JNL(R) VARIABLE FUND III LLC
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PROSPECTUS
August 16, 1999
JNL(R) VARIABLE FUND III LLC
225 West Wacker Drive o Chicago, Illinois 60606
This Prospectus provides you with the basic information you should know before
investing in the JNL Variable Fund III LLC (Fund).
The interests of the Fund are sold to Jackson National Separate Account III to
fund the benefits of variable annuity contracts. The Fund currently offers
interests in the following Series:
JNL/First Trust The Dow(SM) Target 10 Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
FUND'S SECURITIES, OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
The Fund's Statement of Additional Information (SAI) contains additional
information about the Fund and the Series.
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"Dow Jones", "Dow Jones Industrial Average(SM)", "DJIA(SM)", and "The Dow
10(SM)" are service marks of Dow Jones & Company, Inc. (Dow Jones) Dow Jones has
no relationship to the Fund, other than the licensing of the Dow Jones
Industrial Average (DJIA) and its service marks for use in connection with the
JNL/First Trust The Dow Target 10 Series.
DOW JONES DOES NOT:
o Sponsor, endorse, sell or promote the JNL/First Trust The Dow Target 10
Series.
o Recommend that any person invest in the JNL/First Trust The Dow Target 10
Series or any other securities.
o Have any responsibility or liability for or make any decisions about the
timing, amount or pricing of the JNL/First Trust The Dow Target 10 Series.
o Have any responsibility or liability for the administration, management or
marketing of the JNL/First Trust The Dow Target 10 Series.
o Consider the needs of the JNL/First Trust The Dow Target 10 Series or the
owners of the JNL/First Trust The Dow Target 10 Series in determining,
composing or calculating the DJIA or have any obligation to do so.
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DOW JONES WILL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE JNL/FIRST TRUST THE
DOW TARGET 10 SERIES.
SPECIFICALLY,
o DOW JONES DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AND DOW JONES
DISCLAIMS ANY WARRANTY ABOUT:
o THE RESULTS TO BE OBTAINED BY THE JNL/FIRST TRUST THE DOW TARGET 10
SERIES, THE OWNERS OF THE JNL/FIRST TRUST THE DOW TARGET 10 SERIES OR
ANY OTHER PERSON IN CONNECTION WITH THE USE OF THE DJIA AND THE DATA
INCLUDED IN THE DJIA;
o THE ACCURACY OR COMPLETENESS OF THE DJIA AND ITS DATA;
o THE MERCHANTABILITY AND THE FITNESS FOR A PARTICULAR PURPOSE OR USE OF
THE DJIA AND ITS DATA;
o DOW JONES WILL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS
IN THE DJIA OR ITS DATA;
o UNDER NO CIRCUMSTANCES WILL DOW JONES BE LIABLE FOR ANY LOST PROFITS OR
INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF DOW
JONES KNOWS THAT THEY MIGHT OCCUR.
THE LICENSING AGREEMENT BETWEEN FIRST TRUST ADVISORS L.P. AND DOW JONES IS
SOLELY FOR THEIR BENEFIT AND NOT FOR THE BENEFIT OF THE OWNERS OF THE JNL/FIRST
TRUST THE DOW TARGET 10 SERIES OR ANY OTHER THIRD PARTIES.
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"JNL(R)", "Jackson National(R)" and "Jackson National Life(R)" are trademarks
of Jackson National Life Insurance Company.
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TABLE OF CONTENTS
About the JNL/First Trust The Dow(SM) Target 10 Series
Investment Objective
Principal Investment Strategies
Principal Risks of Investing in The Dow Target 10 Series
Additional Information About the Principal Investment Strategies,
Other Investments and Risks of The Dow Target 10 Series
Management of the Fund
Investment Adviser
Investment Sub-Adviser
Portfolio Management
Administrative Fee
Investment in Fund Interests
Redemption of Fund Interests
Tax Status
General
Internal Revenue Services Diversification Requirements
Hypothetical Performance Data for Target Strategy
Financial Highlights
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ABOUT THE JNL/FIRST TRUST THE DOW(SM) TARGET 10 SERIES
INVESTMENT OBJECTIVE
The investment objective of the JNL/First Trust The Dow(SM) Target 10 Series
(The Dow Target 10 Series) is a high total return through a combination of
capital appreciation and dividend income.
PRINCIPAL INVESTMENT STRATEGIES
The Dow Target 10 Series seeks to achieve its objective by investing
approximately equal amounts in the common stock of the ten companies included in
the Dow Jones Industrial Average(SM) (DJIA) which have the highest dividend
yields on or about the business day before each Stock Selection Date. The ten
companies will be selected annually, beginning July 1, 1999, and on each one
year anniversary thereof (Stock Selection Date). The sub-adviser generally uses
a buy and hold strategy, trading only on each Stock Selection Date and when cash
flow activity occurs in the Series.
PRINCIPAL RISKS OF INVESTING IN THE DOW TARGET 10 SERIES
An investment in The Dow Target 10 Series is not guaranteed. As with any mutual
fund, the value of The Dow Target 10 Series' shares will change and you could
lose money by investing in this Series. A variety of factors may influence its
investment performance, such as:
o Market risk. Because The Dow Target 10 Series invests in
U.S.-traded equity securities, it is subject to stock market risk.
Stock prices typically fluctuate more than the values of other
types of securities, typically in response to changes in a
particular company's financial condition and factors affecting the
market in general. For example, unfavorable or unanticipated poor
earnings performance of a company may result in a decline in its
stock's price, and a broad-based market drop may also cause a
stock's price to fall.
o Non-diversification. The Dow Target 10 Series is "non-diversified"
as such term is defined in the Investment Company Act of 1940, as
amended, which means that the Series may hold a smaller number of
issuers than if it were "diversified." With a smaller number of
different issuers, The Dow Target 10 Series is subject to more
risk than another fund holding a larger number of issuers, since
changes in the financial condition or market status of a single
issuer may cause greater fluctuation in The Dow Target 10 Series'
total return and share price.
o Limited management. The Dow Target 10 Series' strategy of
investing in ten companies according to criteria determined on a
Stock Selection Date prevents The Dow Target 10 Series from
responding to market fluctuations. As compared to other funds,
this could subject The Dow Target 10 Series to more risk if one of
the selected stocks declines in price or if certain sectors of the
market, or the United States economy, experience downturns. The
investment strategy may also prevent The Dow Target 10 Series from
taking advantage of opportunities available to other funds.
In addition, the performance of The Dow Target 10 Series depends on the
sub-adviser's ability to effectively implement the investment strategies of this
Series.
ADDITIONAL INFORMATION ABOUT THE PRINCIPAL INVESTMENT STRATEGIES, OTHER
INVESTMENTS AND RISKS OF THE DOW TARGET 10 SERIES
The Dow Target 10 Series invests in the common stock of ten companies included
in The DJIA. The ten common stocks will be chosen on or about the business day
before each Stock Selection Date as follows:
o the sub-adviser will determine the dividend yield on each common
stock in The DJIA on or about the business day before the Stock
Selection Date;
o the sub-adviser will allocate approximately equal amounts of The
Dow Target 10 Series to the ten companies in The DJIA that have
the highest dividend yield;
o the sub-adviser will determine the percentage relationship
between the number of shares of each of the ten common stocks
selected.
Between Stock Selection Dates, The Dow Target 10 Series will purchase and sell
common stocks approximately according to the percentage relationship among the
common stocks established on the prior Stock Selection Date.
The stocks in The Dow Target 10 Series are not expected to reflect the entire
DJIA nor track the movements of The DJIA.
It is generally not possible for the sub-adviser to purchase round lots (usually
100 shares) of stocks in amounts that will precisely duplicate the prescribed
mix of securities. Also, it usually will be impossible for The Dow Target 10
Series to be 100% invested in the prescribed mix of securities at any time. To
the extent that The Dow Target 10 Series is not fully invested, the interests of
the interest holders may be diluted and total return may not directly track the
investment results of the prescribed mix of securities. To minimize this effect,
the sub-adviser will generally try, as much as practicable, to maintain a
minimum cash position at all times. Normally, the only cash items held by The
Dow Target 10 Series will be amounts expected to be deducted as expenses and
amounts too small to purchase additional round lots of the securities.
The sub-adviser will attempt to replicate the percentage relationship of
securities when selling securities for The Dow Target 10 Series. The percentage
relationship among the number of securities in The Dow Target 10 Series should
therefore remain relatively stable. However, given the fact that the market
price of such securities will vary throughout the year, the value of the
securities of each of the companies as compared to the total assets of The Dow
Target 10 Series will fluctuate during the year, above and below the proportion
established on the annual Stock Selection Date. At the Stock Selection Date for
The Dow Target 10 Series, new securities will be selected and a new percentage
relationship will be established among the number of securities for the Series.
The sub-adviser may, but will not necessarily, utilize derivative instruments,
such as options, futures contracts, forward contracts, warrants, indexed
securities and repurchase agreements, for hedging and risk management.
Derivative instruments involve special risks. The value of derivatives may rise
or fall more rapidly than other investments, which may increase the volatility
of the Series depending on the nature and extent of the derivatives in the
Series' portfolio. Additionally, if the sub-adviser uses derivatives in
attempting to manage or "hedge" the overall risk of the Series' portfolio, the
strategy might not be successful, for example, due to changes in the value of
the derivatives that do not correlate with prices movements in the rest of the
portfolio.
The investment objectives and policies of The Dow Target 10 Series are not
fundamental and may be changed by the Board of Managers of the Fund, without
interest holder approval.
Certain provisions of the Investment Company Act of 1940 limit the ability of
the Series to invest more than 5% of the Series' total assets in the stock of
any company that derives more than 15% of its gross revenues from securities
related activities (Securities Related Companies). The Fund has applied to the
Securities and Exchange Commission (SEC) for an exemption from this limitation
so that The Dow Target 10 Series may invest up to 10.5% of the Series' total
assets in the stock of Securities Related Companies. Accordingly, until such
time as the Fund receives approval of its exemption request, or other applicable
relief, the investment strategy of The Dow Target 10 Series will be subject to
modification if the stock selection methodology for the Series results in the
selection of one or more Securities Related Companies. In such an instance, the
Series will only invest up to 5% of its total assets in each applicable
Securities Related Company and will invest its remaining assets in the other
selected companies in approximately equal amounts.
The SAI has more information about The Dow Target 10 Series' authorized
investments and strategies, as well as the risks and restrictions that may apply
to them.
DESCRIPTION OF INDEX. The stocks included in The Dow Jones Industrial
Average(SM) are chosen by the editors of The Wall Street Journal as
representative of the broad market and of American industry. The companies are
major factors in their industries and their stocks are widely held by
individuals and institutional investors.
The portfolio of The Dow Target 10 Series consists of the common stocks of
companies listed on the DJIA. Except as previously described, the publisher of
the DJIA has not granted the Fund or the Fund's investment adviser a license to
use its index. The Dow Target 10 Series is not designed or intended to result in
prices that parallel or correlate with the movements in the DJIA and it is
expected that its prices will not parallel or correlate with such movements. The
publisher of the DJIA has not participated in any way in the creation of the
Fund or the Series or in the selection of stocks in the Series.
YEAR 2000 AND EURO ISSUES. Apart from the particular risks described above, the
Fund could be adversely affected if the computer systems used by the Fund's
investment adviser, sub-adviser or its other service providers are unable to
process and calculate date-related information because they are not programmed
to distinguish between the year 2000 and the year 1900. This is commonly known
as the "Year 2000 Problem."
The Fund relies entirely on outside service providers for the processing of its
business. To the extent that a service provider utilizes computers to process
the Fund's business, the smooth operation of the Fund depends on the ability of
those computers to continue to function properly.
The Fund has contacted each of its service providers to ascertain the service
provider's state of readiness for the year 2000. Each of the service providers
has indicated to the Fund that, at this time, it is either Year 2000 compliant
or that it has identified its systems which are not currently Year 2000
compliant and that it intends to make such systems compliant before December 31,
1999. The Fund intends to continue to monitor the Year 2000 status of its
service providers.
Based on the information currently available, the Fund does not anticipate any
material impact on the delivery of services to and by the Fund. However, since
the Fund must rely on the information provided to it by its service providers,
there can be no assurance that the steps taken by the service providers in
preparation for the Year 2000 will be sufficient to avoid any adverse impact on
the Fund.
Similarly, the companies and other issuers in which The Dow Target 10 Series
invests could be adversely affected by year 2000 computer-related problems, and
there can be no assurance that the steps taken, if any, by these issuers will be
sufficient to avoid any adverse impact on the Series.
LEGISLATION. At any time after the date of the Prospectus, legislation may be
enacted that could negatively affect the common stock in The Dow Target 10
Series or the issuers of such common stock. Further, changing approaches to
regulation may have a negative impact on certain companies represented in The
Dow Target 10 Series. There can be no assurance that future legislation,
regulation or deregulation will not have a material adverse effect on the Series
or will not impair the ability of the issuers of the common stock held in the
Series to achieve their business goals.
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Under Delaware law and the Fund's Certificate of Formation and Operating
Agreement, the management of the business and affairs of the Fund is the
responsibility of the Board of Managers of the Fund.
Jackson National Financial Services, LLC (JNFS), 5901 Executive Drive, Lansing,
Michigan 48911, is the investment adviser to the Fund and 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 Corporation plc, a life insurance company in the
United Kingdom. JNFS is a successor to Jackson National Financial Services, Inc.
which served as an investment adviser to the JNL Series Trust, a registered
investment company, from its inception until July 1, 1998, when it transferred
its duties as investment adviser and its professional staff for investment
advisory services to JNFS.
JNFS has selected First Trust Advisors L.P. as sub-adviser to manage the
investment and reinvestment of the assets of the Series of the Fund. JNFS
monitors the compliance of the sub-adviser with the investment objectives and
related policies of The Dow Target 10 Series and reviews the performance of the
sub-adviser and reports periodically on such performance to the Board of
Managers of the Fund.
As compensation for its services, JNFS receives a fee from the Fund. The fee is
stated as an annual percentage of the net assets of the Series. The fee, which
is accrued daily and payable monthly, is calculated on the basis of the average
net assets of The Dow Target 10 Series. Once the average net assets of the
Series exceed specified amounts, the fee is reduced with respect to such excess.
The Dow Target 10 Series is obligated to pay JNFSLLC the following fee:
ASSETS FEES
$0 to $500 million................................................ .75%
$500 million to $1 billion........................................ .70%
Over $1 billion................................................... .65%
INVESTMENT SUB-ADVISER
First Trust Advisors L.P. (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 The Dow Target 10 Series. 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 Robert Donald Van Kampen.
As of the date of this Prospectus, The Dow Target 10 Series had not commenced
investment operations. However, First Trust is also the portfolio supervisor of
certain unit investment trusts sponsored by Nike Securities L.P. (Nike
Securities) which are substantially similar to the Series in that they have the
same investment objectives as the Series but have a life of approximately one
year. Nike Securities specializes in the underwriting, trading and distribution
of unit investment trusts and other securities. Nike Securities, an Illinois
limited partnership formed in 1991, acts as sponsor for successive series of The
First Trust Combined Series, The First Trust Special Situations Trust, the First
Trust Insured Corporate Trust, The First Trust of Insured Municipal Bonds and
the First Trust GNMA.
Under the terms of the Sub-Advisory Agreement between First Trust and JNFS,
First Trust manages the investment and reinvestment of the assets of The Dow
Target 10 Series, subject to the oversight and supervision of JNFS and the Board
of Managers of the Fund. First Trust formulates a continuous investment program
for the Series consistent with its investment objectives and policies outlined
in this Prospectus. First Trust implements such programs by purchases and sales
of securities and regularly reports to JNFS and the Board of Managers of the
Fund with respect to the implementation of such programs.
As compensation for its services, First Trust receives a fee from JNFS, stated
as an annual percentage of the net assets of The Dow Target 10 Series. The SAI
contains a schedule of the management fees JNFS currently is obligated to pay
First Trust out of the advisory fee it receives from The Dow Target 10 Series.
PORTFOLIO MANAGEMENT
There is no one individual primarily responsible for portfolio management
decisions for the Series. Investments are made under the direction of a
committee.
ADMINISTRATIVE FEE
In addition to the investment advisory fee, The Dow Target 10 Series pays to
JNFS an Administrative Fee of .10% 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
addition, JNFS, at its own expense, arranges for legal, audit, fund accounting,
custody, printing and mailing, and all other services necessary for the
operation of the Series. The Series is responsible for trading expenses
including brokerage commissions, interest and taxes, and other non-operating
expenses.
INVESTMENT IN FUND INTERESTS
Interests in the Fund are currently sold to Jackson National Separate Account
III, a separate account of JNL, 5901 Executive Drive, Lansing, Michigan 48911,
to fund the benefits under certain variable annuity contracts (Contracts). The
Separate Account purchases interests in the Series at net asset value using
premiums received on Contracts issued by JNL. Purchases are effected at net
asset value next determined after the purchase order, in proper form, is
received by the Fund's transfer agent. There is no sales charge.
Interests in the Fund are not available to the general public directly. The Dow
Target 10 Series is managed by a sub-adviser who manages publicly available unit
investment trusts having similar names and investment objectives. While the
Series may be similar to, and may in fact be modeled after publicly available
unit investment trusts, Contract purchasers should understand that the Series is
not otherwise directly related to any publicly available unit investment trust.
Consequently, the investment performance of publicly available unit investment
trusts and the Series may differ substantially.
The net asset value per interest of The Dow Target 10 Series is determined at
the close of regular trading on the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) each day that the New York Stock Exchange is open. The net asset
value per interest is calculated by adding the value of all securities and other
assets of the Series, deducting its liabilities, and dividing by the number of
interests outstanding. Generally, the value of exchange-listed or -traded
securities is based on their respective market prices, bonds are valued based on
prices provided by an independent pricing service and short-term debt securities
are valued at amortized cost, which approximates market value.
All investments in the Fund are credited to the interest holder's account in the
form of full and fractional shares of the Series (rounded to the nearest 1/1000
of a share). The Fund does not issue interest certificates.
REDEMPTION OF FUND INTERESTS
Jackson National Separate Account III redeems shares to make benefit or
withdrawal payments under the terms of its Contracts. Redemptions are processed
on any day on which the Fund is open for business and are effected at net asset
value next determined after the redemption order, in proper form, is received.
The Fund may suspend the right of redemption only under the following unusual
circumstances:
o when the New York Stock Exchange is closed (other than weekends
and holidays) or trading is restricted;
o when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable; or
o during any period when the SEC has by order permitted a
suspension of redemption for the protection of shareholders.
TAX STATUS
GENERAL
The Fund is a limited liability company with all of its interests owned by a
single entity, Jackson National Separate Account III. Accordingly, the Fund is
taxed as part of the operations of JNL and is not taxed separately. Under
current tax law, interest, dividend income and capital gains of the Fund are not
currently taxable when left to accumulate within a variable annuity contract.
For a discussion of the tax status of the variable annuity policy, please refer
to the prospectus for Jackson National Separate Account III.
INTERNAL REVENUE SERVICE DIVERSIFICATION REQUIREMENTS
The Series intend to comply with the diversification requirements currently
imposed by the Internal Revenue Service on separate accounts of insurance
companies as a condition of maintaining the tax deferred status of the variable
annuity policies issued by Jackson National Separate Account III. The
Sub-Advisory Agreement requires the Series to be operated in compliance with
these diversification requirements. First Trust, as sub-adviser, reserves the
right to depart from the investment strategy of The Dow Target 10 Series in
order to meet these diversification requirements. See the SAI for more specific
information.
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HYPOTHETICAL PERFORMANCE DATA FOR THE TARGET STRATEGY
As of the date of this Prospectus, The Dow Target 10 Series had not commenced
investment operations. However, certain aspects of the investment strategy for
The Dow Target 10 Series can be demonstrated using historical data. The
following table illustrates the hypothetical performance of the investment
strategy used by The Dow Target 10 Series and the actual performance of the
DJIA. The table also shows how performance varies from year to year.
The information for the Target Strategy assumes that the Strategy was fully
invested as of the beginning of each year and that each Stock Selection Date was
the first of the year. In addition, the performance information does not take
into consideration any sales charges, commissions, insurance fees or charges
imposed on the sale of the variable annuity policies, expenses or taxes. Any of
such charges will lower the returns shown.
The returns shown below for the Target Strategy does not represent the results
of actual trading using client assets but were achieved by means of the
retroactive application of a strategy that was designed with the benefit of
hindsight. These returns should not be considered indicative of the skill of the
sub-adviser. The returns may not reflect the impact that any material market or
economic factors might have had if the Strategy had been used during the periods
shown to actually manage client assets. During a portion of the period shown in
the table below, the sub-adviser acted as the portfolio supervisor of certain
unit investment trusts which employed strategies similar to the hypothetical
strategy shown below.
The returns shown below for the Target Strategy are not a guarantee of future
performance and should not be used to predict the expected returns on the Target
Strategy. In fact, the hypothetical Target Strategy underperformed its
respective index in certain years.
HYPOTHETICAL COMPARISON OF TOTAL RETURN
Year Target 10 DJIA
Strategy
1979 13.01% 10.60%
1980 27.90% 21.90%
1981 7.46% -3.61%
1982 27.12% 26.85%
1983 39.07% 25.82%
1984 6.22% 1.29%
1985 29.54% 33.28%
1986 35.63% 27.00%
1987 5.59% 5.66%
1988 24.75% 16.03%
1989 26.97% 32.09%
1990 -7.82% -0.73%
1991 34.20% 24.19%
1992 7.69% 7.39%
1993 27.08% 16.87%
1994 4.21% 5.03%
1995 36.85% 36.67%
1996 28.35% 28.71%
1997 21.68% 24.82%
1998 10.59% 18.03%
(1) The Target 10 Strategy for any given period was selected by ranking the
dividend yields for each of the stocks as of the close of the prior period and
dividing by the stock's market value on the last trading day on the exchange
where that stock principally trades in the given period.
(2) The total return shown does not take into consideration any sales charges,
commissions, expenses or taxes. Total return assumes that all dividends are
reinvested semi-annually, and all returns are stated in terms of the United
States dollar. Based on the year-by-year returns contained in the table, over
the 20 full years listed above, the Target 10 Strategy achieved an average
annual total return of 19.57%. In addition, over this period, the Strategy
achieved a greater average annual total return than that of the DJIA, which was
17.28%. Although the Strategy seeks to achieve a better performance than the
DJIA as a whole, there can be no assurance that the Strategy will achieve a
better performance.
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FINANCIAL HIGHLIGHTS
The financial highlights information for the Fund is not included in the
prospectus because the Fund had not commenced operations as of the effective
date of this prospectus.
<PAGE>
PROSPECTUS
August 16, 1999
JNL(R) VARIABLE FUND III LLC
You may find more information about the Fund in the Fund's SAI dated August 16,
1999, which contains further information about the Fund and the Series,
particularly the Series' investment practices and restrictions. The current SAI
is on file with the Securities and Exchange Commission (SEC) and is incorporated
into the Prospectus by reference (which means the SAI is legally part of the
Prospectus).
You may obtain a copy of the current SAI or the most recent Annual and
Semi-Annual Reports without charge, or make other inquiries, by calling (800)
766-4683, or writing the JNL Variable Fund III LLC Service Center, P.O. Box
378002, Denver, Colorado 80237-8002.
You may also obtain information about the Fund (including its current SAI and
most recent Annual and Semi-Annual Reports) from the SEC's Internet site
(http://www.sec.gov) and from the SEC's Public Reference Room in Washington,
D.C. You can find out about the operation of the Public Reference Room and
copying charges by calling (800) SEC-0330.
File No.: 811-09369
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19
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 16, 1999
JNL VARIABLE FUND III LLC
This Statement of Additional Information (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 III LLC Prospectus,
dated August 16, 1999. The Prospectus may be obtained 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............................................. 7
Investment Restrictions.................................................... 9
Management of the Fund..................................................... 10
Performance................................................................ 13
Investment Advisory and Other Services..................................... 15
Purchases, Redemptions and Pricing of Interests............................ 19
Additional Information..................................................... 20
Tax Status................................................................. 21
Financial Statements ...................................................... 22
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GENERAL INFORMATION AND HISTORY
JNL Variable Fund III LLC (Fund) is a non-diversified, open-end management
company organized as a Delaware limited liability company on January 26, 1999.
The Fund offers interests in the JNL/First Trust The Dow(SM) Target 10 Series
(Series).
COMMON TYPES OF INVESTMENTS AND MANAGEMENT PRACTICES
This section describes some of the types of securities the Series may hold in
its portfolio and the various kinds of investment practices that may be used in
day-to-day portfolio management. The 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. The 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. The Series may borrow money from banks for temporary or
emergency purposes in amounts up to 25% of its total assets. To secure
borrowings, the Series may mortgage or pledge securities in amounts up to 15% of
its net assets.
CASH POSITION. The 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, the 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. The 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. The 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, the 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.
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. The 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. The Series may purchase or sell
call and put options on securities and financial indices, and may invest in
futures contracts on financial indices, including interest rates or an index of
U.S. 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 the 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 the Series' income.
The Series' use of commodity futures and commodity options trading should not be
viewed as providing a vehicle for shareholder participation in a commodity pool.
Rather, in accordance with regulations adopted by the Commodity Futures Trading
Commission (CFTC), the 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. The 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 commodity, a particular currency, or a domestic 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. The 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. The Fund 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, the Series may engage in short-term
transactions if such transactions further its investment objective. The 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. The Series may invest
in repurchase or reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by the 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, the 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 the 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. The Series may also lend common stock to broker-dealers and
financial institutions to realize additional income. As a fundamental policy,
the 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) the Series must receive any
dividends or interest paid by the issuer on such securities; (c) the 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) the Series must receive either
interest from the investment of collateral or a fixed fee from the borrower.
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, the 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. The 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. The Series
may also incur expenses in enforcing its rights. If the 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 is seeking exemptive relief from the
Securities and Exchange Commission to allow the 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). Until such relief is received,
despite any investment strategy, the Series will not be able to invest more than
5% of their assets in such issuers.
SHORT SALES. The 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
the 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.
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.
WARRANTS. The 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.
WRITING COVERED OPTIONS ON SECURITIES. The 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 the Series' investment objective. Call options
written by the 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.
The 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. The Series may also write combinations of covered
puts and covered calls on the same underlying security.
The 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, the 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, the 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.
The 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
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. The use of futures, options,
forward contracts, and swaps (derivative instruments) exposes the Series to
additional investment risks and transaction costs. If the sub-adviser seeks to
protect the 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, the 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 III (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 the Series 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 the 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 the 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 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 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 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 the Series' objective will be achieved or that the
Series will provide for capital appreciation in excess of the Series' expenses.
Because of the contrarian nature of the Series and the attributes of the common
stock which caused inclusion in the portfolio, the Series may not be appropriate
for investors seeking either preservation of capital or high current income. In
addition, the strategy for the Series has underperformed its index in certain
years.
LITIGATION. Certain of the issuers of common stock 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.
To the best of the Fund's knowledge, other than tobacco litigation, there is no
litigation pending as of the date of this Statement of Additional Information
with respect to any common stock which might reasonably be expected to have a
material adverse effect on the Series. At any time after the date of this
Statement of Additional Information, litigation may be instituted on a variety
of grounds with respect to the common stock held in the Series portfolio. The
Fund is unable to predict whether any such litigation will be instituted, or if
instituted, whether such litigation might have a material adverse effect on the
Fund.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES. The following fundamental policies may not be changed
without the affirmative vote of the majority of the outstanding voting
securities of the Fund. 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.
(1) The Series may not issue senior securities.
(2) The 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 the Series' assets. In
the case of any borrowing, the Series may pledge, mortgage or
hypothecate up to 15% of its assets.
(3) The 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) The Series will not purchase or sell real estate or interests
therein.
(5) The 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) The Series may invest in repurchase agreements and warrants
and engage in futures and options transactions and securities
lending.
The Series is not 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 the Series in any particular industry
or group 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 the 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 40), 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 Financial Services, LLC, President (3/98
to present) Jackson National Financial Services, LLC, 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) National Planning Corporation, Director (6/97 to
present) Jackson National Financial Services, Inc., CEO (7/97 to 5/98) Jackson
National Financial Services, Inc., President (7/97 to 5/98) Countrywide Credit,
Executive Vice President (3/92 to 6/94)
JOSEPH FRAUENHEIM (Age 64), 1405 Cambridge, Lansing, MI 48911
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
Consultant (1991 to present)
ROBERT A. FRITTS* (Age 50) 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
THOMAS J. MEYER (Age 52) 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)
RICHARD MCLELLAN (Age 57), 1191 Carriageway North, East Lansing, MI 48823
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
Dykema Gossett PLLC, Attorney
PETER MCPHERSON (Age 58), 1 Abbott Road, East Lansing, MI 48824
Member of the Board of Managers of the Fund and each of the other funds in the
Fund Complex
Michigan State University, President (10/93 to present)
MARK D. NERUD (Age 33) 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 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, Assistant Vice President - Mutual Fund
Operations (5/97 to present)
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)
AMY D. EISENBEIS (Age 34) 5901 Executive Drive, Lansing, Michigan 48911
Vice President and Assistant Secretary of the Fund and each of the other funds
in the Fund Complex
Jackson National Financial Services, LLC, Vice President (3/98 to present)
Jackson National Financial Services, LLC, Secretary (3/98 to present)
National Planning Corporation, Vice President (1/98 to 7/98)
National Planning Corporation, Secretary (1/98 to 7/98)
National Planning Corporation, Chief Legal Officer (1/98 to 7/98)
Jackson National Life Insurance Company, Assistant Vice President
(4/99 to present)
Jackson National Life Insurance Company, Associate General Counsel
(7/95 to present)
Waddell & Reed, Inc., Staff Attorney (1/94 to 7/95)
*Managers who are interested persons as defined in the 1940 Act.
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 $4,000 for each meeting of a fund in the Fund Complex that they
attend. It is estimated that the disinterested Managers will receive the
following compensation for services as a Manager during the fiscal year ended
December 31, 1999:
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Compensation from Benefits Accrued As Part of Total Compensation from
Trustee Fund* Trust Expenses Fund and Fund Complex*
------- ---------------------------- --------------------------- -----------------------
<S> <C> <C> <C>
Joseph Frauenheim $2,666.66 0 $16,000
Richard McLellan 2,666.66 0 16,000
Peter McPherson 2,666.66 0 16,000
</TABLE>
* The Fund does not directly compensate the disinterested Managers. The
disinterested Managers are compensated by JNFS pursuant to the Administration
Agreement between the Fund and JNFS. (See "Administrative Fee").
As of July 22, 1999, the officers and managers of the Fund, as a group, owned
less than 1% of the then outstanding shares of the Fund. To the extent required
by applicable law, JNL will solicit voting instructions from owners of variable
insurance or variable annuity contracts. All shares of the Series will be voted
by JNL in accordance with voting instructions received from such variable
contract owners. JNL will vote all of the shares which it is entitled to vote in
the same proportion as the voting instructions given by variable contract
owners, on the issues presented, including shares which are attributable to
JNL's interest in the Fund.
PERFORMANCE
The Series' historical performance may be shown in the form of total return and
yield. These performance measures are described below. Performance advertised
for the 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 the 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 the Series. Yield is a measure of the net investment income per
share earned over a specific one month or 30-day period expressed as a
percentage of the net asset value.
The 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 the 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 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 the Series include
general market conditions, operating expenses and investment management.
The yield for the Series is computed in accordance with a standardized method
prescribed by the rules of the SEC. The yield is calculated by assuming that the
income generated by the investment during that 30-day period is generated each
30-day period over a 12-month period and is shown as a percentage of the
investment. Under this method, yield is computed by dividing the net investment
income per share earned during the specified one month or 30-day period by the
offering price per share on the last day of the period.
In computing the yield, the Series follows certain standardized accounting
practices specified by SEC rules. These practices are not necessarily consistent
with those that the Series use to prepare annual and interim financial
statements in accordance with generally accepted accounting principles.
The 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. Shares of the
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. 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 and permits any of its
officers or employees to serve without compensation as Managers or officers of
the Fund if elected to such positions. JNFS is a wholly owned subsidiary of JNL,
which is in turn wholly owned by Prudential Corporation plc, a life insurance
company in the United Kingdom.
JNFS acts as investment adviser to the Fund pursuant to an Investment Advisory
and Management Agreement. The Investment Advisory and Management Agreement
continues in effect for the 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 the 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 the 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. The Series
is obligated to pay JNFS the following fees:
ASSETS FEES
$0 to $500 million .75%
$500 million to $1 billion .70%
Over $1 billion .65%
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 the 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 the Series. 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 Robert
Donald Van Kampen. Pursuant to a Sub-Advisory Agreement with JNFS, First Trust
is responsible for selecting the investments of the Series consistent with the
investment objectives and policies of the 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 the Series with
discretionary investment services. Specifically, First Trust is responsible for
supervising and directing the investments of the Series in accordance with the
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 the Series.
As compensation for its services, First Trust receives a fee, as disclosed in
the Prospectus, 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 the 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 the 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 the 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 the
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 the Series the following fees:
ASSETS FEES
$0 to $500 million .35%
$500 million to $1 billion .30%
Over $1 billion .25%
LICENSE AGREEMENTS. JNFS, JNL and the Fund have entered into a Sub-License
Agreement with First Trust under the terms of which the Fund and JNL are
permitted to use and refer to certain copyright, trademark and proprietary
rights and trade secrets of Dow Jones & Company.
ADMINISTRATIVE FEE. The Series pays to JNFS an Administrative Fee of .10% 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 addition, JNFS, at its own expense, will arrange for legal,
audit, fund accounting, custody, printing and mailing, and all other services
necessary for the operation of the Series. The 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 the Fund. In general,
the custodian is responsible for holding the Fund's 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 Fund.
JNFS is the transfer agent and dividend-paying agent for the Fund.
INDEPENDENT ACCOUNTANTS. The Series' independent accountants,
PricewaterhouseCoopers LLP, 200 East Randolph Drive, 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 the 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 the Series may be effected on foreign securities exchanges. In
transactions for securities not actively traded on a foreign securities
exchange, the 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.
The 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. The
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 the 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 the 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 the 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.
CODE OF ETHICS. To mitigate the possibility that the 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.
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 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 the 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. The 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.
The Fund may suspend the right of redemption for the 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 SHARES. The Fund may issue an unlimited number of full and
fractional interests of the 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 the Series represents an equal
proportionate interest in the 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 the Series,
interest holders are entitled to share pro rata in the net assets of the Series
available for distribution to interest holders. Each issued and outstanding
interest in the Series is entitled to participate equally in dividends and
distributions declared by the Series, and in the net assets of the Series
remaining upon liquidations or dissolution after outstanding liabilities are
satisfied. The interests of the Series, when issued, are fully paid and
nonassessable. They have no preemptive, conversion, cumulative dividend or
similar rights. They are freely transferable. Interests in the 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 Series affected by the proposal. When a majority
is required, 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.
SHAREHOLDER 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 Separate Account, the
Fund is disregarded as an entity for purposes of federal income taxation.
Jackson National Life, through 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.
The 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 the Series.
FINANCIAL STATEMENTS
No financial statements for the Fund are included in the prospectus or in this
Statement of Additional Information because the Fund had not commenced
operations as of the effective date of this prospectus and Statement of
Additional Information.
