STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000, AS AMENDED MAY 11, 2000
JNL VARIABLE FUND LLC
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and more detailed than set forth in the
Prospectus and should be read in conjunction with the JNL Variable Fund LLC
Prospectus, dated May 1, 2000. Not all Series described in this Statement of
Additional Information may be available for investment. The Prospectus may be
obtained at no charge by calling (800) 766-4683, or writing P.O.
Box 378002, Denver, Colorado 80237-8002.
TABLE OF CONTENTS
General Information and History.......................................... 2
Common Types of Investments and Management Practices..................... 2
Additional Risk Considerations........................................... 8
Investment Restrictions Applicable to All Series......................... 26
Management of the Fund................................................... 27
Performance.............................................................. 29
Investment Advisory and Other Services................................... 31
Purchases, Redemptions and Pricing of Interests.......................... 37
Additional Information................................................... 38
Tax Status............................................................... 39
Financial Statements .................................................... 39
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GENERAL INFORMATION AND HISTORY
JNL Variable Fund LLC (the "Fund") is a non-diversified, open-end management
company organized as a Delaware limited liability company on October 13, 1998.
The Fund offers interests in separate Series (collectively, the "Series"), which
are comprised of two groups - Target Series and Sector Series.
COMMON TYPES OF INVESTMENTS AND MANAGEMENT PRACTICES
This section describes some of the types of securities a Series may hold in its
portfolio and the various kinds of investment practices that may be used in
day-to-day portfolio management. A Series may invest in the following securities
or engage in the following practices to the extent that such securities and
practices are consistent with the Series' investment objective(s) and policies
described in the Prospectus and in this SAI.
BANK OBLIGATIONS. A Series may invest in bank obligations, which include
certificates of deposit, bankers' acceptances, and other short-term debt
obligations. Certificates of deposit are short-term obligations of commercial
banks. A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with international commercial transactions.
Certificates of deposit may have fixed or variable rates. The Series may invest
in U.S. banks, foreign branches of U.S. banks, U.S. branches of foreign banks,
and foreign branches of foreign banks.
BORROWING AND LENDING. A Series may borrow money from banks for temporary or
emergency purposes in amounts up to 25% of its total assets. To secure
borrowings, a Series may mortgage or pledge securities in amounts up to 15% of
its net assets.
CASH POSITION. A Series may hold a certain portion of its assets in repurchase
agreements and money market securities maturing in one year or less that are
rated in one of the two highest rating categories by a nationally recognized
statistical rating organization. For temporary, defensive purposes, a Series may
invest without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments,
and serves as a short-term defense during periods of unusual market volatility.
COMMERCIAL PAPER. A Series may invest in commercial paper. Commercial paper are
short-term promissory notes issued by corporations primarily to finance
short-term credit needs. Such notes may have fixed or variable rates.
COMMON AND PREFERRED STOCKS. A Series may invest in common and/or preferred
stocks. Stocks represent shares of ownership in a company. Generally, preferred
stock has a specified dividend and ranks after bonds and before common stocks in
its claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate in
company profits on a pro rata basis; profits may be paid out in dividends or
reinvested in the company to help it grow. Increases and decreases in earnings
are usually reflected in a company's stock price, so common stocks generally
have the greatest appreciation and depreciation potential of all corporate
securities. While most preferred stocks pay a dividend, a Series may purchase
preferred stock where the issuer has omitted, or is in danger of omitting,
payment of its dividend. Such investments would be made primarily for their
capital appreciation potential. Although common and preferred stocks have a
history of long-term growth in value, their prices tend to fluctuate in the
short term, particularly those of smaller companies.
CONVERTIBLE SECURITIES. A Series may invest in debt or preferred stock
convertible into or exchangeable for common stock. Traditionally, convertible
securities have paid dividends or interest at rates higher than common stocks
but lower than non-convertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features.
FOREIGN CURRENCY TRANSACTIONS. A Series will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash), basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. A Series will
generally not enter into a forward contract with a term of greater than one
year.
There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies of
various countries where the foreign exchange markets are not sufficiently
developed to permit hedging activity to take place.
FOREIGN SECURITIES. A Series may invest in foreign securities. Investors should
realize that investing in foreign securities involves certain special
considerations which are not typically associated with investing in U.S.
Securities. These include non-U.S. dollar-denominated securities traded
principally outside the U.S. and dollar-denominated securities traded in the
U.S. (such as American Depositary Receipts). Such investments increase a Series'
diversification and may enhance return, but they also involve some special risks
such as exposure to potentially adverse local political and economic
developments; nationalization and exchange controls; potentially lower liquidity
and higher volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). In addition,
foreign securities purchased by the Series, may be subject to foreign government
taxes, higher custodian fees, higher brokerage commissions and dividend
collection fees. Foreign government securities are issued or guaranteed by a
foreign government, province, instrumentality, political subdivision or similar
unit thereof.
FUTURES AND OPTIONS. Futures contracts are often used to manage risk, because
they enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. A Series may buy and sell
futures contracts (and options on such contracts) to manage its exposure to
changes in securities prices and foreign currencies and as an efficient means of
adjusting overall exposure to certain markets. A Series may purchase or sell
call and put options on securities, financial indices, and foreign currencies,
and may invest in futures contracts on foreign currencies and financial indices,
including interest rates or an index of U.S. Government securities, foreign
government securities or equity or fixed-income securities.
Futures contracts and options may not always be successful hedges; their prices
can be highly volatile; using them could lower a Series' total return; and the
potential loss from the use of futures can exceed the Series' initial investment
in such contracts. These instruments may also be used for non-hedging purposes
such as increasing a Series' income.
The Series' use of commodity futures and commodity options trading should not be
viewed as providing a vehicle for interest holder participation in a commodity
pool. Rather, in accordance with regulations adopted by the Commodity Futures
Trading Commission (CFTC), a Series will employ such techniques only for (1)
hedging purposes, or (2) otherwise, to the extent that aggregate initial margin
and required premiums do not exceed 5 percent of the Series' net assets.
HYBRID INSTRUMENTS. A Series may purchase hybrid instruments, which combine the
elements of futures contracts or options with those of debt, preferred equity or
a depository instrument. Often these hybrid instruments are indexed to the price
of a commodity, a particular currency, or a domestic or foreign debt or common
stock index. Hybrid instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity.
ILLIQUID SECURITIES. A Series may hold illiquid investments. Illiquid
investments are investments that cannot be sold or disposed of in the ordinary
course of business within seven days at approximately the price at which they
are valued. Illiquid investments generally include: repurchase agreements not
terminable within seven days; securities for which market quotations are not
readily available; restricted securities not determined to be liquid in
accordance with guidelines established by the Fund's Board of Managers;
over-the-counter (OTC) options and, in certain instances, their underlying
collateral; and securities involved in swap, cap, collar and floor transactions.
MONEY MARKET FUNDS. Each Series may invest in shares of money market funds to
the extent permitted by the Investment Company Act of 1940, as amended.
PORTFOLIO TURNOVER. To a limited extent, a Series may engage in short-term
transactions if such transactions further its investment objective. A Series may
sell one security and simultaneously purchase another of comparable quality or
simultaneously purchase and sell the same security to take advantage of
short-term differentials in bond yields or otherwise purchase individual
securities in anticipation of relatively short-term price gains. The rate of
portfolio turnover will not be a determining factor in the purchase and sale of
such securities. Increased portfolio turnover necessarily results in
correspondingly higher costs including brokerage commissions, dealer mark-ups
and other transaction costs on the sale of securities and reinvestment in other
securities, and may result in the acceleration of taxable gains.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. A Series may invest in
repurchase or reverse repurchase agreements. A repurchase agreement involves the
purchase of a security by a Series and a simultaneous agreement (generally by a
bank or dealer) to repurchase that security from the Series at a specified price
and date or upon demand. This technique offers a method of earning income on
idle cash. A repurchase agreement may be considered a loan collateralized by the
underlying security. The Series must take physical possession of the security or
receive written confirmation of the purchase and a custodial or safekeeping
receipt from a third party or be recorded as the owner of the security through
the Federal Reserve Book Entry System.
The Series may invest in open repurchase agreements which vary from the typical
agreement in the following respects: (1) the agreement has no set maturity, but
instead matures upon 24 hours' notice to the seller; and (2) the repurchase
price is not determined at the time the agreement is entered into, but is
instead based on a variable interest rate and the duration of the agreement. In
addition, a Series, together with other registered investment companies having
management agreements with a common investment adviser or its affiliates, may
transfer uninvested cash balances into a single joint account, the daily
aggregate balance of which will be invested in one or more repurchase
agreements.
When a Series invests in a reverse repurchase agreement, it sells a portfolio
security to another party, such as a bank or a broker-dealer, in return for
cash, and agrees to buy the security back at a future date and price. Reverse
repurchase agreements may be used to provide cash to satisfy unusually heavy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio securities or to earn additional income on
portfolio securities, such as Treasury bills and notes.
SECURITIES LENDING. Each Series may also lend common stock to broker-dealers and
financial institutions to realize additional income. As a fundamental policy, a
Series will not lend common stock or other assets, if as a result, more than 33
1/3% of the Series' total assets would be lent to other parties. Under
applicable regulatory requirements (which are subject to change), the following
conditions apply to securities loans: (a) the loan must be continuously secured
by liquid assets maintained on a current basis in an amount at least equal to
the market value of the securities loaned; (b) each Series must receive any
dividends or interest paid by the issuer on such securities; (c) each Series
must have the right to call the loan and obtain the securities loaned at any
time upon notice of not more than five business days, including the right to
call the loan to permit voting of the securities; and (d) each Series must
receive either interest from the investment of collateral or a fixed fee from
the borrower. The Series might experience a loss if the borrowing broker-dealer
or financial institution breaches its agreement with the Series.
Securities lending, as with other extensions of credit, involves the risk that
the borrower may default. Although securities loans will be fully collateralized
at all times, a Series may experience delays in, or be prevented from,
recovering the collateral. During the period that the Series seeks to enforce
its rights against the borrower, the collateral and the securities loaned remain
subject to fluctuations in market value. A Series does not have the right to
vote securities on loan, but would terminate the loan and regain the right to
vote if it were considered important with respect to the investment. A Series
may also incur expenses in enforcing its rights. If a Series has sold a loaned
security, it may not be able to settle the sale of the security and may incur
potential liability to the buyer of the security on loan for its costs to cover
the purchase.
SECURITY-RELATED ISSUERS. The Fund has been granted exemptive relief from the
Securities and Exchange Commission to allow certain Series to invest more than
5% of their assets in the securities of any issuer that derives more than 15
percent of its gross revenue from "securities related activities" (as defined in
rule 12d3-1 under the Investment Company Act of 1940). The Series to which this
exemptive relief apply are the JNL/First Trust The DowSM Target 5 Series, the
JNL/First Trust The DowSM Target 10 Series, the JNL/First Trust The S&P(R)
Target 10 Series, and the JNL/First Trust Global Target 15 Series.
SHORT SALES. A Series may sell securities short. A short sale is the sale of a
security the Series does not own. It is "against the box" if at all times when
the short position is open the Series owns an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short. To the extent that a
Series engages in short sales that are not "against the box," it must maintain
asset coverage in the form of assets determined to be liquid by the sub-adviser
in accordance with procedures established by the Board of Managers, in a
segregated account, or otherwise cover its position in a permissible manner. If
the value of the security goes up, the Series will have to buy it back at a loss
to make good on the borrowing.
SHORT-TERM CORPORATE DEBT SECURITIES. A Series may invest in short-term
corporate debt securities. These are non-convertible corporate debt securities
(e.g., bonds and debentures) which have one year or less remaining to maturity.
Corporate notes may have fixed, variable, or floating rates.
STANDARD & POOR'S DEPOSITORY RECEIPTS. Standard & Poor's Depository Receipts
(SPDRs) are American Stock Exchange-traded securities that represent ownership
in the SPDR Trust, a trust which has been established to accumulate and hold a
portfolio of equity securities that is intended to track the price performance
and dividend yield of the S&P 500 Index. This trust is sponsored by a subsidiary
of the American Stock Exchange. SPDRs may be used for several reasons including
but not limited to: facilitating the handling of cash flows or trading, or
reducing transaction costs. The use of SPDRs would introduce additional risk to
a Series as the price movement of the instrument does not perfectly correlate
with the price action of the underlying index.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are issued or guaranteed
as to principal and interest by U.S. Government agencies or instrumentalities.
These include securities issued by the Federal National Mortgage Association
(Fannie Mae), Government National Mortgage Association (Ginnie Mae), Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm
Credit Banks, the Small Business Association, Student Loan Marketing
Association, and the Tennessee Valley Authority. Some of these securities, such
as those issued by Ginnie Mae, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of Fannie Mae, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government agencies or instrumentalities in the future, other than as
set forth above, since it is not obligated to do so by law.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government obligations include bills, notes,
bonds, and other debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the length of their
maturities.
VARIABLE RATE SECURITIES. Variable rate securities provide for a periodic
adjustment in the interest rate paid on the obligations. The terms of such
obligations must provide that interest rates are adjusted periodically based
upon some appropriate interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular and range from
daily up to annually, or may be event based, such as on a change in the prime
rate.
WARRANTS. A Series may invest in warrants. Warrants have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase common stock at a
specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. Warrants differ
from call options in that warrants are issued by the issuer of the security
which may be purchased on their exercise, whereas call options may be written or
issued by anyone. The prices of warrants do not necessarily move parallel to the
prices of the underlying securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS. A Series may purchase
securities on a when-issued or delayed delivery basis (When-Issueds) and may
purchase securities on a forward commitment basis (Forwards). Any or all of the
Series' investments in debt securities may be in the form of When-Issueds and
Forwards. The price of such securities, which may be expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment take place at a later date. Normally, the settlement date occurs within
90 days of the purchase for When-Issueds, but may be substantially longer for
Forwards. During the period between purchase and settlement, no payment is made
by the Series to the issuer and no interest accrues to the Series. The purchase
of these securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase prior
to settlement. The longer the period between purchase and settlement, the
greater the risks. At the time the Series makes the commitment to purchase these
securities, it will record the transaction and reflect the value of the security
in determining its net asset value. The Series will maintain cash and/or liquid
assets with its custodian bank at least equal in value to commitments for them
during the time between the purchase and the settlement. Therefore, the longer
this period, the longer the period during which alternative investment options
are not available to the Series (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be sold on or
before the settlement date.
WRITING COVERED OPTIONS ON SECURITIES. A Series may write covered call options
and covered put options on optionable securities of the types in which it is
permitted to invest from time to time as the sub-adviser determines is
appropriate in seeking to attain a Series' investment objective. Call options
written by a Series give the holder the right to buy the underlying security
from the Series at a stated exercise price; put options give the holder the
right to sell the underlying security to the Series at a stated price.
A Series may only write call options on a covered basis or for cross-hedging
purposes and will only write covered put options. A put option would be
considered "covered" if the Series owns an option to sell the underlying
security subject to the option having an exercise price equal to or greater than
the exercise price of the "covered" option at all times while the put option is
outstanding. A call option is covered if the Series owns or has the right to
acquire the underlying securities subject to the call option (or comparable
securities satisfying the cover requirements of securities exchanges) at all
times during the option period. A call option is for cross-hedging purposes if
it is not covered, but is designed to provide a hedge against another security
which the Series owns or has the right to acquire. In the case of a call written
for cross-hedging purposes or a put option, the Series will maintain in a
segregated account at the Series' custodian bank cash or short-term U.S.
government securities with a value equal to or greater than the Series'
obligation under the option. A Series may also write combinations of covered
puts and covered calls on the same underlying security.
A Series will receive a premium from writing an option, which increases the
Series' return in the event the option expires unexercised or is terminated at a
profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option, and the volatility of the market
price of the underlying security. By writing a call option, a Series will limit
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Series will assume the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
price, resulting in a potential capital loss if the purchase price exceeds the
market price plus the amount of the premium received.
A Series may terminate an option which it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. The Series will realize a profit
(or loss) from such transaction if the cost of such transaction is less (or
more) than the premium received from the writing of the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Series.
ADDITIONAL RISK CONSIDERATIONS
EMERGING MARKETS. The considerations noted below under "Foreign Securities" may
be intensified in the case of investment in developing countries. Investments in
securities of issuers in emerging markets may involve a high degree of risk and
many may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers to a heightened degree. These
heightened risks include: (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) limitations on daily price changes and the small current size of the
markets for securities of emerging markets issuers and the currently low or
nonexistent volume of trading, resulting in lack of liquidity and in price
volatility; (iii) certain national policies which may restrict a Series'
investment opportunities including limitations on aggregate holdings by foreign
investors and restrictions on investing in issuers or industries deemed
sensitive to relevant national interests; and (iv) the absence of developed
legal structures governing private or foreign investment and private property.
In addition, emerging markets economies may be based on only a few industries,
may be highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
FOREIGN SECURITIES. Investments in foreign securities, including those of
foreign governments, involve risks that are different in some respects from
investments in securities of U.S. issuers, such as the risk of fluctuations in
the value of the currencies in which they are denominated, a heightened risk of
adverse political and economic developments and, with respect to certain
countries, the possibility of expropriation, nationalization or confiscatory
taxation or limitations on the removal of funds or other assets of a Series.
Securities of some foreign issuers in many cases are less liquid and more
volatile than securities of comparable domestic issuers. There also may be less
publicly available information about foreign issuers than domestic issuers, and
foreign issuers generally are not subject to the uniform accounting, auditing
and financial reporting standards, practices and requirements applicable to
domestic issuers. Certain markets may require payment for securities before
delivery. A Series may have limited legal recourse against the issuer in the
event of a default on a debt instrument. Delays may be encountered in settling
securities transactions in certain foreign markets and a Series will incur costs
in converting foreign currencies into U.S. dollars. Bank custody charges are
generally higher for foreign securities. The Series which invest primarily in
foreign securities are particularly susceptible to such risks. American
Depositary Receipts do not involve the same direct currency and liquidity risks
as foreign securities.
The share price of a Series that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which such securities are denominated. A Series' foreign investments may cause
changes in a Series' share price that have a low correlation with movement in
the U.S. markets. Because most of the foreign securities in which a Series
invests will be denominated in foreign currencies, or otherwise will have values
that depend on the performance of foreign currencies relative to the U.S.
dollar, the relative strength of the U.S. dollar may be an important factor in
the performance of a Series, depending on the extent of the Series' foreign
investments.
A Series may employ certain strategies in order to manage exchange rate risks.
For example, a Series may hedge some or all of its investments denominated in or
exposed to a foreign currency against a decline in the value of that currency. A
Series may enter into contracts to sell that foreign currency for U. S. dollars
(not exceeding the value of a Series' assets denominated in or exposed to that
currency) or by participating in options or futures contracts with respect to
such currency (position hedge). A Series could also hedge that position by
selling a second currency, which is expected to perform similarly to the
currency in which portfolio investments are denominated, for U.S. dollars (proxy
hedge). A Series may also enter into a forward contract to sell the currency in
which the security is denominated for a second currency that is expected to
perform better relative to the U.S. dollar if the sub-adviser believes there is
a reasonable degree of correlation between movements in the two currencies
(cross hedge). A Series may also enter into a forward contract to sell a
currency in which portfolio securities are denominated in exchange for a second
currency in order to manage its currency exposure to selected countries. In
addition, when a Series anticipates purchasing or selling securities denominated
in or exposed to a particular currency, the Series may enter into a forward
contract to purchase or sell such currency in exchange for the dollar or another
currency (anticipatory hedge).
These strategies minimize the effect of currency appreciation as well as
depreciation, but do not protect against a decline in the underlying value of
the hedged security. In addition, such strategies may reduce or eliminate the
opportunity to profit from increases in the value of the original currency and
may adversely impact a Series' performance if the sub-adviser's projection of
future exchange rates is inaccurate.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. The use of futures, options,
forward contracts, and swaps (derivative instruments) exposes a Series to
additional investment risks and transaction costs. If the sub-adviser seeks to
protect a Series against potential adverse movements in the securities, foreign
currency or interest rate markets using these instruments, and such markets do
not move in a direction adverse to the Series, that Series could be left in a
less favorable position than if such strategies had not been used. Risks
inherent in the use of futures, options, forward contracts and swaps include:
(1) the risk that interest rates, securities prices and currency markets will
not move in the directions anticipated; (2) imperfect correlation between the
price of derivative instruments and movements in the prices of the securities,
interest rates or currencies being hedged; (3) the fact that skills needed to
use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; and (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences.
HYBRID INSTRUMENTS. The risks of investing in hybrid instruments reflect a
combination of the risks of investing in securities, options, futures and
currencies, including volatility and lack of liquidity. Reference is made to the
discussion of "Futures, Options, and Other Derivative Instruments" herein for a
discussion of these risks. Further, the prices of the hybrid instrument and the
related commodity or currency may not move in the same direction or at the same
time. Hybrid instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, hybrid instruments may
bear interest at above market rates but bear an increased risk of principal
loss. In addition, because the purchase and sale of hybrid instruments could
take place in an over-the-counter or in a private transaction between the Series
and the seller of the hybrid instrument, the creditworthiness of the
counter-party to the transaction would be a risk factor which the Series would
have to consider. Hybrid instruments also may not be subject to regulation of
the Commodity Futures Trading Commission, which generally regulates the trading
of commodity futures by U.S. persons, the Securities and Exchange Commission,
which regulates the offer and sale of securities by and to U.S. persons, or any
other governmental regulatory authority.
INSURANCE LAW RESTRICTIONS. In connection with the Fund's agreement to sell
interests in the Fund to Jackson National Separate Account - I (Separate
Account), Jackson National Financial Services, LLC (JNFS) and Jackson National
Life Insurance Company (JNL) may enter into agreements with the Fund, required
by certain state insurance departments, under which JNFS may agree to use its
best efforts to assure and to permit JNL to monitor that each Series of the Fund
complies with the investment restrictions and limitations prescribed by state
insurance laws and regulations applicable to the investment of separate account
assets in shares of mutual funds. If a Series failed to comply with such
restrictions or limitations, JNL would take appropriate action, which might
include ceasing to make investments in the Fund and/or Series or withdrawing
from the state imposing the limitation. Such restrictions and limitations are
not expected to have a significant impact on the Fund's operations.
INVESTMENT STRATEGY RISKS. The common stock selected for certain Target Series
generally share attributes that have caused them to have lower prices or higher
yields relative to other stocks in their respective index or exchange. The
common stock may, for example, be experiencing financial difficulty, or be out
of favor in the market because of weak performance, poor earnings forecasts or
negative publicity; or they may be reacting to general market cycles. There can
be no assurance that the market factors that caused the relatively low prices
and high dividend yields of the common stock will or will not change, that any
negative conditions adversely affecting the stock prices will not deteriorate,
that the dividend rates on the common stock will be maintained or that share
prices will not decline further during the life of the Target Series, or that
the common stock will continue to be included in the respective indices or
exchanges. Investing in stocks with the highest dividend yields amounts to a
contrarian strategy because these shares are often out of favor. Such strategy
may be effective in achieving the respective strategy-based Series' investment
objective because regular dividends are common for established companies and
dividends have often accounted for a substantial portion of the total return on
stocks of the index as a group. However, there is no guarantee that either a
Target Series objective will be achieved or that a Target Series will provide
for capital appreciation in excess of such Target Series' expenses. Because of
the contrarian nature of such Target Series and the attributes of the common
stock which caused inclusion in the portfolio, such Target Series may not be
appropriate for investors seeking either preservation of capital or high current
income. In addition, the strategies for all of the Target Series have
underperformed their respective index or indices in certain years.
LITIGATION. Certain of the issuers of common stock in certain Series may be
involved in the manufacture, distribution and sale of tobacco products. Pending
litigation proceedings against such issuers in the United States and abroad
cover a wide range of matters including product liability and consumer
protection. Damages claimed in such litigation alleging personal injury (both
individual and class actions), and in health cost recovery cases brought by
governments, labor unions and similar entities seeking reimbursement for health
case expenditures, aggregate many billions of dollars.
In November 1998, certain companies in the U.S. tobacco industry, including
Philip Morris, entered into a negotiated settlement with several states which
would result in the resolution of significant litigation and regulatory issues
affecting the tobacco industry generally. The proposed settlement, while
extremely costly to the tobacco industry, would significantly reduce
uncertainties facing the industry and increase stability in business and capital
markets. Future litigation and/or legislation could adversely affect the value,
operating revenues and financial position of tobacco companies and could
adversely affect the Series.
Certain of the Series may include the common stock of Microsoft Corporation in
their portfolios. Microsoft Corporation is currently engaged in litigation with
Sun Microsystems, Inc., the U.S. Department of Justice and several state
Attorneys General. The complaints against Microsoft include copyright
infringement, unfair competition and anti-trust violations. The claims seek
injunctive relief and monetary damages. In the action brought against Microsoft
by the U.S. Department of Justice, the United States District Court for the
District of Columbia issued findings of fact that included a finding that
Microsoft possesses and exercised monopoly power. The court also recently
entered an order finding that Microsoft exercised this power in violation of the
Sherman Antitrust Act and various state antitrust laws. The next step in the
litigation will be for the court to determine the penalties against Microsoft.
The possible remedies that could potentially be considered by the court,
according to industry experts, range from a possible breakup of Microsoft to
remedies such as ordering the company to surrender its blueprint, or "source
code," for its Windows operating software. Microsoft has stated that it will
appeal this ruling following the penalties phase and final decree. It is
possible that any remedy could have a material adverse impact on Microsoft,
however, it is impossible to predict the impact that any penalty may have on
Microsoft's business in the future or on the Series.
At any time, litigation may be instituted on a variety of grounds with respect
to the common stock held in a Series' portfolio. The Fund is unable to predict
whether any litigation including the above-described litigation, that has been
or will be instituted, might have a material adverse effect on the Fund or any
Series.
SPECIFIC COUNTRY ECONOMIC RISK. The information provided below details certain
important factors which impact the economies of both the United Kingdom and Hong
Kong and may impact the Global Target 15 series, as well as other Series of the
Fund which invest in foreign securities. This information has been extracted
from various governmental and private publications, but no representation can be
made as to its accuracy; furthermore, no representation is made that any
correlation exists between the economies of the United Kingdom and Hong Kong and
the value of the common stock held by the Global Target 15 Series.
United Kingdom. The emphasis of the United Kingdom's economy is in the
private services sector, which includes the wholesale and retail sector,
banking, finance, insurance and tourism. Services as a whole account for a
majority of the United Kingdom's gross national product and make a significant
contribution to the country's balance of payments. The portfolio of the Global
Target 15 Series may contain common stocks of British companies engaged in such
industries as banking, chemicals, building and construction, transportation,
telecommunications and insurance. Many of these industries may be subject to
government regulation, which may have a materially adverse effect on the
performance of their stock. The United Kingdom is a member of the European Union
(EU), which was created through the formation of the Maastricht Treaty on
European Union (Treaty) in late 1993. It is expected that the Treaty will have
the effect of eliminating most remaining trade barriers between the 15 member
nations and make Europe one of the largest common markets in the world. However,
the effective implementation of the Treaty provisions and the rate at which
trade barriers are eliminated is uncertain at this time. Furthermore, the recent
rapid political and social change throughout Europe make the extent and nature
of future economic development in the United Kingdom and Europe and the impact
of such development upon the value of the common stock in the Global Target 15
Series impossible to predict.
A majority of the EU members converted their existing sovereign
currencies to a common currency (euro) on January 1, 1999. The United Kingdom
did not participate in this conversion on January 1, 1999 and it is not possible
to predict if or when the United Kingdom will convert to the euro. Moreover, it
is not possible to accurately predict the effect of the current political and
economic situation upon long-term inflation and balance of trade cycles and how
these changes, as well as the implementation of a common currency throughout a
majority of EU countries, would affect the currency exchange rate between the
U.S. dollar and the British pound sterling. In addition, United Kingdom
companies with significant markets or operations in other European countries
(whether or not such countries are participating) face strategic challenges as
these entities adapt to a single trans-national currency. The euro conversion
may have a material impact on revenues, expenses or income from operations;
increase competition due to the increased price transparency of the EU market;
affect issuers' currency exchange rate risk and derivatives exposure; disrupt
current contracts; cause issuers to increase spending on information technology
updates required for the conversion; and result in potential adverse tax
consequences. It is not possible to predict what impact, if any, the euro
conversion will have on any of the common stock issued by United Kingdom
companies in the Global Target 15 Series.
Hong Kong. Hong Kong, established as a British colony in the 1840's,
reverted to Chinese sovereignty effective July 1, 1997. On such date, Hong Kong
became a Special Administrative Region (SAR) of China. Hong Kong's new
constitution is the Basic Law (promulgated by China in 1990). Prior to July 1,
1997, the Hong Kong government followed a laissez-faire policy toward industry.
However, Hong Kong's recent economic data has not been encouraging. The full
impact of the Asian financial crisis, as well as current international economic
instability, is likely to continue to have a negative impact on the Hong Kong
economy in the near future.
Although China has committed by treaty to preserve for 50 years the economic and
social freedoms enjoyed in Hong Kong prior to the reversion, the continuation of
the economic system in Hong Kong after the reversion will be dependent on the
Chinese government, and there can be no assurances that the commitment made by
China regarding Hong Kong will be maintained. Prior to the reversion,
legislation was enacted in Hong Kong designed to extend democratic voting
procedures for Hong Kong's legislature. China has expressed disagreement with
this legislation, which it states is in contravention of the principles
evidenced in the Basic Law of the Hong Kong SAR. The National Peoples' Congress
of China has passed a resolution to the effect that the Legislative Council and
certain other councils and boards of the Hong Kong Government were to be
terminated on June 30, 1997. Such bodies have subsequently been reconstituted in
accordance with China's interpretation of the Basic Law. Any increase in
uncertainty as to the future economic and political status of Hong Kong could
have a materially adverse effect on the value of the Global Target 15 Series.
The Fund is unable to predict the level of market liquidity or volatility which
may occur as a result of the reversion to sovereignty, both of which may
negatively impact such Series.
China currently enjoys a most favored nation status (MFN Status) with the United
States. MFN Status is subject to annual review by the President of the United
States and approval by Congress. As a result of Hong Kong's reversion to Chinese
control, U.S. lawmakers have suggested that they may review China's MFN status
on a more frequent basis. Revocation of the MFN status would have a severe
effect on China's trade and on the value of the Global Target 15 Series. The
performance of certain companies listed on the Hong Kong Stock Exchange is
linked to the economic climate of China. The renewal of China's MFN Status in
May of 1996 has helped reduce the uncertainty for Hong Kong in conducting
Sino-U.S. trade, and the signing of the agreement on copyright protection
between the U.S. and Chinese governments in June of 1996 averted a trade war
that would have affected Hong Kong's re-export trade. In 1997, China and the
U.S. reached a four year bilateral agreement on textiles, again avoiding a
Sino-U.S. trade war. More recently, the currency crisis which has affected a
majority of Asian markets since mid-1997 has forced Hong Kong leaders to address
whether to devaluate the Hong Kong dollar or maintain its peg to the U.S.
dollar. During the volatile markets of 1998, the Hong Kong Monetary Authority
(HKMA) acquired the common stock of certain Hong Kong issuers listed on the Hong
Kong Stock Exchange in an effort to stabilize the Hong Kong dollar and thwart
currency speculators. Government intervention may hurt Hong Kong's reputation as
a free market and increases concerns that authorities are not willing to let
Hong Kong's currency system function autonomously. This may undermine confidence
in the Hong Kong dollar's peg to the U.S. dollar. Any downturn in economic
growth or increase in the rate of inflation in China or Hong Kong could have a
materially adverse effect on the value of the Global Target 15 Series.
Securities prices on the Hong Kong Stock Exchange, and specifically the Hang
Seng Index, can be highly volatile and are sensitive to developments in Hong
Kong and China, as well as other world markets. For example, the Hang Seng Index
declined by approximately 31% in October, 1997 as a result of speculation that
the Hong Kong dollar would become the next victim of the Asian currency crisis,
and in 1989, the Hang Seng Index dropped 1,216 points (approximately 58%) in
early June following the events at Tiananmen Square. The Hang Seng Index
gradually climbed subsequent to the events at Tiananmen Square but fell by 181
points on October 13, 1989 (approximately 6.5%) following a substantial fall in
the U.S. stock markets. During 1994, the Hang Seng Index lost approximately 31%
of its value. From January through August of 1998, during a period marked by
international economic instability and a global crisis, the Hang Seng Index
declined by nearly 27%. The Hang Seng Index is subject to change, and delisting
of any issues may have an adverse impact on the performance of the Global Target
15 Series, although delisting would not necessarily result in the disposal of
the stock of these companies, nor would it prevent such Series from purchasing
additional common stock. In recent years, a number of companies, comprising
approximately 10% of the total capitalization of the Hang Seng Index, have
delisted. In addition, as a result of Hong Kong's reversion to Chinese
sovereignty, an increased number of Chinese companies could become listed on the
Hong Kong Stock Exchange, thereby changing the composition of the stock market
and, potentially, the composition of the Hang Seng Index.
Exchange Rate Risk. The Global Target 15 Series is comprised
substantially of common stock that are principally traded in foreign currencies
and as such, involve investment risks that are substantially different from an
investment in a fund which invests in securities that are principally traded in
United States dollars. The United States dollar value of the Series' portfolios
and of the distributions from the portfolios will vary with fluctuations in the
United States dollar foreign exchange rates for the relevant currencies. Most
foreign currencies have fluctuated widely in value against the United States
dollar for many reasons, including supply and demand of the respective currency,
the rate of inflation in the respective economies compared to the United States,
the impact of interest rate differentials between different currencies on the
movement of foreign currency rates, the balance of imports and exports of goods
and services, the soundness of the world economy and the strength of the
respective economy as compared to the economies of the United States and other
countries.
Exchange rate fluctuations are partly dependent on a number of economic factors
including economic conditions within countries, the impact of actual and
proposed government policies on the value of currencies, interest rate
differentials between the currencies and the balance of imports and exports of
goods and services and transfers of income and capital from one country to
another. These economic factors are influenced primarily by a particular
country's monetary and fiscal policies (although the perceived political
situation in a particular country may have an influence as well--particularly
with respect to transfers of capital). Investor psychology may also be an
important determinant of currency fluctuations in the short run. Moreover,
institutional investors trying to anticipate the future relative strength or
weakness of a particular currency may sometimes exercise considerable
speculative influence on currency exchange rates by purchasing or selling large
amounts of the same currency or currencies. However, over the long term, the
currency of a country with a low rate of inflation and a favorable balance of
trade should increase in value relative to the currency of a country with a high
rate of inflation and deficits in the balance of trade.
The following table sets forth, for the periods indicated, the range of
fluctuation concerning the equivalent U.S. dollar rates of exchange and end of
month equivalent U.S. dollar rates of exchange for the United Kingdom pound
sterling and the Hong Kong dollar:
Foreign Exchange Rates: Range of Fluctuations in Foreign Currencies
- -------------- ------------------------------------- ---------------------------
ANNUAL PERIOD UNITED KINGDOM POUND HONG KONG/U.S. DOLLAR
STERLING/U.S. DOLLAR
- -------------- ------------------------------------- ---------------------------
1983 0.616 - 0.707 6.480 - 8.700
- -------------- ------------------------------------- ---------------------------
1984 0.671 - 0.864 7.774 - 8.050
- -------------- ------------------------------------- ---------------------------
1985 0.672 - 0.951 7.729 - 7.990
- -------------- ------------------------------------- ---------------------------
1986 0.643 - 0.726 7.768 - 7.819
- -------------- ------------------------------------- ---------------------------
1987 0.530 - 0.680 7.751 - 7.822
- -------------- ------------------------------------- ---------------------------
1988 0.525 - 0.601 7.764 - 7.912
- -------------- ------------------------------------- ---------------------------
1989 0.548 - 0.661 7.775 - 7.817
- -------------- ------------------------------------- ---------------------------
1990 0.504 - 0.627 7.740 - 7.817
- -------------- ------------------------------------- ---------------------------
1991 0.499 - 0.624 7.716 - 7.803
- -------------- ------------------------------------- ---------------------------
1992 0.498 - 0.667 7.697 - 7.781
- -------------- ------------------------------------- ---------------------------
1993 0.630 - 0.705 7.722 - 7.766
- -------------- ------------------------------------- ---------------------------
1994 0.610 - 0.684 7.723 - 7.750
- -------------- ------------------------------------- ---------------------------
1995 0.610 - 0.653 7.726 - 7.763
- -------------- ------------------------------------- ---------------------------
1996 0.583 - 0.670 7.732 - 7.742
- -------------- ------------------------------------- ---------------------------
1997 0.584 - 0.633 7.708 - 7.751
- -------------- ------------------------------------- ---------------------------
1998 0.584 - 0.620 7.735 - 7.749
- -------------- ------------------------------------- ---------------------------
1999 0.597 - 0.646 7.746 - 7.775
- -------------- ------------------------------------- ---------------------------
Source: Bloomberg L.P.
The sub-adviser will estimate current exchange rates for the relevant currencies
based on activity in the various currency exchange markets. However, since these
markets are volatile and are constantly changing, depending on the activity at
any particular time of the large international commercial banks, various central
banks, large multi-national corporations, speculators and other buyers and
sellers of foreign currencies, and since actual foreign currency transactions
may not be instantly reported, the exchange rates estimated by the sub-adviser
may not be indicative of the amount in United States dollars the Series would
receive had the Series sold any particular currency in the market. The foreign
exchange transactions of the Series may be conducted by the Series with foreign
exchange dealers acting as principals on a spot (i.e., cash) buying basis.
Although foreign exchange dealers trade on a net basis, they do realize a profit
based upon the difference between the price at which they are willing to buy a
particular currency (bid price) and the price at which they are willing to sell
the currency (offer price).
SECTOR SERIES RISKS
Leading Brands Sector Series. An investment in this Series should be
made with an understanding of the problems and risks inherent in an investment
in the consumer products industry in general. These include the cyclicality of
revenues and earnings, changing consumer demands, regulatory restrictions,
product liability litigation and other litigation resulting from accidents,
extensive competition (including that of low-cost foreign competition), unfunded
pension fund liabilities and employee and retiree benefit costs and financial
deterioration resulting from leveraged buy-outs, takeovers or acquisitions. In
general, expenditures on consumer products will be affected by the economic
health of consumers. A weak economy with its consequent effect on consumer
spending could have an adverse effect on consumer products companies. Other
factors of particular relevance to the profitability of the industry are the
effects of increasing environmental regulation on packaging and on waste
disposal, the continuing need to conform with foreign regulations governing
packaging and the environment, the outcome of trade negotiations and the effect
on foreign subsidies and tariffs, foreign exchange rates, the price of oil and
its effect on energy costs, inventory cutbacks by retailers, transportation and
distribution costs, health concerns relating to the consumption of certain
products, the effect of demographics on consumer demand, the availability and
cost of raw materials and the ongoing need to develop new products and to
improve productivity.
Communications Sector Series. An investment in this Series should be
made with an understanding of the problems and risks inherent in an investment
in the communications industry in general.
The market for high-technology communications products and services is
characterized by rapidly changing technology, rapid product obsolescence,
cyclical market patterns, evolving industry standards and frequent new product
introductions. The success of the issuers of the common stock depends in
substantial part on the timely and successful introduction of new products and
services. An unexpected change in one or more of the technologies affecting an
issuer's products or in the market for products based on a particular technology
could have a material adverse affect on an issuer's operating results.
Furthermore, there can be no assurance that the issuer of the common stock will
be able to respond in a timely manner to compete in the rapidly developing
marketplace.
The communications industry is subject to governmental regulation. However, as
market forces develop, the government will continue to deregulate the
communications industry, promoting vigorous economic competition and resulting
in rapid development of new communications technologies. The products and
services of communications companies may be subject to rapid obsolescence. These
factors could affect the value of the Series. For example, while telephone
companies in the United States are subject to both state and federal regulations
affecting permitted rates of return and the kinds of services that may be
offered, the prohibition against phone companies delivering video services has
been lifted. This created competition between phone companies and cable
operators and encouraged phone companies to modernize their communications
infrastructure. Certain types of companies represented in the Series' portfolio
are engaged in fierce competition for a share of the market of their products.
As a result, competitive pressures are intense and the stocks are subject to
rapid price volatility.
Many communications companies rely on a combination of patents, copyrights,
trademarks and trade secret laws to establish and protect their proprietary
rights in their products and technologies. There can be no assurance that the
steps taken by the issuers of the common stock to protect their proprietary
rights will be adequate to prevent misappropriation of their technology or that
competitors will not independently develop technologies that are substantially
equivalent or superior to such issuers' technology.
Energy Sector Series. An investment in this Series should be made with
an understanding of the problems and risks such an investment may entail.
The Energy Sector Series invests in common stock of companies involved in the
energy industry. The business activities of companies held in this Series may
include: production, generation, transmission, marketing, control, or
measurement of energy or energy fuels; providing component parts or services to
companies engaged in the above activities; energy research or experimentation;
and environmental activities related to the solution of energy problems, such as
energy conservation and pollution control. Companies participating in new
activities resulting from technological advances or research discoveries in the
energy field are also considered for this Series.
The securities of companies in the energy field are subject to changes in value
and dividend yield which depend, to a large extent, on the price and supply of
energy fuels. Swift price and supply fluctuations may be caused by events
relating to international politics, energy conservation, the success of
exploration projects, and tax and other regulatory policies of various
governments. As a result of the foregoing, the common stock in this Series may
be subject to rapid price volatility. The Fund is unable to predict what impact
the foregoing factors will have on the common stock in this Series.
According to the U.S. Department of Commerce, the factors which will most likely
shape the energy industry include the price and availability of oil from the
Middle East, changes in United States environmental policies and the continued
decline in U.S. production of crude oil. Possible effects of these factors may
be increased U.S. and world dependence on oil from the Organization of Petroleum
Exporting Countries (OPEC) and highly uncertain and potentially more volatile
oil prices. Factors which the sub-adviser believes may increase the
profitability of oil and petroleum operations include increasing demand for oil
and petroleum products as a result of the continued increases in annual miles
driven and the improvement in refinery operating margins caused by increases in
average domestic refinery utilization rates. The existence of surplus crude oil
production capacity and the willingness to adjust production levels are the two
principal requirements for stable crude oil markets. Without excess capacity,
supply disruptions in some countries cannot be compensated for by others.
Surplus capacity in Saudi Arabia and a few other countries and the utilization
of that capacity prevented, during the Persian Gulf crisis, and continues to
prevent, severe market disruption. Although unused capacity contributed to
market stability in 1990 and 1991, it ordinarily creates pressure to overproduce
and contributes to market uncertainty. The restoration of a large portion of
Kuwait and Iraq's production and export capacity could lead to such a
development in the absence of substantial growth in world oil demand. Formerly,
OPEC members attempted to exercise control over production levels in each
country through a system of mandatory production quotas. Because of the
1990-1991 crisis in the Middle East, the mandatory system has since been
replaced with a voluntary system. Production under the new system has had to be
curtailed on at least one occasion as a result of weak prices, even in the
absence of supplies from Kuwait and Iraq. The pressure to deviate from mandatory
quotas, if they are reimposed, is likely to be substantial and could lead to a
weakening of prices. In the longer term, additional capacity and production will
be required to accommodate the expected large increases in world oil demand and
to compensate for expected sharp drops in U.S. crude oil production and exports
from the Soviet Union. Only a few OPEC countries, particularly Saudi Arabia,
have the petroleum reserves that will allow the required increase in production
capacity to be attained. Given the large-scale financing that is required, the
prospect that such expansion will occur soon enough to meet the increased demand
is uncertain.
Declining U.S. crude oil production will likely lead to increased dependence on
OPEC oil, putting refiners at risk of continued and unpredictable supply
disruptions. Increasing sensitivity to environmental concerns will also pose
serious challenges to the industry over the coming decade. Refiners are likely
to be required to make heavy capital investments and make major production
adjustments in order to comply with increasingly stringent environmental
legislation, such as the 1990 amendments to the Clean Air Act. If the cost of
these changes is substantial enough to cut deeply into profits, smaller refiners
may be forced out of the industry entirely. Moreover, lower consumer demand due
to increases in energy efficiency and conservation, gasoline reformulations that
call for less crude oil, warmer winters or a general slowdown in economic growth
in this country and abroad could negatively affect the price of oil and the
profitability of oil companies. No assurance can be given that the demand for or
prices of oil will increase or that any increases will not be marked by great
volatility. Some oil companies may incur large cleanup and litigation costs
relating to oil spills and other environmental damage. Oil production and
refining operations are subject to extensive federal, state and local
environmental laws and regulations governing air emissions and the disposal of
hazardous materials. Increasingly stringent environmental laws and regulations
are expected to require companies with oil production and refining operations to
devote significant financial and managerial resources to pollution control.
General problems of the oil and petroleum products industry include the ability
of a few influential producers to significantly affect production, the
concomitant volatility of crude oil prices, increasing public and governmental
concern over air emissions, waste product disposal, fuel quality and the
environmental effects of fossil-fuel use in general.
In addition, any future scientific advances concerning new sources of energy and
fuels or legislative changes relating to the energy industry or the environment
could have a negative impact on the petroleum products industry. While
legislation has been enacted to deregulate certain aspects of the oil industry,
no assurances can be given that new or additional regulations will not be
adopted. Each of the problems referred to could adversely affect the financial
stability of the issuers of any petroleum industry stocks in this Series.
Financial Sector Series. An investment in this Series should be made
with an understanding of the problems and risks inherent in the bank and
financial services sector in general.
Banks, thrifts and their holding companies are especially subject to the adverse
effects of economic recession, volatile interest rates, portfolio concentrations
in geographic markets and in commercial and residential real estate loans, and
competition from new entrants in their fields of business. Banks and thrifts are
highly dependent on net interest margin. Recently, bank profits have come under
pressure as net interest margins have contracted, but volume gains have been
strong in both commercial and consumer products. There is no certainty that such
conditions will continue. Bank and thrift institutions had received significant
consumer mortgage fee income as a result of activity in mortgage and refinance
markets. As initial home purchasing and refinancing activity subsided, this
income diminished. Economic conditions in the real estate markets, which have
been weak in the past, can have a substantial effect upon banks and thrifts
because they generally have a portion of their assets invested in loans secured
by real estate. Banks, thrifts and their holding companies are subject to
extensive federal regulation and, when such institutions are state-chartered, to
state regulation as well. Such regulations impose strict capital requirements
and limitations on the nature and extent of business activities that banks and
thrifts may pursue. Furthermore, bank regulators have a wide range of discretion
in connection with their supervisory and enforcement authority and may
substantially restrict the permissible activities of a particular institution if
deemed to pose significant risks to the soundness of such institution or the
safety of the federal deposit insurance fund. Regulatory actions, such as
increases in the minimum capital requirements applicable to banks and thrifts
and increases in deposit insurance premiums required to be paid by banks and
thrifts to the Federal Deposit Insurance Corporation (FDIC), can negatively
impact earnings and the ability of a company to pay dividends. Neither federal
insurance of deposits nor governmental regulations, however, insures the
solvency or profitability of banks or their holding companies, or insures
against any risk of investment in the securities issued by such institutions.
The statutory requirements applicable to and regulatory supervision of banks,
thrifts and their holding companies have increased significantly and have
undergone substantial change in recent years. To a great extent, these changes
are embodied in the Financial Institutions Reform, Recovery and Enforcement Act;
enacted in August 1989, the Federal Deposit Insurance Corporation Improvement
Act of 1991, the Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991 and the regulations promulgated under these laws. Many
of the regulations promulgated pursuant to these laws have only recently been
finalized and their impact on the business, financial condition and prospects of
the common stock in the Series' portfolio cannot be predicted with certainty.
The recently enacted Gramm-Leach-Bliley Act repealed most of the barriers set up
by the 1933 Glass-Steagall Act which separated the banking, insurance and
securities industries. Now banks, insurance companies and securities firms can
merge to form one-stop financial conglomerates marketing a wide range of
financial service products to investors. This legislation will likely result in
increased merger activity and heightened competition among existing and new
participants in the field. Efforts to expand the ability of federal thrifts to
branch on an interstate basis have been initially successful through
promulgation of regulations, and legislation to liberalize interstate banking
has recently been signed into law. Under the legislation, banks will be able to
purchase or establish subsidiary banks in any state, one year after the
legislation's enactment. Since mid-1997, banks have been allowed to turn
existing banks into branches. Consolidation is likely to continue. The
Securities and Exchange Commission and the Financial Accounting Standards Board
require the expanded use of market value accounting by banks and have imposed
rules requiring market accounting for investment securities held in trading
accounts or available for sale. Adoption of additional such rules may result in
increased volatility in the reported health of the industry, and mandated
regulatory intervention to correct such problems. Additional legislative and
regulatory changes may be forthcoming. For example, the bank regulatory
authorities have proposed substantial changes to the Community Reinvestment Act
and fair lending laws, rules and regulations, and there can be no certainty as
to the effect, if any, that such changes would have on the common stock in the
Series' portfolio. In addition, from time to time the deposit insurance system
is reviewed by Congress and federal regulators, and proposed reforms of that
system could, among other things, further restrict the ways in which deposited
moneys can be used by banks or reduce the dollar amount or number of deposits
insured for any depositor. Such reforms could reduce profitability such as
investment opportunities available to bank institutions become more limited and
as consumers look for savings vehicles other than bank deposits. Banks and
thrifts face significant competition from other financial institutions such as
mutual funds, credit unions, mortgage banking companies and insurance companies,
and increased competition may result from legislative broadening of regional and
national interstate banking powers as has been recently enacted. The Fund makes
no prediction as to what, if any, manner of bank and thrift regulatory actions
might ultimately be adopted or what ultimate effect such actions might have on
the Series' portfolio.
The Federal Bank Holding Company Act of 1956 generally prohibits a bank holding
company from (1) acquiring, directly or indirectly, more than 25% of the
outstanding shares of any class of voting securities of a bank or bank holding
company, (2) acquiring control of a bank or another bank holding company, (3)
acquiring all or substantially all the assets of a bank, or (4) merging or
consolidating with another bank holding company, without first obtaining Federal
Reserve Board ("FRB") approval. In considering an application with respect to
any such transaction, the FRB is required to consider a variety of factors,
including the potential anti-competitive effects of the transaction, the
financial condition and future prospects of the combining and resulting
institutions, the managerial resources of the resulting institution, the
convenience and needs of the communities the combined organization would serve,
the record of performance of each combining organization under the Community
Reinvestment Act and the Equal Credit Opportunity Act, and the prospective
availability to the FRB of information appropriate to determine ongoing
regulatory compliance with applicable banking laws. In addition, the federal
Change In Bank Control Act and various state laws impose limitations on the
ability of one or more individuals or other entities to acquire control of banks
or bank holding companies.
The Federal Reserve Board (FRB) has issued a policy statement on the payment of
cash dividends by bank holding companies. In the policy statement, the FRB
expressed its view that a bank holding company experiencing earnings weaknesses
should not pay cash dividends which exceed its net income or which could only be
funded in ways that would weaken its financial health, such as by borrowing. The
FRB also may impose limitations on the payment of dividends as a condition to
its approval of certain applications, including applications for approval of
mergers and acquisitions. The Fund makes no prediction as to the effect, if any,
such laws will have on the common stock or whether such approvals, if necessary,
will be obtained.
Companies involved in the insurance industry are engaged in underwriting,
reinsuring, selling, distributing or placing of property and casualty, life or
health insurance. Other growth areas within the insurance industry include
brokerage, reciprocals, claims processors and multiline insurance companies.
Insurance company profits are affected by interest rate levels, general economic
conditions, and price and marketing competition. Property and casualty insurance
profits may also be affected by weather catastrophes and other disasters. Life
and health insurance profits may be affected by mortality and morbidity rates.
Individual companies may be exposed to material risks including reserve
inadequacy and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential tax law changes may also adversely affect
insurance companies' policy sales, tax obligations, and profitability. In
addition to the foregoing, profit margins of these companies continue to shrink
due to the commoditization of traditional businesses, new competitors, capital
expenditures on new technology and the pressures to compete globally.
In addition to the normal risks of business, companies involved in the insurance
industry are subject to significant risk factors, including those applicable to
regulated insurance companies, such as: (i) the inherent uncertainty in the
process of establishing property-liability loss reserves, particularly reserves
for the cost of environmental, asbestos and mass tort claims, and the fact that
ultimate losses could materially exceed established loss reserves which could
have a material adverse effect on results of operations and financial condition;
(ii) the fact that insurance companies have experienced, and can be expected in
the future to experience, catastrophe losses which could have a material adverse
impact on their financial condition, results of operations and cash flow; (iii)
the inherent uncertainty in the process of establishing property-liability loss
reserves due to changes in loss payment patterns caused by new claims settlement
practices; (iv) the need for insurance companies and their subsidiaries to
maintain appropriate levels of statutory capital and surplus, particularly in
light of continuing scrutiny by rating organizations and state insurance
regulatory authorities, and in order to maintain acceptable financial strength
or claims-paying ability rating; (v) the extensive regulation and supervision to
which insurance companies' subsidiaries are subject, various regulatory
initiatives that may affect insurance companies, and regulatory and other legal
actions; (vi) the adverse impact that increases in interest rates could have on
the value of an insurance company's investment portfolio and on the
attractiveness of certain of its products; (vii) the need to adjust the
effective duration of the assets and liabilities of life insurance operations in
order to meet the anticipated cash flow requirements of its policyholder
obligations, and (vii) the uncertainty involved in estimating the availability
of reinsurance and the collectibility of reinsurance recoverables.
The state insurance regulatory framework has, during recent years, come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that alter and, in many cases, increase state authority to regulate
insurance companies and insurance holding company systems. Further, the National
Association of Insurance Commissioners ("NAIC") and state insurance regulators
are re-examining existing laws and regulations, specifically focusing on
insurance companies, interpretations of existing laws and the development of new
laws. In addition, Congress and certain federal agencies have investigated the
condition of the insurance industry in the United States to determine whether to
promulgate additional federal regulations. It is difficult to predict whether
any state or federal legislation will be enacted to change the nature or scope
of regulation of the insurance industry, or what effect, if any, such
legislation would have on the industry.
All insurance companies are subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations could cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean up. The insurance industry is involved in extensive litigation
regarding coverage issues. The Comprehensive Environmental Response Compensation
and Liability Act of 1980 (Superfund) and comparable state statutes
(mini-Superfund) govern the clean-up and restoration by "Potentially Responsible
Parties" (PRP's). Superfund and the mini-Superfunds (Environmental Clean-up Laws
or ECLs) establish a mechanism to pay for clean-up of waste sites if PRPs fail
to do so, and to assign liability to PRPs. The extent of liability to be
allocated to a PRP is dependent on a variety of factors. Further, the number of
waste sites subject to clean-up is unknown. Very few sites have been subject to
clean-up to date. The extent of clean-up necessary and the assignment of
liability has not been established. The insurance industry is disputing many
such claims. Key coverage issues include whether Superfund response costs are
considered damages under the policies, when and how coverage is triggered,
applicability of pollution exclusions, the potential for joint and several
liability and definition of an occurrence. Similar coverage issues exist for
clean up and waste sites not covered under Superfund. To date, courts have been
inconsistent in their rulings on these issues. An insurer's exposure to
liability with regard to its insureds which have been, or may be, named as PRPs
is uncertain. Superfund reform proposals have been introduced in Congress, but
none have been enacted. There can be no assurance that any Superfund reform
legislation will be enacted or that any such legislation will provide for a
fair, effective and cost-efficient system for settlement of Superfund related
claims.
While current federal income tax law permits the tax-deferred accumulation of
earnings on the premiums paid by an annuity owner and holders of certain
savings-oriented life insurance products, no assurance can be given that future
tax law will continue to allow such tax deferrals. If such deferrals were not
allowed, consumer demand for the affected products would be substantially
reduced. In addition, proposals to lower the federal income tax rates through a
form of flat tax or otherwise could have, if enacted, a negative impact on the
demand for such products.
Companies engaged in investment banking/brokerage and investment management
include brokerage firms, broker/dealers, investment banks, finance companies and
mutual fund companies. Earnings and share prices of companies in this industry
are quite volatile, and often exceed the volatility levels of the market as a
whole. Recently, ongoing consolidation in the industry and the strong stock
market has benefited stocks which investors believe will benefit from greater
investor and issuer activity. Major determinants of future earnings of these
companies are the direction of the stock market, investor confidence, equity
transaction volume, the level and direction of long-term and short-term interest
rates, and the outlook for emerging markets. Negative trends in any of these
earnings determinants could have a serious adverse effect on the financial
stability, as well as on the stock prices, of these companies. Furthermore,
there can be no assurance that the issuers of the common stock included in this
Series will be able to respond in a timely manner to compete in the rapidly
developing marketplace. In addition to the forgoing, profit margins of these
companies continue to shrink due to the commoditization of traditional
businesses, new competitors, capital expenditures on new technology and the
pressures to compete globally.
Pharmaceutical/Healthcare Sector Series. An investment in this Series
should be made with an understanding of the characteristics of the
pharmaceutical and healthcare industries and the risks which such investment may
entail.
Pharmaceutical companies are companies involved in drug development and
production services, biotech, and advanced medical devices and instruments. In
addition, they are well known for the vast amounts of money they spend on
world-class research and development. In short, such companies work to improve
the quality of life for millions of people and are vital to the nation's health
and well-being. Such companies have potential risks unique to their sector of
the healthcare field. Such companies are subject to governmental regulation of
their products and services, a factor which could have a significant and
possibly unfavorable effect on the price and availability of such products or
services. Furthermore, such companies face the risk of increasing competition
from generic drug sales, the termination of their patent protection for drug
products and the risk that technological advances will render their products or
services obsolete. The research and development costs of bringing a drug to
market are substantial and include lengthy government review processes, with no
guarantee that the product will ever come to market. Many of these companies may
have losses and not offer certain products for several years. Such companies may
also have persistent losses during a new product's transition from development
to production, and revenue patterns may be erratic.
As the population of the United States ages, the companies involved in the
pharmaceutical field will continue to search for and develop new drugs through
advanced technologies and diagnostics. On a worldwide basis, such companies are
involved in the development and distribution of drugs and vaccines. These
activities may make the pharmaceutical sector very attractive for investors
seeking the potential for growth in their investment portfolio. However, there
are no assurances that the Series' objectives will be met.
Legislative proposals concerning healthcare are considered from time to time.
These proposals span a wide range of topics, including cost and price controls
(which might include a freeze on the prices of prescription drugs), national
health insurance, incentives for competition in the provisions of healthcare
services, tax incentives and penalties related to healthcare insurance premiums
and promotion of prepaid healthcare plans. The Fund is unable to predict the
effect of any of these proposals, if enacted, on the issuers of common stock in
the Series.
Technology Sector Series. An investment in this Series should be made
with an understanding of the characteristics of the technology industry and the
risks which such an investment may entail.
Technology companies generally include companies involved in the development,
design, manufacture and sale of computers, computer-related equipment, computer
networks, communications systems, telecommunications products, electronic
products and other related products, systems and services. The market for these
products, especially those specifically related to the Internet, is
characterized by rapidly changing technology, rapid product obsolescence,
cyclical market patterns, evolving industry standards and frequent new product
introductions. The success of the issuers of the common stock depends in
substantial part on the timely and successful introduction of new products. An
unexpected change in one or more of the technologies affecting an issuer's
products or in the market for products based on a particular technology could
have a material adverse affect on an issuer's operating results. Furthermore,
there can be no assurance that the issuers of the common stock will be able to
respond in a timely manner to compete in the rapidly developing marketplace.
Based on trading history of common stock, factors such as announcements of new
products or development of new technologies and general conditions of the
industry have caused and are likely to cause the market price of high-technology
common stocks to fluctuate substantially. In addition, technology company stocks
have experienced extreme price and volume fluctuations that often have been
unrelated to the operating performance of such companies. This market volatility
may adversely affect the market price of the common stock.
Some key components of certain products of technology issuers are currently
available only from single sources. There can be no assurance that in the future
suppliers will be able to meet the demand for components in a timely and cost
effective manner. Accordingly, an issuer's operating results and customer
relationships could be adversely affected by either an increase in price for, or
an interruption or reduction in supply of, any key components. Additionally,
many technology issuers are characterized by a highly concentrated customer base
consisting of a limited number of large customers who may require product
vendors to comply with rigorous industry standards. Any failure to comply with
such standards may result in a significant loss or reduction of sales. Because
many products and technologies of technology companies are incorporated into
other related products, such companies are often highly dependent on the
performance of the personal computer, electronics and telecommunications
industries. There can be no assurance that these customers will place additional
orders, or that an issuer of common stock will obtain orders of similar
magnitude such as past orders from other customers. Similarly, the success of
certain technology companies is tied to a relatively small concentration of
products or technologies. Accordingly, a decline in demand of such products,
technologies or from such customers could have a material adverse impact on
issuers of common stock.
Many technology companies rely on a combination of patents, copyrights,
trademarks and trade secret laws to establish and protect their proprietary
rights in their products and technologies. There can be no assurance that the
steps taken by the issuers of the common stock to protect their proprietary
rights will be adequate to prevent misappropriation of their technology or that
competitors will not independently develop technologies that are substantially
equivalent or superior to such issuers' technology. In addition, due to the
increasing public use of the Internet, it is possible that other laws and
regulations may be adopted to address issues such as privacy, pricing,
characteristics, and quality of Internet products and services. For example,
recent proposals would prohibit the distribution of obscene, lascivious or
indecent communications on the Internet. The adoption of any such laws could
have a material adverse impact on the common stock in the Series.
Like many areas of technology, the semiconductor business environment is highly
competitive, notoriously cyclical and subject to rapid and often unanticipated
change. Recent industry downturns have resulted, in part, from weak pricing,
persistent overcapacity, slowdown in Asian demand and a shift in retail personal
computer sales toward the low end, or "sub-$1000" segment. Industry growth is
dependent upon several factors, including: the rate of global economic
expansion; demand for products such as personal computers and networking and
communications equipment; excess productive capacity and the resultant effect on
pricing; and the rate of growth in the market for low-price personal computers.
INVESTMENT RESTRICTIONS APPLICABLE TO ALL SERIES
FUNDAMENTAL POLICIES APPLICABLE TO ALL SERIES. The following fundamental
policies may not be changed without the affirmative vote of the majority of the
outstanding voting securities of the Fund (or of a particular Series, if
appropriate). The Investment Company Act of 1940 (1940 Act) defines a majority
vote as the vote of the lesser of (i) 67% of the Fund interests represented at a
meeting at which more than 50% of the outstanding interests are represented or
(ii) more than 50% of the outstanding voting interests. With respect to the
submission of a change in an investment policy to the holders of outstanding
voting interests of a particular Series, such matter shall be deemed to have
been effectively acted upon with respect to such Series if a majority of the
outstanding voting interests of such Series vote for the approval of such
matter, notwithstanding that (1) such matter has not been approved by the
holders of a majority of the outstanding voting interests of any other Series
affected by such matter, and (2) such matter has not been approved by the vote
of a majority of the outstanding voting Fund interests.
(1) A Series may not issue senior securities.
(2) A Series will not borrow money, except for temporary or
emergency purposes, from banks. The aggregate amount borrowed
shall not exceed 25% of the value of a Series' assets. In the
case of any borrowing, a Series may pledge, mortgage or
hypothecate up to 15% of its assets.
(3) A Series will not underwrite the securities of other issuers
except to the extent the Fund may be considered an underwriter
under the Securities Act of 1933 when selling portfolio
securities.
(4) A Series will not purchase or sell real estate or interests
therein.
(5) A Series will not lend any security or make any other loan if,
as a result, more than 33 1/3% of the Series' total assets
would be lent to other parties (but this limitation does not
apply to purchases of commercial paper, debt securities or
repurchase agreements).
(6) A Series may invest in repurchase agreements and warrants and
engage in futures and options transactions and securities
lending.
None of the Series is a "diversified company," as that term is defined in the
Investment Company Act of 1940, as amended. There are no limitations on the
concentration of the investments held by any Series in any particular industry
or group of industries. However, because each Sector Series is only investing in
common stocks of companies within specific industries, the Series' performance
is closely tied to, and affected by, those specific industries. Companies within
an industry are often faced with the same obstacles, issues or regulatory
burdens, and their common stock may react similarly and move in unison to these
and other market conditions. As a result of these factors, stocks in which the
Sector Series will invest may be more volatile than a mixture of stocks of
companies from a wide variety of industries.
MANAGEMENT OF THE FUND
The officers of the Fund manage its day to day operations and are responsible to
the Fund's Board of Managers. The Board of Managers of the Fund sets broad
policies for each Series and chooses the Fund's officers. The following is a
list of the Managers and officers of the Fund and a statement of their present
positions and principal occupations during the past five years.
For purposes of this section, the term "Fund Complex" includes each of the
following investment companies: JNL Series Trust, JNL Variable Fund LLC, JNL
Variable Fund III LLC, JNL Variable Fund V LLC, JNLNY Variable Fund I LLC, and
JNLNY Variable Fund II LLC. Each of the Fund's Managers is also a Trustee or
Manager of each of the other funds in the Fund Complex and each of the Fund's
officers is also an officer of one or more of the funds in the Fund Complex.
ANDREW B. HOPPING* (Age 41), 5901 Executive Drive, Lansing, Michigan 48911
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
President and Chief Executive Officer of the Fund and each of the other funds
in the Fund Complex
JNL Series Trust, Vice President (8/96 to 8/97)
JNL Series Trust, Treasurer (8/96 to 8/97)
JNL Series Trust, Chief Financial Officer (8/96 to 8/97)
Jackson National Life Distributors, Inc., Treasurer (1/98 to present)
Jackson National Financial Services, LLC, President and Managing Board Member
(3/98 to present)
Jackson National Life Insurance Company, Executive Vice President
(7/98 to present)
Jackson National Life Insurance Company, Chief Financial Officer
(12/97 to present)
Jackson National Life Insurance Company, Senior Vice President (6/94 to 7/98)
National Planning Corporation, Vice President (5/98 to 7/98)
Jackson National Life Distributors, Inc., Chief Financial Officer and
Vice President (7/97 to present)
National Planning Corporation, Director (6/97 to present)
Jackson National Financial Services, Inc., CEO and President (7/97 to 5/98)
Countrywide Credit, Executive Vice President (3/92 to 6/94)
MICHAEL BOUCHARD** (Age 44), 344 Fairfax, Birmingham, MI 48009
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
Sheriff, Oakland County, Michigan (1/99 to present)
Senator State of Michigan (1991 to 1999)
DOMINIC D'ANNUNZIO** (Age 62), 100 Siena Way, Unit 1204, Naples, FL 34119
Member of the Board of Managers of the Fund and each of the other funds in
the Fund Complex
Acting Commissioner of Insurance for the State of Michigan, (8/97 to 5/98)
Acting Commissioner of Insurance for the State of Michigan, (1/90 to 5/90)
Acting Manager of Michigan State Accident Fund (9/89 to 12/89)
Deputy Commissioner of the Office of Financial Analysis and Examinations
(4/89 to 8/97)
Deputy Commissioner of the Office of Market Standards (1/87 to 4/89)
MICHELLE ENGLER** (Age 42), 2520 Oxford Drive, Lansing, MI 48911
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
First Lady of the State of Michigan (1991 to present)
Chair, Michigan Community Service Commission (1991 to present)
ROBERT A. FRITTS* (Age 51) 5901 Executive Drive, Lansing, Michigan 48911
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
Vice President, Treasurer and Chief Financial Officer of the Fund and each of
the other funds in the Fund Complex
JNL Series Trust, Assistant Treasurer (2/96 to August 1997)
JNL Series Trust, Assistant Secretary (12/94 to 2/96)
Jackson National Life Insurance Company, Vice President and Controller
(8/82 to present)
THOMAS J. MEYER (Age 53) 5901 Executive Drive, Lansing, Michigan 48911
Vice President, Secretary and Counsel of the Fund and each of the other funds in
the Fund Complex
Jackson National Life Insurance Company, Senior Vice President (7/98 to present)
Jackson National Life Insurance Company, Secretary (9/94 to present)
Jackson National Life Insurance Company, General Counsel (3/85 to present)
Jackson National Life Insurance Company, Vice President (3/85 to 7/98)
MARK D. NERUD (Age33) 225 West Wacker Drive, Suite 1200, Chicago, IL 60606
Vice President and Assistant Treasurer of the Fund and each of the other funds
in the Fund Complex
Jackson National Financial Services, LLC, Chief Financial Officer
(3/98 to present)
Jackson National Financial Services, LLC, Managing Board Member
(3/98 to present)
National Planning Corporation, Vice President (5/98 to present)
Jackson National Life Distributors, Inc., Chief Operating Officer
(7/97 to present)
Jackson National Life Distributors. Inc., Vice President, Assistant Treasurer
(1/98 to present)
Jackson National Financial Services, Inc., Director (1/98 to 5/98)
Jackson National Financial Services, Inc., Chief Operating Officer
(6/97 to 5/98)
Jackson National Financial Services, Inc., Treasurer (6/97 to 5/98)
Jackson National Life Insurance Company, Vice President - Fund Accounting &
Administration (1/00 to present)
Jackson National Life Insurance Company, Assistant Vice President - Mutual Fund
Operations (5/97 to 12/99)
Jackson National Life Insurance Company, Assistant Vice President
(10/96 to 4/97)
Jackson National Life Insurance Company, Assistant Controller (10/96 to 4/97)
Jackson National Life Insurance Company, Senior Manager - Mutual Fund Operations
(4/96 to 10/96)
Voyageur Asset Management Company, Manager - Mutual Fund Accounting
(5/93 to 4/96)
SUSAN MIN (Age 28) 5901 Executive Drive, Lansing, MI 48911
Assistant Secretary of the Fund and each of the other funds in the Fund Complex
Jackson National Financial Services, LLC, Secretary (1/00 to present)
Jackson National Life Insurance Company, Senior Attorney (1/00 to present)
Goldman, Sachs & Co., Associates (10/99 to 12/99)
Van Eck Associates Corporation, Staff Attorney (9/97 to 10/99)
*Managers who are interested persons as defined in the 1940 Act.
**A new member of the Board of Managers as of May 11, 2000.
The officers of the Fund and the Managers who are "interested persons" as
designated above receive no compensation from the Fund. Disinterested Managers
will be paid $5,000 for each meeting of a fund in the Fund Complex that they
attend. The disinterested Managers received the following compensation for
services as a Manager during the fiscal year ended December 31, 1999:
AGGREGATE COMPENSATION PENSION OR RETIREMENT
FROM ADVISER BENEFITS ACCRUED AS PART OF
MANAGER FUND EXPENSES
Joseph Frauenheim* $16,000 0
Richard McLellan* 16,000 0
Peter McPherson* 16,000 0
*Member of the Board of Managers that served on the Board until May 11, 2000.
As of April 1, 2000, the officers and Managers of the Fund, as a group, owned
less than 1% of the then outstanding interests of the Fund. To the extent
required by applicable law, JNL will solicit voting instructions from owners of
variable annuity contracts. All interests of each Series of the Fund will be
voted by JNL in accordance with voting instructions received from such variable
contract owners. JNL will vote all of the interests which it is entitled to vote
in the same proportion as the voting instructions given by variable contract
owners, on the issues presented, including interests which are attributable to
JNL's interest in the Fund.
PERFORMANCE
A Series' historical performance may be shown in the form of total return. This
performance measure is described below. Performance advertised for a Series may
or may not reflect the effect of any charges that are imposed under a variable
annuity contract (Contract) that is funded by the Fund. Such charges, described
in the prospectus for the Contract, will have the effect of reducing a Series'
performance.
Standardized average annual total return and non-standardized total return
measure both the net investment income generated by, and the effect of any
realized and unrealized appreciation or depreciation of, the underlying
investments of a Series. A Series' standardized average annual total return
quotation is computed in accordance with a standardized method prescribed by
rules of the Securities and Exchange Commission (SEC). Standardized average
annual total return shows the percentage rate of return of a hypothetical
initial investment of $1,000 for the most recent one-, five- and ten-year
periods, or for a period covering the time the Series has been in existence if
the Series has not been in existence for one of the prescribed periods. Because
average annual total returns tend to smooth out variations in the Series'
returns, you should recognize that they are not the same as actual year-by-year
results. The standardized average annual total return for a Series for a
specific period is found by first taking a hypothetical $1,000 investment
(initial investment) in the Series' shares on the first day of the period,
adjusting to deduct the applicable charges, if any, and computing the redeemable
value of that investment at the end of the period. The redeemable value is then
divided by the initial investment, and the quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Series have been reinvested
at net asset value on the reinvestment dates during the period.
The standardized average annual total return will be based on rolling calendar
quarters and will cover at least periods of one, five and ten years, or a period
covering the time the Series has been in existence, if it has not been in
existence for one of the prescribed periods.
Non-standardized total return may also be advertised. Non-standardized total
return may be for periods other than those required to be presented or may
otherwise differ from standardized average annual total return. Non-standardized
total return for a specific period is calculated by first taking an investment
(initial investment) in the applicable Series on the first day of the period and
computing the end value of that investment at the end of the period. The total
return percentage is then determined by subtracting the initial investment from
the ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by the Series have been reinvested at net asset
value on the reinvestment dates during the period. Non-standardized total return
may also be shown as the increased dollar value of the hypothetical investment
over the period.
Quotations of standardized average annual total return and non-standardized
total return are based upon historical earnings and will fluctuate. Any
quotation of performance, therefore, should not be considered a guarantee of
future performance. Factors affecting the performance of a Series include
general market conditions, operating expenses and investment management.
A Series' performance quotations are based upon historical results and are not
necessarily representative of future performance. The Series' interests are sold
at net asset value. Returns and net asset value will fluctuate. Interests of a
Series are redeemable at the then current net asset value, which may be more or
less than original cost.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. Jackson National Financial Services, LLC (JNFS), 5901
Executive Drive, Lansing, Michigan 48911, is the investment adviser to the Fund.
As investment adviser, JNFS provides the Fund with professional investment
supervision and management. JNFS is a wholly owned subsidiary of Jackson
National Life Insurance Company (JNL), which is in turn wholly owned by
Prudential plc, a life insurance company in the United Kingdom.
JNFS acts as investment adviser to the Series pursuant to an Investment Advisory
and Management Agreement. The Investment Advisory and Management Agreement
continues in effect for each Series from year to year after its initial two-year
term so long as its continuation is approved at least annually by (i) a majority
of the Managers who are not parties to such agreement or interested persons of
any such party except in their capacity as Managers of the Fund, and (ii) the
interest holders of each Series or the Board of Managers. It may be terminated
at any time upon 60 days notice by either party, or by a majority vote of the
outstanding interests of a Series with respect to that Series, and will
terminate automatically upon assignment. Additional Series may be subject to a
different agreement. The Investment Advisory and Management Agreement provides
that JNFS shall not be liable for any error of judgment, or for any loss
suffered by the Series in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of JNFS in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
agreement. Each Series is obligated to pay JNFS the following fees (the fee
percentages are identical for each Series):
ASSETS FEES
$0 to $500 million ...................... .75%
$500 million to $1 billion .............. .70%
Over $1 billion ......................... .65%
The fee paid by the Fund to JNFS pursuant to the Investment Advisory and
Management Agreement for the fiscal year ended December 31, 1999 was $92,915.
SUB-ADVISER. JNFS has entered into a Sub-Advisory Agreement with First Trust
Advisors L.P. (First Trust) to manage the investment and reinvestment of the
assets of each Series, subject to JNFS' supervision.
First Trust, an Illinois limited partnership formed in 1991 and an investment
adviser registered with the SEC under the Investment Advisers Act of 1940, is
the sub-adviser for each Series of the Fund. First Trust's address is 1001
Warrenville Road, Lisle, Illinois 60532. First Trust is a limited partnership
with one limited partner, Grace Partners of Dupage L.P., and one general
partner, Nike Securities Corporation. Grace Partners of Dupage L.P. is a limited
partnership with one general partner, Nike Securities Corporation, and a number
of limited partners. Nike Securities Corporation is an Illinois corporation
controlled by the Robert Donald Van Kampen family. Pursuant to a Sub-Advisory
Agreement with JNFS, First Trust is responsible for selecting the investments of
each Series consistent with the investment objectives and policies of that
Series, and will conduct securities trading for the Series. First Trust
discharges its responsibilities subject to the policies of the Board of Managers
of the Fund and the oversight and supervision of JNFS, which pays First Trust's
sub-advisory fees.
Under the Sub-Advisory Agreement, First Trust provides each Series with
discretionary investment services. Specifically, First Trust is responsible for
supervising and directing the investments of each Series in accordance with each
Series' investment objective, program, and restrictions as provided in the
Prospectus and this Statement of Additional Information. First Trust is also
responsible for effecting all security transactions on behalf of each Series.
As compensation for its services, First Trust receives a fee, , which is paid by
JNFS. The Sub-Advisory Agreement also provides that First Trust, its directors,
officers, employees, and certain other persons performing specific functions for
the Series will only be liable to the Series for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
The Sub-Advisory Agreement continues in effect for each Series from year to year
after its initial two-year term so long as its continuation is approved at least
annually by a majority of the Managers who are not parties to such agreement or
interested persons of any such party except in their capacity as Managers of the
Series and by the interest holders of each Series or the Board of Managers. It
may be terminated at any time upon 60 days' notice by either party, or by a
majority vote of the outstanding interests of a Series with respect to that
Series, and will terminate automatically upon assignment or upon the termination
of the investment management agreement between JNFS and the Series. Additional
Series may be subject to a different agreement. The Sub-Advisory Agreement also
provides that First Trust is responsible for compliance with the provisions of
Section 817(h) of the Internal Revenue Code of 1986, as amended (Code),
applicable to each Series (relating to the diversification requirements
applicable to investments in underlying variable annuity contracts). JNFS is
obligated to pay First Trust out of the advisory fee it receives from each
Series the following fees (the fee percentages are identical for each Series):
ASSETS FEES
$0 to $500 million .......................................... .35%
$500 million to $1 billion .................................. .30%
Over $1 billion ............................................. .25%
LICENSE AGREEMENTS. JNFS, JNL and the Series have entered into a Sub-License
Agreement with First Trust under the terms of which the Series and JNL are
permitted to use and refer to certain copyright, trademark and proprietary
rights and trade secrets of Dow Jones & Company.
JNL has also entered into a License Agreement with Standard & Poor's(R). The
JNL/First Trust The S&P Target 10 Series is not sponsored, endorsed, sold or
promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
(S&P). S&P makes no representation or warranty, express or implied, to the
owners of the Series or any member of the public regarding the advisability of
investing in securities generally or in the Series particularly or the ability
of the S&P 500 Index to track general stock market performance. S&P's only
relationship to the Licensee is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which are determined, composed and
calculated by S&P without regard to the Licensee or the Series. S&P has no
obligation to take the needs of the Licensee or the owners of the Series into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the Series or the timing of the issuance or sale of the Series or
in the determination or calculation of the equation by which the Series is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Series.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE SERIES, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
ADMINISTRATIVE FEE. Each Series pays to JNFS an Administrative Fee. Each Series,
except the JNL/First Trust Global Target 15 Series, pays an Administrative Fee
of .10% of the average daily net assets of the Series. The JNL/First Trust
Global Target 15 Series pays an Administrative Fee of .15% of the average daily
net assets of the Series. In return for the fee, JNFS provides or procures all
necessary administrative functions and services for the operation of the Series.
In accordance with the Administration Agreement, JNFS is responsible for the
payment of expenses related to legal, audit, fund accounting, custody, printing
and mailing, managers fees and all other services necessary for the operation of
each Series. Each Series is responsible for trading expenses including brokerage
commissions, interest and taxes, and other non-operating expenses.
CUSTODIAN AND TRANSFER AGENT. Boston Safe Deposit & Trust Company, One Boston
Place, Boston, Massachusetts 02108, acts as custodian for each Series of the
Fund. In general, the custodian is responsible for holding the Series' cash and
securities and attends to the collection of principal and income and payment for
and collection of proceeds of securities bought and sold by the Series.
JNFS is the transfer agent and dividend-paying agent for each Series of the
Fund.
INDEPENDENT ACCOUNTANTS. The Series' independent accountants,
PricewaterhouseCoopers LLP, 203 North LaSalle, Chicago, Illinois 60601, audit
and report on the Series' annual financial statements, and perform other
professional accounting, auditing and advisory services when engaged to do so by
the Series.
SERIES TRANSACTIONS AND BROKERAGE. Purchases and sales of newly issued portfolio
securities are usually principal transactions without brokerage commissions
effected directly with the issuer or with an underwriter acting as principal.
Other purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a Series to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or mark-down.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. There is
generally no stated commission in the case of securities traded in domestic or
foreign over-the-counter markets, but the price of securities traded in
over-the-counter markets includes an undisclosed commission or mark-up. U.S.
Government Securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. Government Securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
Transactions for a Series may be effected on foreign securities exchanges. In
transactions for securities not actively traded on a foreign securities
exchange, a Series will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve brokerage commissions. Securities firms may receive
brokerage commissions on certain portfolio transactions, including options,
futures and options on futures transactions and the purchase and sale of
underlying securities upon exercise of options.
Each Series may participate, if and when practicable, in bidding for the
purchase of securities for the Series' portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group. A Series will engage in this practice, however, only when the
sub-adviser, in its sole discretion, believes such practice to be otherwise in
the Series' interest.
The primary consideration in portfolio security transactions is "best
execution," i.e., execution at the most favorable prices and in the most
effective manner possible. JNFS and First Trust always attempt to achieve best
execution and have complete freedom as to the markets in and the broker/dealers
through which they seek this result. Subject to the requirement of seeking best
execution, securities may be bought from or sold to broker/dealers who have
furnished statistical, research, and other information or services to JNFS or
First Trust. In placing orders with such broker/dealers, JNFS and First Trust
will, where possible, take into account the comparative usefulness of such
information. Such information is useful to JNFS and First Trust even though its
dollar value may be indeterminable and its receipt or availability generally
does not reduce JNFS's or First Trust's normal research activities or expenses.
JNFS and First Trust are authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for a Series with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes (a) advice as to (i) the value of securities, (ii) the advisability of
investing in, purchasing or selling securities, and (iii) the availability of
securities or purchasers or sellers of securities and (b) furnishing analysis
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts. Higher commissions
may be paid to firms that provide research services to the extent permitted by
law. JNFS and First Trust may use this research information in managing the
Fund's assets, as well as the assets of other clients.
Any portfolio transaction for a Series may be executed through brokers that are
affiliated with the Fund, investment adviser and/or sub-adviser, if, in the
investment adviser's judgment, the use of such affiliated brokers is likely to
result in price and execution at least as favorable as those of other qualified
brokers, and if, in the transaction, the affiliated broker charges the Series a
commission rate consistent with those charged by the affiliated broker to
comparable unaffiliated customers in similar transactions. All transactions with
affiliated brokers will comply with Rule 17e-1 under the 1940 Act.
Fund portfolio transactions may be effected with broker/dealers who have
assisted investors in the purchase of policies. Subject to best execution,
broker/dealers may be selected based on the volume of interests sold.
There may be occasions when portfolio transactions for a Series are executed as
part of concurrent authorizations to purchase or sell the same security for
trusts or other accounts served by affiliated companies of JNFS or First Trust.
Although such concurrent authorizations potentially could be either advantageous
or disadvantageous to the Fund, they are effected only when JNFS and First Trust
believe that to do so is in the interest of the Fund. When such concurrent
authorizations occur the executions will be allocated in an equitable manner.
During the period indicated, the Series paid the following amounts in
brokerage commissions.
Fiscal year ended
December 31, 1999
JNL/First Trust The Dow sm Target 5 Series* $3,645
- --------------------------------------------------------------------------------
JNL/ First Trust The Dow sm Target 10 Series* 4,657
- --------------------------------------------------------------------------------
JNL/ First Trust The S&P(R)Target 10 Series* 5,086
- --------------------------------------------------------------------------------
JNL/First Trust Global Target 15 Series * 8,480
- --------------------------------------------------------------------------------
JNL/First Trust Target 25 Series* 3,820
- --------------------------------------------------------------------------------
JNL/First Trust Target Small-Cap Series* 4,238
- --------------------------------------------------------------------------------
JNL/First Trust Technology Sector Series* 4,178
- --------------------------------------------------------------------------------
JNL/First Trust Pharmaceutical/Healthcare Sector
Series* 4,638
- --------------------------------------------------------------------------------
JNL/First Trust Financial Sector Series* 2,708
- --------------------------------------------------------------------------------
JNL/First Trust Energy Sector Series* 2,525
- --------------------------------------------------------------------------------
JNL/First Trust Leading Brands Sector Series* 2,752
- --------------------------------------------------------------------------------
JNL/First Trust Communications Sector Series* 3,222
- --------------------------------------------------------------------------------
* Commenced operations on July 2, 1999.
As of December 31, 1999, the following Series owned securities of one
of the Fund's regular broker/dealers:
<TABLE>
<CAPTION>
Amount of
Series Broker/Dealer Shares Owned
------ ------------- ------------
<S> <C> <C>
JNL/First Trust Financial Sector Series Morgan Stanley & Co. Inc. 110,917
JNL/First Trust Financial Sector Series Merrill Lynch Pierce, Fenner & Smith 96,526
JNL/First Trust The Dowsm Target 10 Series J.P. Morgan Securities, Inc. 807,108
</TABLE>
CODE OF ETHICS. To mitigate the possibility that a Series will be adversely
affected by personal trading of employees, the Fund, JNFS and First Trust have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. JNFS' Code complies, in all material respects, with the
recommendations of the Investment Company Institute. Employees subject to the
Code of Ethics may invest in securities for their own investment accounts,
including securities that may be purchased or held by the Trust.
PURCHASES, REDEMPTIONS AND PRICING OF INTERESTS
The Separate Account may purchase interests of the Series at their net asset
value. Interests are purchased using premiums received on policies issued by
JNL. The Separate Account is funded by interests of the Fund.
All investments in the Fund are credited to the interest holder's account in the
form of full and fractional interests of the designated Series (rounded to the
nearest 1/1000 of an interest). The Fund does not issue interest certificates.
As stated in the Prospectus, the net asset value (NAV) of Series' interests is
determined once each day on which the New York Stock Exchange (NYSE) is open
(Business Day) at the close of the regular trading session of the Exchange
(normally 4:00 p.m., Eastern Time, Monday through Friday). The NAV of Series'
interests is not determined on the days the NYSE is closed, which days generally
are New Year's Day, Martin Luther King Jr. holiday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The per interest NAV of a Series is determined by dividing the total value of
the securities and other assets, less liabilities, by the total number of
interests outstanding. In determining NAV, securities listed on the national
securities exchanges, the NASDAQ National Market and foreign markets are valued
at the closing prices on such markets, or if such price is lacking for the
trading period immediately preceding the time of determination, such securities
are valued at their current bid price. Securities that are traded on the
over-the-counter market are valued at their closing bid prices. Foreign
securities and currencies are converted to U.S. dollars using exchange rates in
effect at the time of valuation. A Series will determine the market value of
individual securities held by it, by using prices provided by one or more
professional pricing services which may provide market prices to other funds,
or, as needed, by obtaining market quotations from independent broker-dealers.
Short-term securities maturing within 60 days are valued on the amortized cost
basis. Securities for which quotations are not readily available, and other
assets, are valued at fair values determined in good faith under procedures
established by and under the supervision of the Managers.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each Business Day. In addition, European and Far Eastern securities trading
generally or in a particular country or countries may not take place on all
Business Days. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not Business Days and
on which a Series' net asset value is not calculated. A Series calculates net
asset value per interest, and therefore effects sales, redemptions and
repurchases of its interests, as of the close of the NYSE once on each day on
which the NYSE is open. Such calculation does not take place contemporaneously
with the determination of the prices of the majority of the foreign portfolio
securities used in such calculation.
The Fund may suspend the right of redemption for any Series only under the
following unusual circumstances: (a) when the New York Stock Exchange is closed
(other than weekends and holidays) or trading is restricted; (b) when an
emergency exists, making disposal of portfolio securities or the valuation of
net assets not reasonably practicable; or (c) during any period when the
Securities and Exchange Commission has by order permitted a suspension of
redemption for the protection of interest holders.
ADDITIONAL INFORMATION
DESCRIPTION OF INTERESTS. The Fund may issue an unlimited number of full and
fractional interests of each Series and divide or combine such interests into a
greater or lesser number of interests without thereby changing the proportionate
interests in the Fund. Each interest of a Series represents an equal
proportionate interest in that Series with each other interest. The Fund
reserves the right to create and issue any number of series of interests. In
that case, the interests of each series would participate equally in the
earnings, dividends, and assets of the particular Series. Upon liquidation of a
Series, interest holders are entitled to share pro rata in the net assets of
such Series available for distribution to interest holders. Each issued and
outstanding interest in a Series is entitled to participate equally in dividends
and distributions declared by its corresponding Series, and in the net assets of
the Series remaining upon liquidations or dissolution after outstanding
liabilities are satisfied. The interests of each Series, when issued, are fully
paid and nonassessable. They have no preemptive, conversion, cumulative dividend
or similar rights. They are freely transferable. Interests in a Series do not
have cumulative rights. This means that owners of more than half of the Fund's
interests voting for election of Managers can elect all the Managers if they so
choose. Then, the remaining interest owners would not be able to elect any
Managers.
VOTING RIGHTS. Interest holders are entitled to one vote for each interest held.
Interest holders may vote on the election of Managers and on other matters
submitted to meetings of interest holders. In regard to termination, sale of
assets, or change of investment restrictions, the right to vote is limited to
the holders of interests of the particular Series affected by the proposal. When
a majority is required under the Investment Company Act of 1940, as amended, it
means the lesser of 67% or more of the interests present at a meeting when the
holders of more than 50% of the outstanding interests are present or represented
by proxy, or more than 50% of the outstanding interests.
INTEREST HOLDER INQUIRIES. All inquiries regarding the Fund should be directed
to the Fund at the telephone number or address shown on the cover page of the
Prospectus.
TAX STATUS
The Fund is not a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (Code). The Fund nonetheless does not
pay federal income tax on its interest, dividend income or capital gains. As a
limited liability company whose interests are sold only to the Separate Account,
the Fund is disregarded as an entity for purposes of federal income taxation.
Jackson National Life, through the Separate Account, is treated as owning the
assets of the Series directly and its tax obligations thereon are computed
pursuant to Subchapter L of the Code (which governs the taxation of insurance
companies). Under current tax law, interest, dividend income and capital gains
of the Fund are not taxable to the Fund, and are not currently taxable to JNL or
to policy owners, when left to accumulate within a variable annuity policy. Tax
disclosure relating to the variable annuity policies that offer the Fund as an
investment alternative is contained in the prospectuses for those policies.
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of segregated asset accounts that fund contracts such as the
variable annuity policies (that is, the assets of the Series). Failure to
satisfy those standards would result in imposition of Federal income tax on a
variable annuity policy owner with respect to the increase in the value of the
variable annuity policy. Section 817(h)(2) provides that a segregated asset
account that funds contracts such as the variable annuity policies is treated as
meeting the diversification standards if, as of the close of each calendar
quarter, the assets in the account meet the diversification requirements for a
regulated investment company and no more than 55% of those assets consist of
cash, cash items, U.S. Government securities and securities of other regulated
investment companies.
The Treasury Regulations amplify the diversification standards set forth in
Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of such
value is represented by any four investments. For purposes of these regulations
all securities of the same issuer are treated as a single investment, but each
United States government agency or instrumentality shall be treated as a
separate issuer.
Each Series will be managed with the intention of complying with these
diversification requirements. It is possible that, in order to comply with these
requirements, less desirable investment decisions may be made which could affect
the investment performance of a Series.
FINANCIAL STATEMENTS
The financial statements of the JNL Variable Fund LLC for the period
ended December 31, 1999 are incorporated by reference from the Fund's Annual
Report to interest holders which is available at no charge upon written or
telephone request to the Fund at the address and telephone number set forth on
the front page of this Statement of Additional Information.
