entered into for the purpose of seeking to increase total return (net of
the amount the positions are "in the money") may not exceed 5% of the market
value of the Portfolio's net assets. A Portfolio will engage in transactions in
futures contracts and related options only to the extent such transactions are
consistent with the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for maintaining its qualification as a regulated
investment company for federal income tax purposes.
Transaction costs associated with futures contracts and related options
include brokerage costs, required margin deposits and, in the case of contracts
and options obligating a Portfolio to purchase securities or currencies, the
requirement that the Portfolio segregate assets to cover such contracts and
options.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while a Portfolio may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Portfolio than
if it had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Portfolio may be exposed to risk of loss.
Perfect correlation between a Portfolio's futures positions and
portfolio positions will be difficult to achieve because the only futures
contracts available to hedge a Portfolio's portfolio are various futures on U.S.
Government securities and foreign currencies, futures on a municipal securities
index and stock index futures. In addition, it is not possible to hedge fully or
perfectly against the effect of currency fluctuations on the value of foreign
securities because currency movements affect the value of different securities
in differing degrees.
Restricted and Illiquid Securities
Each Portfolio other than America Income Portfolio and Money Market
Portfolio may invest up to 5% of its net assets in "restricted securities"
(i.e., securities that would be required to be registered prior to distribution
B-14
<PAGE>
to the public), excluding restricted securities eligible for resale under Rule
144A under the Securities Act of 1933, as amended (the "1933 Act"), and, for the
Portfolios that allow non-U.S. investments, foreign securities which are offered
or sold outside the United States. In addition, each Portfolio other than Money
Market Portfolio may invest up to 15% of its net assets in illiquid investments,
which includes securities that are not readily marketable and repurchase
agreements maturing in more than seven days. Money Market Portfolio may invest
up to 10% of its net assets in such investments. Generally, a security may be
considered illiquid if a Portfolio is unable to dispose of such security within
seven days at approximately the price at which it values such security.
Securities may also be considered illiquid as a result of certain legal or
contractual restrictions on resale. The sale of illiquid securities, if they can
be sold at all, generally will require more time and result in higher brokerage
charges and other selling expenses than will the sale of liquid securities, such
as securities eligible for trading on U.S. securities exchanges or in the
over-the-counter markets. Moreover, restricted securities (i.e., securities that
would be required to be registered prior to distribution to the general public),
such as securities eligible for resale pursuant to Rule 144A ("144A
securities"), which may be illiquid for purposes of this limitation, often sell,
if at all, at a price lower than similar securities that are not subject to
restrictions on resale.
With respect to liquidity determinations generally, the Board of
Trustees has the ultimate responsibility for determining whether specific
securities, including Rule 144A securities, are liquid or illiquid. The Board
has delegated the function of making day-to-day determinations of liquidity for
each Portfolio to that Portfolio's Manager, pursuant to guidelines reviewed by
the Trustees. Each Portfolio's Manager takes into account a number of factors in
reaching liquidity decisions. These factors may include, but are not limited to:
(i) the frequency of trading in the security; (ii) the number of dealers who
make quotes for the security; (iii) the number of dealers who have undertaken to
make a market in the security; (iv) the number of other potential purchasers;
and (v) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how offers are solicited and the mechanics of
transfer). Each Portfolio's Manager will monitor the liquidity of securities
held by the Portfolio and report periodically on such decisions to the Trustees.
State securities laws may impose further limitations on the amount of
illiquid securities that a Portfolio may purchase.
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<PAGE>
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with "primary
dealers" in U.S. Government securities and banks which furnish collateral at
least equal in value or market price to the amount of their repurchase
obligation. Each Portfolio that may invest in foreign securities may also enter
into repurchase agreements involving certain foreign government securities. The
primary risk associated with repurchase agreements is that, if the seller
defaults, a Portfolio might suffer a loss to the extent that the proceeds from
the sale of the underlying securities and other collateral held by the Portfolio
in connection with the related repurchase agreement are less than the repurchase
price. Another risk is that, in the event of bankruptcy of the seller, a
Portfolio could be delayed in or prohibited from disposing of the underlying
securities and other collateral held by the Portfolio in connection with the
related repurchase agreement pending court proceedings. In evaluating whether to
enter into a repurchase agreement for a Portfolio, the Portfolio's Manager will
carefully consider the creditworthiness of the seller pursuant to procedures
reviewed and approved by the Trustees. See "Repurchase Agreements" in the
Prospectus.
Lending of Portfolio Securities
Each Portfolio other than America Income Portfolio and Money Market
Portfolios may lend portfolio securities to member firms of the New York Stock
Exchange, under agreements which would require that the loans be secured
continuously by collateral in cash, cash equivalents or U.S. Treasury Bills
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. A Portfolio would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities loaned as well as
the benefit of an increase in the market value of the securities loaned and
would also receive compensation based on investment of the collateral. A
Portfolio would not, however, have the right to vote any securities having
voting rights during the existence of the loan, but would call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of consent on a material matter affecting the
investment.
As with other extensions of credit there are risks of delay in recovery
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will lend portfolio securities only to firms which
have been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms. At no time would the value of the securities
loaned by a Portfolio exceed 33 1/3% of the value of its total assets.
B-16
<PAGE>
Investment Restrictions
The Trust, on behalf of each Portfolio, has adopted certain fundamental
investment restrictions which may not be changed without the affirmative vote of
the record holders of a "majority" (as defined in the 1940 Act) of the
Portfolio's outstanding voting securities. As used in the Prospectus and this
Statement of Additional Information, such approval means the approval of the
lesser of (i) the recordholders of 67% or more of the shares of a Portfolio
represented at a meeting if the record holders of more than 50% of the
outstanding shares of the Portfolios are present in person or by proxy, or (ii)
the holders of more than 50% of the Portfolio's outstanding shares.
Restrictions That Apply to International Growth Portfolio, Capital Growth
Portfolio, Real Estate Growth Portfolio, Equity-Income Portfolio and Balanced
Portfolio
Each Portfolio may not:
(1) Issue senior securities, except as permitted by paragraphs (2), (6)
and (7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Portfolio's
investment policy, and the pledge, mortgage or hypothecation of the Portfolio's
assets within the meaning of paragraph (3) below are not deemed to be senior
securities.
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes and except pursuant to reverse repurchase
agreements and then only in amounts not to exceed 33 1/3% of the Portfolio's
total assets (including the amount borrowed) taken at market value. The
Portfolio will not use leverage to attempt to increase income. The Portfolio
will not purchase securities while outstanding borrowings (including reverse
repurchase agreements) exceed 5% of the Portfolio's total assets.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the Portfolio's total
assets taken at market value.
(4) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the Portfolio may be deemed to be
an underwriter for purposes of the Securities Act of 1933.
B-17
<PAGE>
(5) Purchase or sell real estate, except that the Portfolio may (i)
lease office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities that are
secured by real estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate acquired by the
Portfolio as a result of the ownership of securities.
(6) Make loans, except that the Portfolio may lend portfolio securities
in accordance with the Portfolio's investment policies and may purchase or
invest in repurchase agreements, bank certificates of deposit, a portion of an
issue of publicly distributed bonds, bank loan participation agreements,
bankers' acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants, interest rate swaps, caps and floors and repurchase agreements entered
into in accordance with the Fund's investment policies.
(8) (This restriction No. 8 does not apply to Real Estate Growth
Portfolio) With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies or instrumentalities), if
(a) such purchase would cause more than 5% of the Portfolio's
total assets, taken at market value, to be invested in the securities
of such issuer, or
(b) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by the
Portfolio.
It is the fundamental policy of each Portfolio other than Real Estate
Growth Portfolio not to concentrate its investments in securities of companies
in any particular industry. In the opinion of the staff of the Securities and
Exchange Commission the ("SEC"), investments are concentrated in a particular
industry if such investments aggregate 25% or more of the Portfolio's total
assets. The foregoing industry concentration policy does not apply to
investments in U.S. Government securities.
B-18
<PAGE>
Real Estate Growth Portfolio will invest 25% or more of its total
assets in securities issued by companies in the real estate industry.
As a matter of nonfundamental investment policy and in connection with
the offering of its shares in various states and foreign countries, the Trust,
on behalf of each Portfolio, has agreed not to:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of either Manager
to save commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales unless by virtue
of its ownership of other securities, the Portfolio has the right to obtain,
without payment of additional consideration, securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except that the Portfolio may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities and in connection with transactions involving forward foreign
currency exchange transactions, options, futures contracts and options on
futures contracts.
(c) Purchase a security if, as a result, (i) more than 10% of the
Portfolio's total assets would be invested in securities of closed-end
investment companies, (ii) such purchase would result in more than 3% of the
total outstanding voting securities of any one such closed-end investment
company being held by the Portfolio, or (iii) more than 5% of the Portfolio's
total assets would be invested in any one such closed-end investment company;
provided, however, the Portfolio can exceed such limitations in connection with
a plan of merger or consolidation with or acquisition of substantially all the
assets of such other closed-end investment company. The Portfolio will not
invest in the securities of any open-end investment company, except in
connection with a plan of merger or consolidation with, or acquisition of,
substantially all the assets of such other open-end investment company.
(d) Purchase securities of any issuer which, together with any
predecessor, has a record of less than three years' continuous operations prior
to the purchase if such purchase would cause investments of the Portfolio in all
such issuers to exceed 5% of the value of the total assets of the Portfolio.
(e) Invest for the purpose of exercising control over or management of
any company.
B-19
<PAGE>
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Portfolio's total assets would be invested in
warrants which are not listed on the New York Stock Exchange, the American Stock
Exchange or comparable international exchanges or more than 5% of the value of
the Portfolio's net assets would be invested in warrants, whether or not so
listed. For these purposes, warrants are to be valued at the lesser of cost or
market, but warrants acquired by the Portfolio in units with or attached to debt
securities shall be deemed to be without value.
(g) Knowingly purchase or retain securities of an issuer if one or more
of the Trustees or officers of the Portfolio or directors or officers of the
Portfolio's Manager or any investment management subsidiary of such Manager
individually owns beneficially more than 1/2% and together own beneficially more
than 5% of the securities of such issuer.
(h) Purchase interests in oil, gas or other mineral leases or
exploration programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil, gas or
other minerals.
(i) Purchase any security which is illiquid, if more than 15% of the
net assets of the Portfolio, taken at market value, would be invested in such
securities. The Portfolio may not invest in repurchase agreements maturing in
more than seven days. The Portfolio currently intends to limit its investments
in illiquid securities to illiquid Rule 144A securities.
(j) Invest more than 5% of its total assets in restricted securities,
excluding Rule 144A securities; provided, however, the Portfolio may not invest
more than 15% of its total assets in restricted securities, including such Rule
144A securities.
(k) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads, or straddles, other than protective put options.
(l) Invest in real estate limited partnerships.
(m) Real Estate Growth Portfolio may not invest more than 10% of its
total assets in shares of REITs that are not readily marketable.
B-20
<PAGE>
Restrictions That Apply to America Income Portfolio
America Income Portfolio may not:
(1) invest in assets, except in U.S. Government Securities that are
backed by the full faith and credit of the United States and in when-issued
commitments and repurchase agreements with respect to these securities;
(2) borrow money, except from banks to meet redemptions in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its total
assets (including the amount borrowed). The Portfolio does not intend to borrow
money during the coming year, and will do so only as a temporary measure for
extraordinary purposes or to facilitate redemptions. The Portfolio will not
purchase securities while any borrowings are outstanding;
(3) purchase securities on margin;
(4) make loans to any person, except by (a) the purchase of a debt
obligation in which the Portfolio is permitted to invest and (b) engaging in
repurchase agreements;
(5) act as an underwriter, except as it may be deemed to be an
underwriter in a sale of restricted securities; or
(6) issue senior securities, except as permitted by restrictions nos. 2
and 4 above, and, for purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts and repurchase agreements
entered into in accordance with the Portfolio's investment policies.
The Trust, on behalf of America Income Portfolio, has agreed to adopt
certain additional investment restrictions which are not fundamental and may be
changed by a vote of the Trust's Board of Trustees and without shareholder
approval or notification. Pursuant to these additional restrictions, the
Portfolio may not:
(a) make short sales of securities, unless by virtue of its ownership
of other securities, the Portfolio has the right to obtain securities equivalent
in kind and amount to the securities sold and, if the right is conditional, the
sale is made upon the same terms and conditions, except that the Portfolio may
obtain such short-term credits as may be necessary for the clearance of purchase
and sale securities;
(b) write, purchase or otherwise invest in any put, call, straddle or
spread options;
B-21
<PAGE>
(c) invest in any security, including any repurchase agreement maturing
in more than seven days, which is illiquid, if more than 15% of the net assets
of the Portfolio, taken at market value, would be invested in such securities;
(d) pledge, mortgage or hypothecate its portfolio securities if at the
time of such action the value of the securities so pledged, mortgaged or
hypothecated would exceed 10% of the value of the Portfolio;
(e) invest in warrants;
(f) invest in oil, gas or other mineral leases or exploration or
development programs; and
(g) purchase or sell real estate, including real estate limited
partnerships except that the Portfolio may (i) acquire or lease office space for
its own use, (ii) invest in securities of issuers that invest in real estate or
interests therein, (iii) invest in securities that are secured by real estate or
interests therein, (iv) purchase and sell mortgage-related securities and (v)
hold and sell real estate acquired by the Portfolio as a result of the ownership
or securities.
Restrictions That Apply to Money Market Portfolio
Money Market Portfolio may not:
(1) except with respect to investments in obligations of (a) the U.S.
Government, its agencies, authorities or instrumentalities and (b) domestic
banks, purchase any security if, as a result (i) more than 5% of the assets of
the Portfolio would be invested in the securities of any one issuer, or (ii)
more than 25% of its assets would be invested in a particular industry;
(2) borrow money, except from banks to meet redemptions in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its total
assets (including the amount borrowed). The Portfolio does not intend to borrow
money during the coming year, and will do so only as a temporary measure for
extraordinary purposes or to facilitate redemptions. The Portfolio will not
purchase securities while any borrowings are outstanding;
(3) make short sales of securities;
(4) purchase securities on margin;
(5) write, purchase or otherwise invest in any put, call, straddle or
spread option or buy or sell real estate, commodities or commodity futures
contracts or invest in oil, gas or mineral exploration or development programs;
B-22
<PAGE>
(6) make loans to any person, except by (a) the purchase of a debt
obligation in which the Portfolio is permitted to invest and (b) engaging in
repurchase agreements;
(7) knowingly purchase any security that is subject to legal or
contractual restrictions on resale or for which there is no readily available
market;
(8) purchase the securities of other or its investment companies or
investment trusts, unless they are acquired as part of a merger, consolidation
or acquisition of assets;
(9) purchase or retain the securities of any issuer if any officer or
Trustee of the Trust or the Portfolio or its investment adviser is an officer or
director of such issuer and beneficially owns more than 1/2 of 1% of the
securities of such issuer and all of the officers and the Trustees of the Trust
and the Portfolio's investment adviser together own more than 5% of the
securities of such issuer;
(10) act as an underwriter, except as it may be deemed to be an
underwriter in a sale of restricted securities;
(11) invest in companies for the purpose of exercising control or
management; or
(12) issue senior securities.
In addition, in order to comply with certain nonfundamental policies of
the Portfolio, the Portfolio will not (i) pledge, mortgage or hypothecate its
portfolio securities if at the time of such action the value of the securities
so pledged, mortgaged or hypothecated would exceed 10% of the value of the
Portfolio, (ii) will not commit more than 10% of its assets to illiquid
investments, such as repurchase agreements that mature in more than seven days,
(iii) invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years continuous operation, or
(iv) invest in warrants. The term "person" as used in Investment Restriction No.
6 includes institutions as well as individuals. Policies in this paragraph may
be changed by the Trustees without shareholder approval or notification.
2. MANAGEMENT OF THE TRUST
The Trust's Board of Trustees provides broad supervision over the
affairs of the Trust. The officers of the Trust are responsible for the Trust's
operations. The Trustees and executive officers of the Trust are listed below,
together with their principal occupations during the past five years. An
asterisk indicates those Trustees who are interested persons of the Trust within
the meaning of the 1940 Act.
B-23
<PAGE>
JOHN F. COGAN, JR.*, Chairman and Trustee or Director of
Chairman of the Board, all the Pioneer Funds; President and
President and Trustee Director of The
Pioneer Group, Inc. ("PGI"); Chairman
and Director of Pioneering Management
Corporation ("PMC"); Chairman of the
Board and Chief Executive Officer of
Pioneer Winthrop Advisers ("PWA") since
1993; Chairman of the Board of Pioneer
Funds Distributor, Inc. ("PFD");
Director of Pioneering Services
Corporation ("PSC") and Pioneer Capital
Corporation ("PCC"); President and
Director of Pioneer Plans Corporation
("PPC"), Pioneer Investment Corp.
("PIC"), Pioneer International Corp.
("PIntl"), and Pioneer Metals &
Technology, Inc. ("PMT"); Chairman of
the Board and Director of Teberebie
Goldfields Limited; Chairman, President
and Director of Pioneer Goldfields
Limited ("PGL"); Chairman of the
Supervisory Board of Pioneer Fonds
Marketing GmbH; and Chairman and
Partner, Hale and Dorr (counsel to the
Fund).
RICHARD H. EGDAHL, M.D., Trustee or Director of all the
Trustee Pioneer Funds; Professor of
53 Bay State Road Management, Boston University School
Boston, Massachusetts of Management; Professor of Public
Health, Boston University School of
Public Health; Professor of Surgery,
Boston University School of Medicine
and Boston University Health Policy
Institute; Director, Boston University
Medical Center; Executive Vice
President and Vice Chairman of the
Board, University Hospital; Academic
Vice President for Health Affairs,
Boston University; Director, Essex
Investment Management Company, Inc.
(investment adviser), Health Payment
Review, Inc. (health care containment
software firm), Mediplex Group, Inc.
(nursing care facilities firm), Peer
Review Analysis, Inc. (health care
utilization management firm) and
Springer-Verlag New York, Inc.
(publisher); Honorary Director,
Franciscan Children's Hospital.
B-24
<PAGE>
MARGUERITE A. PIRET, Trustee or Director of all the
Trustee Pioneer Funds; President, Newbury,
One Boston Place Piret & Company, Inc. (a merchant
Suite 2635 banking firm).
Boston, Massachusetts
DAVID D. TRIPPLE*, Trustee or Director of all the
Trustee and Executive Pioneer Funds; Executive Vice
Vice President President and Director of PGI and PWA
(since 1993); Director of PFD, since
1989; Director of PCC and Pioneer SBIC
Corporation; President (since 1993),
Chief Investment Officer and Director
of PMC.
JOHN WINTHROP, Trustee or Director of all the
Trustee Pioneer Funds; President, John
One North Adgers Wharf Winthrop & Co., Inc. (a private
Charleston, South Carolina investment firm); Director of NUI
Corp., and Trustee of Alliance Capital
Reserves, Alliance Government Reserves
and Alliance Tax Exempt Reserves.
NORMAN KURLAND, Senior Vice President of PMC since
Vice President 1993; Vice President of PMC from 1990
to 1993; International Portfolio
Manager and Analyst, Keystone Custodian
Funds from 1987 to 1990.
ARTHUR J. HALLERAN, JR. Trustee, President and Chief
Vice President Operating Officer of Pioneer
49 Miles River Winthrop Real Estate Investment
Hamilton, Massachusetts Fund; Chairman and Chief Executive
Officer of Winthrop Financial
Associates, a Limited Partnership
("WFA") (a real estate investment and
management firm); Chairman and Chief
Executive Officer of Winthrop Advisors
Limited Partnership ("WALP"); General
Partner of Linnaeus Associates Limited
Partnership (the sole general partner
of WFA); and President, Chief Operating
Officer and a Director of PWA since
1993.
B-25
<PAGE>
STEPHEN G. KASNET Trustee and Vice President of
Vice President Pioneer Winthrop Real Estate
One University Lane Investment Fund; Managing Director,
Manchester, Massachusetts WFA since 1991; Director and Vice
President of PWA since 1993; Executive
Vice President, Cabot, Cabot & Forbes,
1989 to 1991.
WILLIAM H. KEOUGH, Senior Vice President, Chief
Treasurer Financial Officer and Treasurer of PGI
and Treasurer of PFD, PMC, PSC, PCC,
PPC, PIC, PIntl, PMT, PWA and Pioneer
SBIC Corporation.
JOSEPH P. BARRI, Secretary of PGI, PMC, PCC, PPC,
Secretary PIC, PIntl, PMT and PWA; Clerk
of PFD and PSC and Partner, Hale and
Dorr (counsel to the Fund).
ERIC RECKARD, Manager of Fund Accounting and
Assistant Treasurer Compliance of PMC since May,
1994; Manager of Auditing and Business
Analysis of PGI prior to May, 1994.
The Trust's Agreement and Declaration of Trust provides that the
recordholders of two-thirds of its outstanding shares may vote to remove a
Trustee of the Trust at any special meeting of shareholders. The business
address of all officers is 60 State Street, Boston, Massachusetts 02109.
All of the outstanding capital stock of PFD, PMC and PSC is owned by
PGI, a Delaware corporation. The table below lists all the Pioneer Funds
currently offered to the public (other than the Portfolios) and the investment
adviser and principal underwriter for each fund.
Investment Principal
Fund Name Adviser Underwriter
Pioneer Fund PMC PFD
Pioneer II PMC PFD
Pioneer Three PMC PFD
Pioneer Growth Shares PMC PFD
Pioneer Capital Growth Fund PMC PFD
Pioneer Equity-Income Fund PMC PFD
Pioneer Gold Shares PMC PFD
Pioneer Winthrop Real Estate Investment Fund * PFD
Pioneer Europe Fund PMC PFD
Pioneer International Growth Fund PMC PFD
Pioneer Bond Fund PMC PFD
Pioneer America Income Trust PMC PFD
Pioneer Short-Term Income Trust PMC PFD
Pioneer Income Fund PMC PFD
B-26
<PAGE>
Pioneer Tax-Free Income Fund PMC PFD
Pioneer Intermediate Tax-Free Fund PMC PFD
Pioneer California Double Tax-Free Fund PMC PFD
Pioneer New York Triple Tax-Free Fund PMC PFD
Pioneer Massachusetts Double Tax-Free Fund PMC PFD
Pioneer Cash Reserves Fund PMC **
Pioneer U.S. Government Money Market Fund PMC **
Pioneer Tax-Free Money Fund PMC **
Pioneer Money Market Account, Inc. PMC PFD
Pioneer Interest Shares, Inc. PMC ***
Pioneer Emerging Markets Fund PMC PFD
Pioneer India Fund **** PFD
- ------------------------------
* PWA is the investment adviser of this fund. PMC and WALP are each
subadvisers of this fund.
** This fund distributes its own shares.
*** This fund is a closed-end investment company.
**** ITI Pioneer AMC Ltd. subadvises this Fund's investment in India and PMC
manages all of the Fund's other investments.
PMC, the investment adviser to each Portfolio other than Real Estate
Growth Portfolio, also manages the investments of certain institutional private
accounts. PWA and WALP, the adviser and a subadviser, respectively, to Real
Estate Growth Portfolio, do not provide investment advice to any other account
other than Pioneer Winthrop Real Estate Investment Fund. Messrs. Cogan, Tripple,
Keough and Barri, officers and/or Trustees of the Trust, are also officers
and/or directors of PFD, PMC, PSC (except Mr. Tripple) and PGI. To the knowledge
of the Trust, no officer or Trustee of the Trust owned 5% or more of the issued
and outstanding shares of PGI as of the date of this Statement of Additional
Information, except Mr. Cogan who then owned approximately 15% of such shares.
Compensation of Officers and Trustees
The Trust pays no salaries or compensation to any of its officers. The
Trust pays an annual trustees' fee of $500 to each Trustee who is not affiliated
with PWA, WALP, PMC, PFD or PSC as well as an annual fee of $200 to each of the
Trustees who is a member of the Trust's Audit Committee, except for the Chairman
of such Committee, who receives an annual fee of $250. The Trust also pays an
annual trustees' fee of $500 plus expenses to each Trustee affiliated with PWA,
WALP, PMC, PSC or PFD. Any such fees and expenses paid to affiliates or
interested persons of PWA, WALP, PMC, PFD or PSC are reimbursed to the Trust
under its Management Contracts with PMC and PWA (each a "Manager"). As of the
date of this Statement of Additional Information, PGI owned all the outstanding
shares of the Trust.
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The following table sets forth the estimated compensation of the
Trustees from the Fund and other Pioneer Funds for the fiscal year of the Fund
ending December 31, 1995:
Pension or Total
Retirement Compensation
Benefits from Pioneer
Aggregate Accrued as Family of Funds
Compensation Part of (including
Name of Trustee From the Trust Trust's Expenses Trust)
John F. Cogan, Jr. $0 $0 $0
Richard H. Egdahl, M.D. $1,000 0 $56,650
Marguerite A. Piret $1,050 0 $56,700
David D. Tripple $0 0 $0
John Winthrop $1,000 0 $56,650
3. INVESTMENT ADVISERS
As stated in the Prospectus, PMC, 60 State Street, Boston,
Massachusetts, serves as the investment adviser to each Portfolio other than
Real Estate Growth Portfolio. PWA, 60 State Street, Boston, Massachusetts,
serves as the investment adviser to Real Estate Growth Portfolio. Pursuant to
subadvisory contracts with the Trust, both PMC and WALP serve as subadvisers to
Real Estate Growth Portfolio. Each of the Trust's management contracts and
subadvisory contracts expires initially on February 1, 1996, but each contract
is renewable annually after such date by the vote of a majority of the Board of
Trustees of the Trust (including a majority of the Board of Trustees who are not
parties to the contract or interested persons of any such parties) cast in
person at a meeting called for the purpose of voting on such renewal. Each
contract terminates if assigned and may be terminated with respect to one or
more Portfolios without penalty by either party by vote of its Board of
Directors or Trustees, as the case may be, or a majority of the affected
Portfolio's outstanding voting securities and the giving of sixty days' written
notice.
As compensation for the management services and expenses incurred, the
Managers are entitled to management fees at the annual rate of the applicable
Portfolio's average daily net assets set forth below.
Percentage of Average
Portfolio Daily Net Assets
International Growth Portfolio 1.00%
Real Estate Growth Portfolio
Capital Growth Portfolio 0.65%
Equity-Income Portfolio
Balanced Portfolio
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America Income Portfolio 0.55%
Money Market Portfolio 0.50%
In addition, as compensation for advisory and other services and
expenses incurred, PMC and WALP are each entitled to subadvisory fees payable by
PWA equal to 0.30% of Real Estate Growth Portfolio's average daily net assets.
The above management and subadvisory fees are normally computed daily
and paid monthly in arrears. Each Manager has voluntarily agreed not to impose a
portion of of its management fee and to make other arrangements, if necessary,
to limit certain other expenses of the Portfolios to the extent necessary to
reduce expenses to a specified percentage of average daily net assets, as
indicated below, for the fiscal period ending December 31, 1995. Such voluntary
and temporary fee waiver or expense limitation arrangements may be terminated by
Pioneer (or, in the case of Real Estate Growth Portfolio, PWA) at any time
without notice.
Percentage of Portfolio's
Portfolio Average Daily Net Assets
International Growth Portfolio 2.00%
Capital Growth Portfolio 1.75%
Real Estate Growth Portfolio 1.75%
Equity-Income Portfolio 1.75%
Balanced Portfolio 1.75%
America Income Portfolio 1.00%
Money Market Portfolio 0.75%
In addition, each Manager has agreed that if in any fiscal year the
aggregate expenses of a Portfolio for which it acts as investment adviser exceed
the expense limitation established by any state having jurisdiction over the
Portfolio, the Manager will reduce its management fee to the extent required by
state law.
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4. PRINCIPAL UNDERWRITER
Pioneer Funds Distributor, Inc., 60 State Street, Boston,
Massachusetts, serves as the principal underwriter for the Trust in connection
with the continuous offering of shares of the Portfolios. The Trust will not
generally issue shares for consideration other than cash. At the Trust's sole
discretion, however, it may issue shares for consideration other than cash in
connection with an acquisition of portfolio securities pursuant to a bona fide
purchase of assets, merger or other reorganization provided (i) securities meet
the investment objectives andpolicies of the Portfolio; (ii) the securities are
acquired by the Portfolio for investment and not for resale; (iii) the
securities are not restricted as to transfer either by law or liquidity of
market; and (iv) the securities have a value which is readily ascertainable (and
not established only by evaluation procedures) as evidenced by the listing on
the American Stock Exchange or the New York Stock Exchange, or by quotation
under the NASD Automated Quotation System. An exchange of securities for shares
of a Portfolio will generally be a taxable transaction to the shareholder.
The redemption price of shares of beneficial interest of a Portfolio
may, at PMC's or PWA's discretion, be paid in cash or portfolio securities. The
Trust has, however, elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which each Portfolio is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the Portfolio's net asset value during any
90-day period for any one shareholder. Should the amount of redemptions by any
shareholder exceed such limitation, the Trust will have the option of redeeming
the excess in cash or portfolio securities. In the latter case, the securities
are taken at their value employed in determining the Portfolio's net asset
value. A shareholder whose shares are redeemed in-kind may incur brokerage
charges in selling the securities received in-kind. The selection of such
securities will be made in such manner as the Board deems fair and reasonable.
5. CUSTODIAN
Brown Brothers Harriman & Co. (the "Custodian") is the custodian of
each Portfolio's assets. The Custodian's responsibilities include safekeeping
and controlling each Portfolio's cash and securities in the United States as
well as in foreign countries, handling the receipt and delivery of securities,
and collecting interest and dividends on the Portfolio's investments. The
Custodian fulfills its function in foreign countries through a network of
subcustodian banks located in the foreign countries (the "Subcustodians"). The
Custodian also provides fund accounting, bookkeeping and pricing assistance to
the Portfolios and assistance in arranging for forward currency exchange
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contracts as described above under "Investment Policies and Restrictions."
The Custodian does not determine the investment policies of any
Portfolio or decide which securities it will buy or sell. Each Portfolio may
invest in securities issued by the Custodian or any of the Subcustodians,
deposit cash in the Custodian or any Subcustodian and deal with the Custodian or
any of the Subcustodians as a principal in securities transactions. Portfolio
securities may be deposited into the Federal Reserve-Treasury Department Book
Entry System or the Depository Trust Company in the United States or in
recognized central depositories in foreign countries. In selecting Brown
Brothers Harriman & Co. and its network of foreign subcustodians as the
custodians for foreign countries securities, the Board of Trustees made certain
determinations required by Rule 17f-5 promulgated under the 1940 Act. The
Trustees annually review and approve the continuations of its international
subcustodian arrangements.
6. INDEPENDENT PUBLIC ACCOUNTANT
Arthur Andersen LLP is the Trust's independent public accountant,
providing audit services, tax return review, and assistance and consultation
with respect to the preparation of filings with the Securities and Exchange
Commission (the "SEC").
7. PORTFOLIO TRANSACTIONS
Money Market Portfolio
PMC intends to fully manage Money Market Portfolio by buying and
selling securities, as well as holding securities to maturity. In managing
Pioneer Money Market Portfolio, PMC seeks to take advantage of market
developments and yield disparities, which may include use of the following
strategies:
(1) shortening the average maturity of the Portfolio in anticipation of
a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of the Portfolio in anticipation
of a decline in interest rates so as to maximize yield;
(3) selling one type of debt security and buying another when
disparities arise in the relative values of each; and
(4) changing from one debt security to an essentially similar debt
security when their respective yields appear distorted due to market factors.
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All Portfolios
All orders for the purchase or sale of portfolio securities are placed
on behalf of a Portfolio by PMC pursuant to authority contained in the
Management Contract, or in the case of Real Estate Growth Portfolio, the
subadvisory contract among PMC, PWA and the Trust, on behalf of Real Estate
Growth Portfolio. The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Additionally, in
selecting brokers and dealers, PMC considers other factors relating to best
execution, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability, and financial condition
of the dealer; the dealer's execution services rendered on a continuing basis;
and the reasonableness of any dealer spreads. Most transactions in foreign
equity securities are executed by broker-dealers in foreign countries in which
commission rates are fixed and, therefore, are not negotiable (as such rates are
in the United States) and are generally higher than in the United States. In
addition, debt securities are traded principally in the over-the-counter market
on a net basis through dealers acting for their own account and not as brokers.
The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased and sold from and to dealers include a dealer's mark-up or mark-down.
PMC attempts to negotiate with underwriters to decrease the commission or
concession for the benefit of the Portfolios. PMC normally seeks to deal
directly with the primary market makers unless, in its opinion, better prices
are available elsewhere.
PMC may select broker-dealers which provide brokerage and/or research
services to the Portfolios and/or other investment companies or accounts managed
by PMC, PWA or WALP. Such services may include advice concerning the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts; and
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement). PMC maintains a listing of broker-dealers
who provide such services on a regular basis. However, because many transactions
on behalf of the Portfolios and other investment companies or accounts managed
by PMC, PWA or WALP are placed with broker-dealers (including broker-dealers on
the listing) without regard to the furnishing of such services, it is not
possible to estimate the proportion of such transactions directed to such
dealers solely because such services were provided. Management believes that no
exact dollar value can be calculated for such services.
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The research received from broker-dealers may be useful to PMC, PWA or
WALP in rendering investment management services to a Portfolio as well as to
other investment companies or accounts managed by PMC, PWA or WALP, although not
all of such research may be useful to the Portfolio. Conversely, such
information provided by brokers or dealers who have executed transaction orders
on behalf of such other accounts may be useful to PMC, PWA or WALP in carrying
out its obligations to a Portfolio. The receipt of such research has not reduced
PMC, PWA or WALP's normal independent research activities; however, it enables
PMC, PWA and WALP to avoid the additional expenses which might otherwise be
incurred if they were to attempt to develop comparable information through their
own staffs.
In circumstances where two or more broker-dealers offer comparable
prices and executions, preference may be given to a broker-dealer which has sold
shares of other investment companies or accounts managed by PMC, PWA or WALP.
This policy does not imply a commitment to execute all portfolio transactions
through all broker-dealers that sell shares of such investment companies and
accounts. In addition, if PMC determines in good faith that the amount of
commissions charged by a broker is reasonable in relation to the value of the
brokerage and research services provided by such broker, a Portfolio may pay
commissions to such broker in an amount greater than the amount another firm may
charge.
In addition to serving as investment adviser to the Portfolios (with
the exception of Real Estate Growth Portfolio, for which it serves as
subadviser), PMC acts as investment adviser to the other Pioneer Funds and
certain private accounts with investment objectives similar to those of the
Portfolios. Further, in addition to serving as investment adviser and
subadviser, respectively, to Real Estate Growth Portfolio, PWA and WALP act in
identical capacities for another Pioneer Fund with an investment objective that
is identical to that of Real Estate Growth Portfolio. As such, securities may
meet investment objectives of a Portfolio, such other funds and such private
accounts. In such cases, the decision to recommend purchases for one fund or
account rather than another is based on a number of factors. The determining
factors in most cases are the amount of securities of the issuer then
outstanding, the value of those securities and the market for them. Other
factors considered in the investment recommendations include other investments
which each fund or account presently has in a particular industry or country and
the availability of investment funds in each fund or account.
It is possible that, at times, identical securities will be held by
more than one fund and/or account. However, the position of any fund or account
in the same issue may vary and the length of time that any fund or account may
choose to hold its investment in the same issue may likewise vary. To the extent
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that a Portfolio, another fund in the Pioneer group or a private account managed
by PMC seeks to acquire the same security at about the same time, the Portfolio
may not be able to acquire as large a position in such security as it desires or
it may have to pay a higher price for the security. Similarly, a Portfolio may
not be able to obtain as large an execution of an order to sell or as high a
price for any particular portfolio security if PMC decides to sell on behalf of
another account the same portfolio security at the same time. On the other hand,
if the same securities are bought or sold at the same time by more than one
account, the resulting participation in volume transactions could produce better
executions for a Portfolio or other account. In the event that more than one
account purchases or sells the same security on a given date, the purchases and
sales will normally be made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each.
The Trustees periodically review PMC's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Portfolios.
8. TAX STATUS
It is each Portfolio's policy to meet the requirements of Subchapter M
of the Code for qualification as a regulated investment company. If a Portfolio
meets all such requirements and distributes to its shareholders at least
annually all investment company taxable income and net capital gain, if any,
which it receives, the Portfolio will be relieved of the necessity of paying
federal income tax.
In order to qualify as a regulated investment company under Subchapter
M, a Portfolio must, among other things, derive at least 90% of its annual gross
income from dividends, interest, gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including gains from
options, futures and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "90% income test"), limit
its gains from the sale of stock, securities and certain other investments held
for less than three months to less than 30% of its annual gross income (the "30%
test") and satisfy certain annual distribution and quarterly diversification
requirements. For purposes of the 90% income test, income that a Portfolio earns
from equity interests in certain entities that are not treated as corporations
(e.g., are treated as partnerships or trusts) for U.S. tax purposes will
generally have the same character for the Portfolio as in the hands of such
entities; consequently, the Portfolio may be required to limit its equity
investments in such entities that earn fee income, rental income, or other
nonqualifying income.
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As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by Section 817(h) of the Code and
the regulations thereunder. These requirements, which are in addition to the
diversification requirements imposed on a Portfolio by the Investment Company
Act and Subchapter M of the Code, place certain limitations on the assets of
each separate account and, because Section 817(h) and those regulations treat
the assets of the Portfolio as assets of the related separate account, the
assets of a Portfolio, that may be invested in securities of a single issuer.
Specifically, the regulations provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter or within 30
days thereafter no more than 55% of the total assets of a Portfolio may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and while each U.S. Government agency and instrumentality
is considered a separate issuer, a particular foreign government and its
agencies, instrumentalities and political subdivisions are considered the same
issuer. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items (including receivables), U.S.
Government securities and securities of other regulated investment companies.
Failure by a Portfolio to both qualify as a regulated investment company and
satisfy the Section 817(h) requirements would generally result in treatment of
the variable contract holders other than as described in the applicable variable
contract prospectus, including inclusion in ordinary income of income accrued
under the contracts for the current and all prior taxable years. Any such
failure may also result in adverse tax consequences for the insurance company
issuing the contracts.
Dividends from net investment income, net short-term capital gains, and
certain net foreign exchange gains are taxable as ordinary income, whether
received in cash or in additional shares. Dividends from net long-term capital
gains, if any, whether received in cash or additional shares, are taxable to a
Portfolio's shareholders as long-term capital gains for federal income tax
purposes without regard to the length of time shares of the Portfolio have been
held. The federal income tax status of all distributions will be reported to
shareholders annually.
Any dividend declared by a Portfolio in October, November or December
as of a record date in such a month and paid during the following January will
be treated for federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it is declared.
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Foreign exchange gains and losses realized by a Portfolio in connection
with certain transactions involving foreign currency- denominated debt
securities, certain options and futures contracts relating to foreign currency,
forward foreign currency contracts, foreign currencies, or payables or
receivables denominated in a foreign currency are subject to Section 988 of the
Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders. Any such transactions that are not directly
related to a Portfolio's investment in stock or securities may increase the
amount of gain it is deemed to recognize from the sale of certain investments
held for less than 3 months for purposes of the 30% test and may under future
Treasury regulations produce income not among the types of "qualifying income"
for purposes of the 90% income test. If the net foreign exchange loss for a year
were to exceed the Portfolio's investment company taxable income (computed
without regard to such loss) the resulting overall ordinary loss for such year
would not be deductible by the Portfolio or its shareholders in future years.
If a Portfolio acquires the stock of certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
sources that produce interest, dividend, rental, royalty or capital gain income)
or hold at least 50% of their assets in such passive sources ("passive foreign
investment companies"), the Portfolio could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Portfolio is timely distributed to its
shareholders. The Portfolio would not be able to pass through to its
shareholders any credit or deduction for such a tax. In certain cases, an
election may be available that would ameliorate these adverse tax consequences.
Each Portfolio may limit its investments in passive foreign investment companies
and will undertake appropriate actions, including consideration of any available
elections, to limit its tax liability, if any, or take other defensive actions
with respect to such investments.
Real Estate Growth Portfolio and Equity-Income Portfolio may invest in
debt obligations that are in the lowest rating categories or are unrated,
including debt obligations of issuers not currently paying interest as well as
issuers who are in default. International Growth Portfolio may hold such
securities only as a result of credit quality downgrades. Investments in debt
obligations that are at risk of or in default present special tax issues for a
Portfolio. Tax rules are not entirely clear about issues such as when a
Portfolio may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
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obligations in a workout context are taxable. These and other issues will be
addressed by a Portfolio, in the event it invests in such securities, in order
to ensure that it distributes sufficient income to preserve its status as a
regulated investment company and to avoid becoming subject to federal income or
excise tax.
Since, at the time of an investor's purchase of shares of a Portfolio,
a portion of the per share net asset value by which the purchase price is
determined may be represented by realized or unrealized appreciation in the
Portfolio or undistributed taxable income of the Portfolio, subsequent
distributions (or portions thereof) on such shares may be taxable to such
investor even if the net asset value of his shares is, as a result of the
distributions, reduced below his cost for such shares and the distributions (or
portions thereof) in reality represent a return of a portion of his investment.
Any loss realized by a shareholder upon the redemption of shares with a
tax holding period at the time of redemption of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
For federal income tax purposes, each Portfolio is permitted to carry
forward a net realized capital loss in any year to offset realized capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net realized capital gains are offset by such losses, they
would not result in federal income tax liability to the Portfolio and are not
expected to be distributed as such to shareholders.
To the extent that a Portfolio receives dividends from investments in
U.S. domestic corporations, dividends paid by the Portfolio normally will
qualify for the 70% dividends-received deduction available to corporations.
Each Portfolio that may invest in foreign countries, may be subject to
withholding and other taxes imposed by foreign countries with respect to its
investments in those countries. Tax conventions between certain countries and
the United States may reduce or eliminate such taxes. If more than 50% of a
Portfolio's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect to pass through to
shareholders their pro rata shares of qualified foreign taxes paid by the
Portfolio, with the result that shareholders would be required to include such
taxes in their gross incomes (in addition to dividends actually received) and
would treat such taxes as foreign taxes paid by them.
Qualified foreign taxes generally include taxes that would be treated
as income taxes under U.S. tax regulations but do not include most other taxes,
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such as stamp taxes, securities transaction taxes, and similar taxes. If a
Portfolio makes the election described above, shareholders may deduct their pro
rata portion of qualified foreign taxes paid by the Portfolio in computing their
income subject to U.S. federal income taxation or, alternatively, use them as
foreign tax credits, subject to applicable limitations under the Code, against
their U.S. federal income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct their pro rata
portion of qualified foreign taxes paid by the Portfolio, although such
shareholders will be required to include their shares of such taxes in gross
income.
If a shareholder chooses to take a credit for the foreign taxes deemed
paid by such shareholder, the amount of the credit that may be claimed in any
year may not exceed the same proportion of the U.S. tax against which such
credit is taken which the shareholder's taxable income from foreign sources (but
not in excess of the shareholder's entire taxable income) bears to his entire
taxable income. For this purpose, long-term and short-term capital gains a
Portfolio realizes and distributes to shareholders will generally not be treated
as income from foreign sources in their hands, nor will distributions of certain
foreign currency gains subject to Section 988 of the Code and of any other
income realized by the Portfolio that is deemed, under the Code, to be
U.S.-source income in the hands of the Portfolio. This foreign tax credit
limitation may also be applied separately to certain specific categories of
foreign-source income and the related foreign taxes. As a result of these rules,
which have different effects depending upon each shareholder's particular tax
situation, certain shareholders may not be able to claim a credit for the full
amount of their proportionate share of the foreign taxes paid by a Portfolio.
Shareholders who are not liable for U.S. income taxes, including tax-exempt
shareholders, will ordinarily not benefit from this election. If a Portfolio
does make the election, it will provide required tax information to
shareholders. If a Portfolio does not make the election, it may deduct such
taxes in computing its income available for distribution to shareholders to
satisfy applicable tax distribution requirements.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Provided that each Portfolio qualifies as a regulated investment
company ("RIC") under the Code, it will not be required to pay any Massachusetts
income, corporate excise or franchise taxes. Provided that each Portfolio
qualifies as a RIC and meets certain income-source requirements under Delaware
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law, each Portfolio should also not be required to pay Delaware corporation
income tax.
Options written or purchased and futures contracts entered into by a
Portfolio on certain securities, securities indices and foreign currencies, as
well as certain foreign currency forward contracts, may cause the Portfolio to
recognize gains or losses from marking-to-market at the end of its taxable year
even though such options may not have lapsed, been closed out, or exercised or
such futures or forward contracts may not have been closed out or disposed of
and may affect the characterization as long-term or short-term of some capital
gains and losses realized by the Portfolio. Certain options, futures and forward
contracts on foreign currency may be subject to Section 988, described above,
and accordingly produce ordinary income or loss. Losses on certain options,
futures or forward contracts and/or offsetting positions (portfolio securities
or other positions with respect to which the Portfolio's risk of loss is
substantially diminished by one or more options, futures or forward contracts)
may also be deferred under the tax straddle rules of the Code, which may also
affect the characterization of capital gains or losses from straddle positions
and certain successor positions as long-term or short-term. The tax rules
applicable to options, futures, forward contracts and straddles may affect the
amount, timing and character of the Portfolio's income and loss and hence of
distributions to shareholders. Certain tax elections may be available that would
enable the Portfolio to ameliorate some adverse effects of the tax rules
described in this paragraph.
Federal law requires that each Portfolio withhold (as "backup
withholding") 31% of reportable payments, including dividends, capital gain
dividends, and the proceeds of redemptions (including exchanges) and
repurchases, to shareholders who have not complied with IRS regulations. In
order to avoid this withholding requirement, shareholders must certify on their
Account Applications, or on separate W-9 Forms, that their Social Security or
other Taxpayer Identification Number is correct and that they are not currently
subject to backup withholding, or that they are exempt from backup withholding.
A Portfolio may nevertheless be required to withhold if it receives notice from
the IRS or a broker that the number provided is incorrect or backup withholding
is applicable as a result of previous underreporting of interest or dividend
income.
The description above relates only to U.S. federal income tax
consequences for shareholders who are U.S. persons, i.e., U.S. citizens or
residents and U.S. domestic corporations, partnerships, trusts or estates, and
who are subject to U.S. federal income tax. The description does not address
special tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies, and financial institutions. Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
possible 30% U.S. withholding tax (or withholding tax at a lower treaty rate) on
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dividends treated as ordinary income. Shareholders should consult their own tax
advisers on these matters and on state, local and other applicable tax laws.
9. DESCRIPTION OF SHARES
The Trust's Agreement and Declaration of Trust permits the Board of
Trustees to authorize the issuance of an unlimited number of full and fractional
shares of beneficial interest (without par value) which may be divided into such
separate series as the Trustees may establish. Currently, the Trust consists of
seven Portfolios. The Trustees may establish additional portfolios of shares in
the future, and may divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial interests. Each
share of a Portfolio represents an equal proportionate interest in the
Portfolio. The shares of each Portfolio participate equally in the earnings,
dividends and assets of the Portfolio, and are entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shareholders of all Portfolios vote together in the election and selection
of Trustees and accountants. Upon liquidation of a Portfolio, the Portfolio's
shareholders are entitled to share pro rata in the Portfolio's net assets
available for distribution to shareholders.
Shareholders are entitled to one vote for each share held
and may vote in the election of Trustees and on other matters submitted to
meetings of shareholders. Although Trustees are not elected annually by the
shareholders, shareholders have, under certain circumstances, the right to
remove one or more Trustees. No amendment adversely affecting the rights of
shareholders may be made to the Trust's Agreement and Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable by the
Trust, except as stated below.
The rights, if any, of Variable Contract holders to vote the shares of
a Portfolio beneficially owned by such Variable Contract holders are governed by
the relevant Variable Contract. For information on such voting rights, see the
prospectus describing such Variable Contract.
10. CERTAIN LIABILITIES
As a Delaware business trust, the Trust's operations are governed by
its Agreement and Declaration of Trust dated September 16, 1994. A copy of the
Trust's Certificate of Trust, also dated September 16, 1994, as amended February
3, 1995, is on file with the Office of the Secretary of State of the State of
Delaware. Generally, Delaware business trust shareholders are not personally
liable for obligations of a Delaware business trust under Delaware law. The
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Delaware Business Trust Act (the "Delaware Act") provides that a shareholder of
a Delaware business trust shall be entitled to the same limitation of liability
extended to shareholders of private for-profit corporations. The Trust's
Agreement and Declaration of Trust expressly provides that the Trust has been
organized under the Delaware Act and that the Agreement and Declaration of Trust
is to be governed by Delaware law. It is nevertheless possible that a Delaware
business trust, such as the Trust, might become a party to an action in another
state whose courts refused to apply Delaware law, in which case the Trust's
shareholders could be subject to personal liability.
To guard against this risk, the Agreement and Declaration of Trust (i)
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides that notice of such disclaimer may be given in each
agreement, obligation and instrument entered into or executed by the Trust or
its Trustees, (ii) provides for the indemnification out of Trust or Portfolio
property of any shareholders held personally liable for any obligations of the
Trust or of such Portfolio and (iii) provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. Thus, the risk
of a Trust shareholder incurring financial loss beyond his or her investment
because of shareholder liability with respect to a Portfolio is limited to
circumstances in which all of the following factors are present: (1) a court
refused to apply Delaware law; (2) the liability arose under tort law or, if
not, no contractual limitation of liability was in effect; and (3) the Portfolio
itself would be unable to meet its obligations. In the light of Delaware law,
the nature of the Trust business and the nature of its assets, the risk of
personal liability to a Trust shareholder is remote.
The Agreement and Declaration of Trust further provides that the Trust
shall indemnify each of its Trustees and officers against liabilities and
expenses reasonably incurred by them, in connection with, or arising out of, any
action, suit or proceeding, threatened against or otherwise involving such
Trustee or officer, directly or indirectly, by reason of being or having been a
Trustee or officer of the Trust. The Agreement and Declaration of Trust does not
authorize the Trust or any Portfolio to indemnify any Trustee or officer against
any liability to which he or she would otherwise be subject by reason of or for
willful misfeasance, bad faith, gross negligence or reckless disregard of such
person's duties.
11. DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the
close of regular trading (currently 4:00 p.m., Eastern Time) on each day on
which the New York Stock Exchange (the "Exchange") is open for trading. As of
the date of this Statement of Additional Information, the Exchange is open for
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trading every weekday except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset value per share of each
Portfolio is also determined on any other day in which the level of trading in
its portfolio securities is sufficiently high so that the current net asset
value per share might be materially affected by changes in the value of its
portfolio securities. No Portfolio is required to determine its net asset value
per share on any day in which no purchase orders for the shares of the Portfolio
become effective and no shares of the Portfolio are tendered for redemption.
The net asset value per share of each Portfolio is computed by taking
the value of all of the Portfolio's assets less the Portfolio's liabilities, and
dividing it by the number of outstanding shares of the Portfolio. For purposes
of determining net asset value, expenses of each Portfolio are accrued daily.
Money Market Portfolio
Except as set forth in the following paragraph, Money Market
Portfolio's investments are valued on each business day on the basis of
amortized cost, if the Board of Trustees determines in good faith that the
method approximates fair value. This technique involves valuing an instrument at
its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price such Portfolio would receive
if it sold the investment. During periods of declining interest rates, the yield
on shares of Money Market Portfolio computed as described below may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio investments. Thus, if the use of amortized cost
by Money Market Portfolio resulted in a lower aggregate portfolio value on a
particular day, a prospective investor in the Portfolio would be able to obtain
a somewhat higher yield than would result from investment in a fund utilizing
solely market values. The converse would apply in a period of rising interest
rates.
In determining Money Market Portfolio's net asset value, "when-issued"
securities will be valued at the value of the security at the time the
commitment to purchase is entered into.
The valuation of Money Market Portfolio's investments based upon their
amortized cost and the concomitant maintenance of the Portfolio's per share net
asset value of $1.00 is permitted in accordance with Rule 2a-7 under the 1940
Act, pursuant to which the Portfolio must adhere to certain conditions which are
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described in detail in the Prospectus. Money Market Portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or less. The maturities of
variable rate demand instruments held by the Portfolio will be deemed to be the
longer of the demand period or the period remaining until the next interest rate
adjustment, although stated maturities may be in excess of one year. The
Trustees have established procedures designed to stabilize, to the extent
reasonably possible, the price per share of Money Market Portfolio for the
purpose of maintaining sales and redemptions at a single value. Such procedures
will include review of the Portfolio's holdings by the Trustees, at such
intervals as they may deem appropriate, to determine whether the Portfolio's net
asset value calculated by using available market quotations deviates from $1.00
per share and, if so, whether such deviation may result in material dilution or
is otherwise unfair to existing shareholders. In the event the Trustees
determine that such a deviation exists, they have agreed to take such corrective
action as they regard as necessary and appropriate, including: (i) the sale of
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity; (ii) withholding dividends; (iii) redeeming
shares in kind; or (iv) establishing a net asset value per share by using
available market quotations. It is the intention of the Trust to maintain Money
Market Portfolio's per-share net asset value at $1.00 but there can be no
assurance of this.
All Other Portfolios
Securities which have not traded on the date of valuation or securities
for which sales prices are not generally reported are valued at the mean between
the last bid and asked prices. Securities for which no market quotations are
readily available (including those the trading of which has been suspended) will
be valued at fair value as determined in good faith by the Trust's Board of
Trustees, although the actual computations may be made by persons acting
pursuant to the direction of the Board.
12. INVESTMENT RESULTS
Each Portfolio's average annual total return quotations and yield
quotations as they may appear in the Prospectus, this Statement of Additional
Information or in advertising are calculated by standard methods prescribed by
the SEC.
Quotations, Comparisons, and General Information
From time to time, in advertisements, in sales literature, or in
reports to shareholders, the past performance of a Portfolio may be illustrated
and/or compared with that of other mutual funds with similar investment
objectives, and to other relevant indices. In addition, the performance of a
Portfolio may be compared to alternative investment or savings vehicles and/or
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to indices or indicators of economic activity, e.g., inflation or interest
rates. Performance rankings and listings reported in newspapers or national
business and financial publications, such as Barron's, Business Week, Consumers
Digest, Consumer Reports, Financial World, Forbes, Fortune, Investors Business
Daily, Kiplinger's Personal Finance Magazine, Money Magazine, New York Times,
Personal Investor, Smart Money, USA Today, U.S. News and World Report, The Wall
Street Journal, and Worth may also be cited (if the Portfolio is listed in such
publications) or used for comparisons, as well as performance listings and
rankings from various other sources including CDA/Weisenberger Investment
Companies Service, Donoghue's Mutual Fund Almanac, Investment Company Data,
Inc., Ibbotson Associates, Johnson's Charts, Kanon Block Carre and Co., Lipper
Analytical Services, Micropal, Inc., Morningstar, Inc., Schabacker Investment
Management and Towers Data Systems, Inc.
In addition, from time to time quotations from articles from financial
publications such as those listed above may be used in advertisements, in sales
literature or in reports to Trust shareholders.
One of the primary methods used to measure the performance of each
Portfolio is "total return." Total return will normally represent the percentage
change in value of an account, or of a hypothetical investment in a Portfolio,
over any period up to the lifetime of that Portfolio. Total return calculations
will usually assume the reinvestment of all dividends and capital gains
distributions and will be expressed as a percentage increase or decrease from an
initial value, for the entire period or for one or more specified periods within
the entire period. Total return percentages for periods of less than one year
will usually be annualized; total return percentages for periods longer than one
year will usually be accompanied by total return percentages for each year
within the period and/or by the average annual compounded total return for the
period. The income and capital components of a given return may be separated and
portrayed in a variety of ways in order to illustrate their relative
significance. Performance may also be portrayed in terms of cash or investment
values, without percentages. Past performance cannot guarantee any particular
future result.
The Trust may also present, from time to time, historical information
depicting the value of a hypothetical account in a Portfolio since the
Portfolio's inception.
In presenting investment results, the Trust may also include references
to certain financial planning concepts, including (a) an investor's need to
evaluate his financial assets and obligations to determine how much to invest;
(b) his need to analyze the objectives of various investments to determine where
to invest; and (c) his need to analyze his time frame for future capital needs
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to determine how long to invest. The investor controls these three factors, all
of which affect the use of investments in building assets.
Standardized Average Annual Total Return Quotations
Average annual total return quotations for shares of the Portfolios are
computed by finding the average annual compounded rates of return that would
cause a hypothetical investment made on the first day of a designated period
(assuming all dividends and distributions are reinvested) to equal the ending
redeemable value of such hypothetical investment on the last day of the
designated period in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1000
initial payment made at the beginning of the designated
period (or fractional portion thereof)
For purposes of the above computation, it is assumed that all dividends and
distributions made by a Portfolio are reinvested at net asset value during the
designated period. The average annual total return quotation is determined to
the nearest 1/100 of 1%.
In determining the average annual total return (calculated as provided
above), recurring fees, if any, that are charged to all shareholder accounts are
taken into consideration. For any account fees that vary with the size of the
account, the account fee used for purposes of the above computation is assumed
to be the fee that would be charged to the mean account size.
Standardized Yield Quotations
The yield of a Portfolio is computed by dividing the Portfolio's net
investment income per share during a base period of 30 days, or one month, by
the maximum offering price per share of the Portfolio on the last day of such
base period in accordance with the following formula:
a-b 6
YIELD = 2[ ( ------ +1) -1]
cd
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Where: a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding
during the period that were entitled to
receive dividends
d = the maximum offering price per share on the
last day of the period
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the Portfolio is
computed based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest, if any) on settlement date, and with
respect to obligations sold during the month the sale price (plus actual accrued
interest, if any) between the trade and settlement dates.
(ii) The yield to maturity of each obligation is then divided by 360
and the resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest income on
the obligation for each day. The yield to maturity calculation has been made on
each obligation during the 30-day base period.
(iii) Interest earned on all debt obligations during the 30-day or one
month period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), each Portfolio accounts for
gain or loss attributable to actual monthly pay downs as an increase or decrease
to interest income during the period. In addition, a Portfolio may elect (i) to
amortize the discount or premium on a remaining security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
on a remaining security.
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For purposes of computing a Portfolio's yield, interest income is
recognized by accruing 1/360 of the stated interest rate of each obligation held
by the Portfolio each day that the obligation is held by the Portfolio.
Yield Quotations for Money Market Portfolio
Money Market Portfolio's yield quotations are computed as follows: the
net change, exclusive of capital changes (i.e., realized gains and losses from
the sale of securities and unrealized appreciation and depreciation), in the
value of a hypothetical pre-existing account having a balance of one share of
the Portfolio at the beginning of the seven-day base period is determined by
subtracting a hypothetical charge reflecting expense deductions from the
hypothetical account, and dividing the net change in value by the value of the
share at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest 100th
of 1%. The determination of net change in account value reflects the value of
additional shares purchased with dividends from the original share, dividends
declared on both the original share and any such additional shares, and all fees
that are charged to the Portfolio, in proportion to the length of the base
period and the Portfolio's average account size (with respect to any fees that
vary with the size of an account).
Money Market Portfolio may also advertise quotations of effective
yield. Effective yield is computed by compounding the unannualized base period
return determined as in the preceding paragraph by adding 1 to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result, according to the following formula:
Effective Yield = (base period return +1) 365/7 - 1
13. FINANCIAL STATEMENTS
The Balance Sheet and the Report of Independent Public Accountants
included in this Statement of Additional Information have been included in
reliance upon the report of Arthur Andersen LLP, independent public accountants,
as experts in accounting and auditing.
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APPENDIX A
ADDITIONAL GENERAL ECONOMIC INFORMATION
AND INFORMATION REGARDING PIONEER
Pioneer
The Pioneer family of mutual funds was established in 1928 with the
creation of Pioneer Fund. Pioneer is one of the oldest, most respected and
successful money managers in the United States.
As of December 31, 1994, PMC employed a professional investment staff
of 46, with a combined average of 14 years' experience in the financial services
industry.
As of December 31, 1994, The Pioneer Group, Inc. ("PGI"), through its
wholly-owned subsidiary Pioneering Management Corporation ("PMC"), managed
approximately $10.04 billion in assets for more than 920,000 investors.
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APPENDIX B
DESCRIPTION OF BOND RATINGS
The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Statement of Additional Information for
the securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the Fund's fiscal year end.
Moody's Investors Service, Inc.
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.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
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safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believe possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1 and B1.
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Standard & Poor's Ratings Group1
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
D: Bonds rated D are 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 Standard & Poor's
believes that such payments will be made during such grace period.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public 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 obligations as a matter of policy.
- --------
1 Rates all governmental bodies having $1,000,000 or more of debt
outstanding, unless adequate information is not available.
3-B