May 17, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Post-Effective Amendment No. 40
to Registration Statement of Maxim Series Fund, Inc.
File No. 2-75503
Ladies and Gentlemen:
On behalf of Maxim Series Fund, Inc. (the "Fund"), this EDGAR
filing is made pursuant to Rule 485(a) under the Securities Act of
1933. The purpose of this filing is to add a new portfolio to the
Fund. The portfolio is intended to be sold only to tax-qualified
separate accounts of Great-West Life & Annuity Insurance Company
and New England Mutual Life Insurance Company.
If you have any comments or questions regarding the foregoing,
please call Thomas C. Mira of Jorden Burt & Berenson at (202) 965-
8158.
Sincerely,
/s/ Beverly A. Byrne
Beverly A. Byrne
Assistant Secretary
Maxim Series Fund, Inc. May 17, 1995
Registration No. 2-75503
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 40 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 40 (X)
MAXIM SERIES FUND, INC.,
(Exact Name of Registrant as Specified in Charter)
8515 E. Orchard Road
Englewood, Colorado 80111
Registrant's Telephone Number, including Area Code: (303) 689-
3000
W. T. McCallum
President and Chief Executive Officer
Great-West Life & Annuity Insurance Company
8515 E. Orchard Road
Englewood, Colorado 80111
(Name and Address of Agent for Service)
Copies of Communications to:
James F. Jorden, Esquire
Jorden Burt & Berenson
1025 Thomas Jefferson St. N. W.
Suite 400 East
Washington, D. C. 20007-0805
It is proposed that this filing will become effective (check
appropriate box)
filing pursuant to paragraph (b) of Rule 485
on
pursuant to paragraph (b) of Rule 485
60 days after filing
pursuant to paragraph (a)(1) of Rule 485
on
pursuant to paragraph (a)(1) of Rule 485
X 75 days after filing
pursuant to paragraph (a)(2) of Rule 485
on pursuant to
paragraph (a)(2) of Rule 485.
If appropriate, check the following:
this post-effective
amendment designates a new effective date for a previously filedpost-effective
amendment
The Registrant has previously filed a declaration of indefiniteregistration of
its shares pursuant to Rule 24f-2 under the Investment Company Actof 1940. The
Rule 24f-2 Notice for Registrant's fiscal year ended December 31,1994 was filed
by February 28, 1995.
EXPLANATORY NOTE
The purpose of this Post-Effective Amendment is to register an
additional portfolio of the Maxim Series Fund. This Post-Effective
Amendment shall not supersede or effect this Registration Statement
as it applies to the Prospectuses or Statements of Additional
Information for the Money Market, Bond, Stock Index, U.S.
Government Securities, Zero-Coupon Treasury, Total Return, Small-
Cap Index, International Equity, MidCap, U.S. Government Mortgage
Securities, Investment Grade Corporate Bond, Value Index, Growth
Index, Small-Cap Value, Corporate Bond, Foreign Equity, Small-Cap
Aggressive Growth, Maxim INVESCO ADR, Maxim INVESCO Small-Cap
Growth, Maxim T. Rowe Price Equity/Income and Maxim Vista Growth &
Income Portfolios. This Post-Effective Amendment also shall not
supersede or effect this Registration Statement as it applies to
the Prospectuses or Statements of Additional Information for the
Mid-Cap Aggressive Growth, Large-Cap Equity, Growth and Income,
Mid-Cap Aggressive Equity, Global Equity, Retirement and Global
Bond Portfolios as filed in Post-Effective Amendment Nos. 36, 37
and 38.
mxm\not.40 REGISTRATION STATEMENT ON FORM N-1A
CROSS-REFERENCE SHEET
PART A
Form N-1A Item Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Not Applicable
4. General Description of Registrant
Introduction; Fund
Portfolios; The Fund and
Its Shares
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Securities The Fund and Its Shares
7. Purchase of Securities Being Offered
Introduction; Purchase
and Redemption of Shares;
Valuation of Shares
8. Redemption or Repurchase
Purchase and Redemption
of Shares
9. Pending Legal Proceedings Not Applicable
PART B
Statement of Additional
Form N-1A Item Information Caption
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies The Fund Portfolios
14. Management of the Registrant Management of the Fund
15. Control Persons and Principal Holders of Securities
Purchase and Redemption
of Shares
16. Investment Advisory and Other ServicesManagement of Fund
17. Brokerage Allocation
Portfolio Transactions
and Brokerage
18. Capital Stock and Other Securities Not Applicable
19. Purchase, Redemption and Price of Securities Being Offered
Purchase and Redemption
of Shares
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Yield Quotations of Performance DataCalculation
of Yields
and Total Return
23. Financial Statements Financial Statements
Form N-1A Item Part C Caption
24. Financial Statements and Exhibits Financial Statements and
Exhibits
25. Persons Controlled by or Under Common Control
Persons Controlled by or
Under Common Control
26. Number of Holders of Securities Number of Holders of
Securities
27. Indemnification Indemnification
28. Business and Other Connections of Investment Adviser
Business and Other
Connections of Investment
Adviser
29. Principal Underwriters Principal Underwriters
30. Location of Accounts and Records Location of Accounts and
Records
31. Management Services Management Services
32. Undertakings Undertakings
33. Signatures Signatures
MAXIM SERIES FUND, INC.
8515 E. Orchard Rd., Englewood, Colorado 80111
Phone No. (303) 689-3000
Maxim Series Fund, Inc. (the "Fund"), an open-end
management investment company, includes the following non-
diversified investment portfolio: the Short Term Maturity Bond
Portfolio.
The investment objective of the Short-Term Maturity Bond
Portfolio is preservation of capital, liquidity, and maximum total
return through investment in an actively managed portfolio of debt
securities.
This Prospectus sets forth concisely the information about the
Fund that prospective investors ought to know before investing.
Additional information about the Fund has been filed with the
Securities and Exchange Commission and is available upon request,
without charge by calling or writing the Fund. The "Statement of
Additional Information" bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
THE GREAT-WEST LIFE ASSURANCE COMPANY
Investment Adviser
The date of this Prospectus is July 31, 1995 .
Maxim Series Fund, Inc. (the "Fund") is an open-end management
investment company (a mutual fund) that sells its shares to the
Maxim Series Account, FutureFunds Series Account and Pinnacle
Series Account of Great-West Life & Annuity Insurance Company
("GWL&A") and TNE Series(k) Account and TNE Retirement Plan Series
Account (collectively, the "Series Accounts") of The New England
Mutual Life Insurance Company ("TNE"). The shares in the Series
Accounts are currently used to fund benefits under certain
individual and group variable annuity contracts and variable life
insurance policies (the "Variable Contracts") issued by GWL&A and
TNE. For information concerning your rights under a variable
contract, see the applicable Series Account prospectus. Shares of
the Fund are, and may in the future be, used to fund benefits under
other contracts issued by GWL&A, its affiliates, TNE or other
insurance companies. The Great-West Life Assurance Company
("Great-West") is the Investment Adviser for the Fund.
THE FUND PORTFOLIOS
Each Portfolio
of the Fund has its own investment
objective and investment strategy. The investment objective
may not be changed without a vote of a majority of the shares
of the Portfolio. A more detailed description of the Fund's
investment policies and a glossary further describing certain
investment securities mentioned in the discussions that follow are
contained in the Statement of Additional Information. The
Short-Term Maturity bond Portfolio is the only Portfolio offered in
this prospectus and is described below.
Short-Term Maturity Bond Portfolio
The investment objective of the Short-Term Maturity Bond
Portfolio (the "Portfolio") is preservation of capital, liquidity,
and maximum total return through investment in an actively managed
portfolio of debt securities. It is classified as a non-
diversified portfolio.
The Portfolio will pursue its objectives primarily through
investment in a portfolio of investment grade bonds and other debt
securities of similar quality. The weighted average quality of the
Portfolio will be A rated or higher. The Portfolio will consist
only of individual securities with maturities of no longer than
three years.
Other debt securities in which the Portfolio may invest
include securities of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities, corporate debt obligations, asset-
backed securities (including mortgage-related securities),
commercial paper, certificates of deposits, bankers' acceptances
and other short-term instruments relating to such securities.
Securities may be issued by both domestic and foreign entities but
may be denominated in U.S. dollars only.U.S. Treasury or by an agency or
instrumentality of the U.S.
Government. Not all U.S. Government securities are backed by the
full faith and credit of the United States. Some are supported
only by the credit of the agency that issued them.
The Portfolio may invest in repurchase agreements relating to
the securities in which it may invest. In a repurchase agreement,
the Portfolio buys a security at one price and simultaneously
agrees to sell it back at a higher price. Delays or losses could
result if the party to the agreement defaults or becomes bankrupt.
The Portfolio may purchase securities on a when-issued or
forward delivery basis. When-issued and forward delivery
transactions are trading practices wherein payment for and delivery
of the securities take place at a future date. The market value of
a security could change during this period, which could effect the
market value of the Portfolio's assets. See the Statement of
Additional Information for further information about when-issued
and forward delivery securities.
In order to generate additional income, the Portfolio may lend
up to one-third of the portfolio securities to financial borrowers
of securities. This practice could cause a Portfolio to experience
a loss or a delay in recovering its securities. The Statement of
Additional Information contains more information regarding the
lending of securities.
The Portfolio can use various techniques to increase or
decrease its exposure to changing security prices, interest rates,
commodity prices, or other factors that effect securities values.
These techniques include buying and selling options and certain
futures contracts, entering into swap agreements and purchasing
index securities. Further information regarding such techniques is
contained in the Statement of Additional Information. These
techniques will be used for hedging purposes only.
Generally, the Portfolio intends to invest in investment grade
securities. An investment grade security is one rated in one of
the top four categories by one or more nationally recognized
security rating organizations or which is deemed by the Investment
Adviser to be of comparable creditworthiness. However, if a
security's rating were to drop below investment grade (commonly
referred to as "junk bonds"), the Portfolio may determine to retain
the security until such time as it is deemed appropriate to sell
the security, which could mean that the security may be held to
maturity. Lower rated fixed-income securities generally provide
higher yields, but are subject to greater credit and market risks
than higher quality fixed-income securities and are considered
predominately speculative with respect to the ability of the issuer
to meet principal and interest payments. In addition, the
secondary market may be less liquid for lower-rated fixed-income
securities which may make the valuation and sale of the securities
more difficult. The Statement of Additional Information contains
The Portfolio may invest in money market securities as part of
the ongoing investment strategy or as a cash reserve.
The Portfolio is classified as non-diversified. This means
that the proportion of the Portfolio's assets that may be invested
in the securities of a single issuer is not limited by the
Investment Company Act of 1940. Because a relatively high
percentage of the Portfolio's assets may be invested in the
securities of a limited number of issuers, primarily within the
same industry or economic sector, the Portfolio's securities may be
more susceptible to any single economic, political or regulatory
occurrence than that experience by a diversified portfolio.
Illiquid Securities
The Portfolio may invest up to 15% of its total assets in
"illiquid securities" (taken as of the time of acquisition of an
illiquid security).
Illiquid securities are securities that
may not be sold in the ordinary course of business within seven
days at approximately the price used in determining the net asset
value of the Portfolio. This restriction applies to securities for
which a ready market does not exist, such as restricted securities,
but does not necessarily encompass all restricted securities.
Institutional markets for restricted securities have developed as
a result of the promulgation of Rule 144A under the Securities Act
of 1933 which provides a "safe harbor" from 1933 Act registration
requirements for qualifying sales to institutional investors. When
Rule 144A securities present an attractive investment opportunity
and otherwise meet selection criteria, the Portfolio may make such
investments. Whether or not such securities are "illiquid"
depends on the market that exists for the particular security. [/R]
The staff of the Securities and Exchange Commission has taken
the position that the liquidity of Rule 144A securities is a
question of fact for the board of directors to determine, such
determination to be based on a consideration of the readily
available trading markets and the review of any contractual
restrictions. The staff also acknowledges that while the board
retains ultimate responsibility, it may delegate this function to
an investment adviser. The Board of Directors of the Fund has
delegated this responsibility to the Investment Adviser.
It is not possible to predict with assurance exactly howthe
market for Rule 144A securities or any other security will develop.
A security which when purchased enjoyed a fair degree of
marketability may subsequently become illiquid and, accordingly, a
security which was deemed to be liquid at the time of acquisition
may subsequently become illiquid. In such event, appropriate
remedies will be considered to minimize the effect on the
Investments in foreign securities present risks not typically
associated with investments in comparable securities of U.S.
issuers.
There may be less information publicly available about a
foreign corporate or government issuer than about a U.S. issuer,
and foreign corporate issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The securities
of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage
commissions and securities custody costs are often higher than
those in the United States, and judgments against foreign entities
may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental
expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could affect
the value of investments in those countries. The receipt of
interest on foreign government securities may depend on the
availability of tax or other revenues to satisfy the issuer's
obligations.
The Portfolio's investments in foreign securities may
include investments in countries whose economies or securities
markets are not yet highly developed. Special considerations
associated with these investments (in addition to the
considerations regarding foreign investments generally) may
include, among other things, greater political uncertainties, an
economy's dependence on revenues from particular commodities or on
international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such
securities, delays and disruptions in securities settlement
procedures.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the
Fund rests with the Fund's directors. There are currently five
directors, three of whom are not "interested persons" of the Fund
within the meaning of that term under the Investment Company Act of
1940. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by
Great-West as Investment Adviser, the Fund requires no employees
other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of
Great-West and receive compensation from it. The Statement of
Additional Information contains the names of, and general
background information regarding, each Director and executive
officer of the Fund.
Investment Adviser Colorado 80111, serves as the Fund's "Investment Adviser."
Through
Power Corporation of Canada, a holding and management company, the
Investment Adviser is controlled by a Canadian investor, Paul
Desmarais, and his associates. The Investment Adviser presently
acts as the investment adviser for Great-West Variable Annuity
Account A, a separate account of GWL&A registered as a management
investment company, and certain non-registered, qualified corporate
pension plan separate accounts of GWL&A. Great-West is a
registered investment adviser with the Securities and Exchange
Commission.
Subject to the supervision and direction of the Fund's
Board of Directors, the Investment Adviser manages the Portfolio in
accordance with its stated investment objective and policies, makes
investment decisions for the Portfolio and places orders to buy and
sell securities on behalf of the Fund. The Investment Adviser
provides investment advisory services and pays all the expenses of
the Portfolio, except extraordinary expenses. As compensation for
its services to the Portfolio, the Investment Adviser receives
monthly compensation at the annual rate of 0.60% of the average
daily net assets of Portfolio.
The day-to-day lead portfolio manager for the Short-Term
Maturity Bond Portfolio is B.G. Masters. Mr. Masters is Manager,
Public Bond Investments, Great-West, 1993 to Present; Manager,
Bond, Investment Grade Corporate Bond and Zero-Coupon Treasury 1995
Portfolios of Maxim Series Fund, June 1994 to Present. Previously,
he was Assistant Manager, Public Bond Investments, Great-West, 1987
to 1993.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends from investment income of the Short-Term
Maturity Bond Portfolio shall be declared and reinvested monthly.
Distributions of net realized capital gains, if any, are
declared in the fiscal year in which they have been earned and are
reinvested in additional shares of the Portfolio at net asset
value.
The Fund has qualified, and intends to continue to qualify, as
a registered investment company under Subchapter M of the Internal
Revenue Code ("Code"). Each Portfolio of the Fund is treated as a
separate corporation for federal income tax purposes. The Fund
intends to distribute all of its net income so as to avoid any
Fund-level tax. Therefore, dividends derived from interest and
distributions of any realized capital gains will be taxable, under
Subchapter M, to the Fund's shareholders, which in this case are
GWL&A's and TNE's Series Accounts. The Fund also intends to
distribute sufficient income to avoid the imposition of the Code
Section 4982 excise tax.
Accounts, see "Federal Tax Considerations" included in the
applicable Series Account prospectus.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are sold and redeemed at their net asset
value next determined after initial receipt of a purchase order or
notice of redemption without the imposition of any sales commission
or redemption charge. However, certain deferred sales and other
charges may apply to the variable contracts. Such charges are
described in the applicable Series Account prospectus.
VALUATION OF SHARES
The Portfolio's net asset value per share is determined as of
4:00 p.m., EST/EDT once daily Monday through Friday, except on
holidays on which the New York Stock Exchange is closed.
Net asset value of a portfolio share is computed by dividing
the value of the net assets of the Portfolio by the total number of
portfolio shares outstanding. Portfolio securities that are traded
on the stock exchange are valued at the last sale price as of the
close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked price.
Securities traded in the over-the-counter market are valued at the
mean between the bid and asked prices or yield equivalent as
obtained from one or more dealers that make markets in the
securities. Portfolio securities that are traded both in the
over-the-counter market and on an exchange are valued according to
the broadest and most representative market. Securities and assets
for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of
the Board of Directors, including valuations furnished by a pricing
service that may be retained by the Fund. Such a determination may
take into account, for example, quotations by dealers or issuers
for securities of similar type, quality, and maturity, or
valuations furnished by a pricing service retained by the Fund.
Money market securities held by the Fund are valued on an
amortized cost basis, which involves valuing a portfolio instrument
at its cost initially and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would
receive if it sold the security.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of
Maryland on December 7, 1981 and is registered with the Securities company.
The Fund commenced operations on February 25, 1982.
The Fund offers a separate class of common stock for each
portfolio. All shares will have equal voting rights, except that
only shares of a respective portfolio will be entitled to vote on
matters concerning only that portfolio. Each issued and
outstanding share of the Portfolio is entitled to one vote and to
participate equally in dividends and distributions declared by the
Portfolio and, upon liquidation or dissolution, to participate
equally in the net assets of the Portfolio remaining after
satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and non-assessable, have
no preference, preemptive, conversion, exchange or similar rights,
and will be freely transferable. Shares do not have cumulative
voting rights and the holders of more than 50% of the shares of the
Fund voting for the election of directors can elect all of the
directors of the Fund if they choose to do so and, in such event,
holders of the remaining shares would not be able to elect any
directors.
The Series Accounts, as part of GWL&A or of TNE, and
Great-West, which provided the Fund's initial capitalization, and
the affiliates of Great-West, will be holders of the shares and be
entitled to exercise the rights directly as described in the
applicable Series Account prospectus.
The Fund offers its shares to the Series Accounts. For
various reasons, it may become disadvantageous for one or more of
the Series Accounts to continue to invest in Fund shares. In such
an event, one or more Series Accounts may redeem its Fund shares.
For further information, see the Statement of Additional
Information.
PERFORMANCE RELATED INFORMATION
The Fund may advertise certain performance related
information. Performance information about the Portfolio is based
on the Portfolio's past performance only and is no indication of
future performance.
The Fund may include total return in advertisements or other
sales materials regarding the Portfolio. When the Fund advertises
the total return of the Portfolio, it will usually be calculated
for one year, five years, and ten years or some other relevant
period if the Portfolio has not been in existence for at least ten
years. Total return is measured by comparing the value of an
investment in the Portfolio at the beginning of the relevant period
to the value of the investment at the end of the period (assuming
immediate reinvestment of any dividends or capital gains
distributions).
The Portfolio may also advertise its yield in addition to
total return. This yield will be computed by dividing the net by the net
asset value of a Fund share (reduced by any dividend
expected to be paid shortly out of Fund income) on the last day of
the period.
GENERAL INFORMATION
Reports to Shareholders
The fiscal year of the Fund ends on December 31 of each year.
The Fund will send to its shareholders, at least semiannually,
reports showing performance of the Portfolio and other information.
An annual report, containing financial statements, audited by
independent certified public accountants, will be sent to
shareholders each year.
Custodian
Morgan Guaranty Trust Company of New York ("Morgan"), New York
City, New York, acts as custodian of the Fund's assets. Morgan has
custody of the Fund's assets held within and outside the United
States. Morgan holds the Fund's assets in safekeeping and collects
and remits the income thereon subject to the instructions of the
Fund.
Independent Auditors
Deloitte & Touche LLP has been selected as the independent
auditors of the Fund. The selection of independent auditors is
subject to annual ratification by the Fund's shareholders.
Legal Counsel
Jorden Burt & Berenson is counsel for the Fund.
Additional Information
The telephone number or the address of the Fund appearing on
the front page of this prospectus should be used for requests for
additional information.
___________________________________________________________
MAXIM SERIES FUND, INC.
Short-Term Maturity Bond Portfolio
___________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is
not a prospectus but supplements and should be
read in conjunction with the Prospectus for
the Fund. A copy of the Prospectus may be
obtained from the Fund by writing the Fund at
8515 E. Orchard Rd., Englewood, Colorado 80111
or by calling the Fund at (303) 689-3000.
___________________________________________________________
THE GREAT-WEST LIFE ASSURANCE COMPANY
Investment Adviser
___________________________________________________________
The date of the Prospectus to which this Statement
of Additional Information relates and the date of
this Statement of Additional Information is
July 31, 1995.
TABLE OF CONTENTS
Cross-
reference
to page(s)
in
Page Prospectus
Sale of Shares............................. 3 6
The Fund Portfolios........................ 3 2
Description of Investment Securities.. 3 2
Information About Securities Ratings.. 8 --
Investment Limitations................ 11 2
Lending of Portfolio Securities....... 12 2
Foreign Securities.................... 12 2
Management of the Fund..................... 13 4
Directors and Officers................ 13 --
The Investment Adviser................ 14 5
Portfolio Transactions and Brokerage....... 14 5
Portfolio Turnover.................... 14 --
Placement of Portfolio Brokerage...... 15 5
Calculation of Yield and Return............ 16 7
Financial Statements........................ 17 --
Shares of the Fund are sold to the FutureFunds Series Account and
the Maxim Series Account, which are separate accounts established
by GWL&A to receive and invest premiums paid under variable annuity
contracts issued by GWL&A. Shares of the Fund are also sold to TNE
Series (K) Account of The New England Mutual Life Insurance Company
("TNE") to fund benefits under variable annuity contracts. Shares
of the Fund are also sold to the Pinnacle Series Account, a
separate account established by GWL&A to fund variable life
insurance policies. Shares of the Fund are, and in the future may
be, sold to other separate accounts of GWL&A, its affiliates or
other insurance companies. It is conceivable that in the future it
may be disadvantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in the
Fund simultaneously. Although no such disadvantages are currently
foreseen either to variable life insurance policyowners or to
variable annuity contract owners, the Fund's Board of Directors
intends to monitor events in order to identify any material
conflicts between such policyowners and contract owners and to
determine what action, if any, should be taken in response thereto.
Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, (3)
changes in the investment management of any portfolio of the Fund,
or (4) differences in voting instructions between those given by
policyowners and those given by contract owners.
THE FUND PORTFOLIOS
The discussion that follows provides supplemental information to
the discussion captioned "The Fund Portfolios" in the Prospectus.
The Fund commenced operations as a management investment company in
1982. The Short-Term Maturity Bond Portfolio was added effective
July 31, 1995.
Description of Investment Securities
1. Asset-Backed Securities. Asset-backed securities may be
classified as pass-through certificates of collateralized
obligations. They depend primarily on the credit quality of
the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the
originator or any other affiliated entities and the amount and
quality of any credit support provided to the securities. The
rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision
and actual yield to maturity may be more or less than the
anticipated yield to maturity. represent an undivided fractional
ownership interest in any
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership
interest in the underlying assets, the holders thereof bear
directly the risk of any defaults by the obligors on the
underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purposes of owning such assets and
issuing such debt. Such assets are most often trade, credit
card or automobile receivables. The assets collateralizing
the debt instrument are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally
hold no assets other than those underlying the security and
any credit support provided. As a result, although payments
on such securities are obligations of the issuers, in the
event of a default on the underlying assets not covered by
credit support, the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related
asset-backed securities.
2. Bankers' Acceptance. A bankers' acceptance is a time draft
drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions (to
finance the import, export, transfer or storage of goods).
The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount
on the maturity date. Most acceptances have maturities of six
months or less and are traded in secondary markets prior to
maturity. The Fund generally will not invest in acceptances
with maturities exceeding 7 days where to do so would tend to
create liquidity problems.
3. Certificate of Deposit. A certificate of deposit generally is
a short-term, interest bearing negotiable certificate issued
by a commercial bank or savings and loan association against
funds deposited in the issuing institution.
4. Collateralized Mortgage Obligations. A Collateralized
Mortgage Obligation ("CMO") is a bond which uses certificates
issued by the Government National Mortgage Association, or the
Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation as collateral in trust. The trust then
issues several bonds which will be paid using the cash flow
from the collateral. The trust can redirect cash flow
temporarily, first paying one bond before other bonds are
paid. The trust can also redirect prepayments from one bond bonds.
The proportion of principal cash flow and interest
cash flow from the collateral flowing to each bond can also be
changed, creating bonds with higher or lower coupons to the
extreme of passing through the interest only to one bond and
principal only to another bond. Variable rate or floating
coupon bonds are also often created through the use of CMO's.
5. Commercial Paper. Commercial paper is a short-term promissory
note issued by a corporation primarily to finance short-term
credit needs.
6. Covered Options. There are two types of covered options. A
covered call option gives the purchaser the right to buy the
underlying securities from the seller at a stated exercise
price. In writing a covered call option, the seller must own
the underlying securities subject to the option (or comparable
securities satisfying the cover requirements of securities
exchanges). A covered put option gives the purchaser the
right to sell the underlying securities at a stated price. In
the case of a covered put option, the seller will hold cash
and/or high-grade short-term debt obligations equal to the
price to be paid if the option is exercised. The seller will
be considered to have covered a put or call option if and to
the extent that it holds an option that offsets some or all of
the risk of the option it has written. Combinations of
covered puts and calls may be written on the same underlying
security.
Put options may be purchased to protect its portfolio holdings
in an underlying security against a decline in market value.
Such protection is provided during the life of the put option
because the holder of the option is able to sell the
underlying security at the put exercise price regardless of
any decline in the underlying security's market price. In
order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By
using put options in this manner, the seller will reduce any
profit it might otherwise have realized from appreciation of
the underlying security by the premium paid for the put option
and by transaction costs.
Premiums are received from writing a put or call option, which
increases the return on the underlying security in the event
the option expires unexercised or is closed out at a profit.
The amount of the premium reflects, among other things, the
relationship between the exercise price and the current market
value of the underlying security, the volatility of the
underlying security, the amount of time remaining until
expiration, current interest rates, and the effect of supply
and demand in the options market and in the market for the
underlying security. By writing a call option, the seller
limits its opportunity to profit from any increase in the price of
the option but continues to bear the risk of a
decline in the value of the underlying security. By writing
a put option, the seller assumes the risk that it may be
required to purchase the underlying security for an exercises
price higher than its then-current market value, resulting in
a potential capital loss unless the security subsequently
appreciates in value.
Call options may be purchased to hedge against an increase in
the price of securities that the purchaser wants ultimately to
buy. Such hedge protection is provided during the life of the
call option since the holder of the call option is able to buy
the underlying security at the exercise price regardless of
any increase in the underlying security's market price. In
order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the
exercise price to cover the premium and transactions costs.
Special risks are presented by internationally-traded options.
Because of time differences, and because different holidays
are observed in different countries, foreign options markets
may be open for trading during hours or on days when U.S.
markets are closed. As a result, option premiums may not
reflect the current prices of the underlying interest in the
United States.
7. Dealer (Over-the-Counter) Options. A dealer option is an
option which is not traded on an exchange and may be exercised
through the dealer from whom it had purchased the option. If
a Portfolio were to purchase a dealer option, failure by the
dealer to perform on the option would result in the loss of
the premium paid as well as loss of the expected benefit of
the transaction.
Dealer options do not have a continuous liquid market as do
exchange-traded options. Consequently, the value of a dealer
option may be realized only be exercising it or reselling it
to the dealer who issued it. Dealer options will only be
entered into with dealers who will agree to and which are
expected to be capable of entering into closing transactions;
however, there can be no assurance the a dealer option may be
liquidated at a favorable price at any time prior to
expiration. In the event of an insolvency of the contra
party, a dealer option may not be liquidated.
The staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written
dealer options are illiquid securities. The cover used for
written over-the-counter options may be treated as liquid if
the dealer agrees that the over-the-counter option which the
dealer has written may be repurchased for a maximum price to
be calculated by a predetermined formula. In such cases, the
the extent the maximum repurchase price under the formula
exceeds the intrinsic value of the option. Accordingly,
dealer options will be treated as subject to the limitation on
illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its
treatment of such instrument accordingly.
8. Eurodollar Certificate of Deposit. A Eurodollar certificate
of deposit is a short-term obligation of a foreign subsidiary
of a U.S. bank payable in U.S. dollars.
9. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years
in term but has a resetting of the interest rate on a one to
six month rollover basis.
10. Forward Contracts. A forward contract involves an obligation
to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the
time of the contract. These contracts may be bought or sold
to protect the seller, to some degree, against a possible loss
resulting from an adverse change in the relationship between
foreign currencies and the U.S. dollar. Forward contracts can
be used to protect the value of a seller's investment
securities by establishing a rate of exchange that the seller
can achieve at some future point in time; they do not simulate
fluctuations in the underlying prices of the securities.
Additionally, although forward contracts tend to minimize the
risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential
gains that might result should the value of such currency
increase.
11. Hybrid Instruments. Hybrid instruments have recently been
developed and combine the elements of futures contracts or
options with those of debt, preferred equity or a depository
instrument. Often these hybrid instruments are indexed to the
price of a commodity, particular currency, or a domestic or
foreign debt or equity securities 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. The risks associated with hybrid instruments
reflect a combination of the risks of investing in securities,
options, futures and currencies, including volatility and lack
of liquidity. 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. the seller to deliver (and the
purchaser to take) an amount of
cash equal to a specific dollar amount times the difference
between the value of a specific index at the close of the last
trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying
security in the index is made. When purchasing an index
futures contract or selling index futures, (1) a segregated
account consisting of cash, U.S. Government securities, or
other liquid high-grade debt securities must be maintained
with the custodian bank (and marked to market daily) which,
when added to any amounts deposited with a futures commission
merchant as margin, are equal to the market value of the
futures contract; or (2) the Fund must "cover" its position.
13. Interest Rate Transactions. Interest rate swaps and interest
rate caps and floors are types of hedging transactions which
are utilized to attempt to protect the Portfolio against and
potentially benefit from fluctuations in interest rates and to
preserve a return or spread on a particular investment or
portion of the Portfolio's holdings. These transactions may
also be used to attempt to protect against possible declines
in the market value of the Portfolio's assets resulting from
downward trends in the debt securities markets (generally due
to a rise in interest rates) or to protect unrealized gains in
the value of the Portfolio's holdings, or to facilitate the
sale of such securities.
Interest rate swaps involve the exchange with another party of
commitments to pay or receive interest; e.g., an exchange of
fixed rate payments for variable rate payments. The purchase
of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate,
to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate
floor.
The successful utilization of interest rate transactions
depends on the Portfolio manager's ability to predict
correctly the direction and degree of movements in interest
rates. If the Portfolio manager's judgment about the
direction or extent of movement in interest rates is
incorrect, the Portfolio's overall performance would be worse
than if it had not entered into such transactions. For
example, if the Portfolio purchases an interest rate swap or
an interest rate floor to hedge against the expectation that
interest rates will decline but instead interest rates rise,
the Portfolio would lose part or all of the benefit of the
increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its
purchase price of the interest rate floor.
The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap
documentation. Caps and floors are more recent innovations
for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
Interest rate swaps, caps and floors are considered by the
Staff of the Securities and Exchange Commission to be illiquid
securities and, therefore, the Portfolio may not invest more
than 15% of its assets in such instruments. Finally, there
can be no assurance that the Portfolio will be able to enter
into interest rate swaps or to purchase interest rate caps or
floors at prices or on terms the Portfolio manager believes
are advantageous to the Portfolio. In addition, although the
terms of interest rate swaps, caps and floors may provide for
termination, there can be no assurance that the Portfolio will
be able to terminate an interest rate swap or to sell or
offset interest rate caps or floors that it has purchased.
14. Repurchase Agreements. A repurchase agreement is an
instrument under which the purchaser acquires ownership of a
debt security and the seller agrees to repurchase the
obligation at a mutually agreed upon time and price. The
total amount received on repurchase is calculated to exceed
the price paid by the purchaser, reflecting an agreed upon
market rate of interest for the period from the time of
purchase of the security to the settlement date (i.e., the
time of repurchase), and would not necessarily relate to the
interest rate on the underlying securities. A purchaser will
only enter repurchase agreements with underlying securities
consisting of U.S. Government or government agency securities,
certificates of deposit, commercial paper or bankers'
acceptances, and will be entered only with primary dealers.
While investment in repurchase agreements may be made for
periods up to 30 days, it is expected that typically such
periods will be for a week or less. The staff of the
Securities and Exchange Commission has taken the position that
repurchase agreements of greater than 7 days should be limited
to an amount not in excess of 10% of a purchaser's total
assets.
Although repurchase transactions usually do not impose market
risks on the purchaser, the purchaser would be subject to the
risk of loss if the seller fails to repurchase the securities
for any reason and the value of the securities is less than
the agreed upon repurchase price. In addition, if the seller
defaults, the purchaser may incur disposition costs in
connection with liquidating the securities. Moreover, if the
seller is insolvent and bankruptcy proceedings are commenced,
under current law, the purchaser could be ordered by a court
not to liquidate the securities for an indeterminate period of
of the securities may be limited.
15. Reverse Repurchase Agreements. Reverse repurchase agreements
involve the sale of securities held by the seller, with an
agreement to repurchase the securities at an agreed upon
price, date and interest payment. The seller will use the
proceeds of the reverse repurchase agreements to purchase
other money market securities either maturing, or under an
agreement to resell, at a date simultaneous with or prior to
the expiration of the reverse repurchase agreement. The
seller will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the
proceeds from the transaction is greater than the interest
expense of the reverse repurchase transaction.
16. Stripped Treasury Securities. Zero-Coupon Treasury Securities
come in two forms: U.S. Treasury bills issued directly by the
U.S. Treasury and U.S. Treasury bonds or notes and their
unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage
firm. A number of securities firms and banks have stripped
the interest coupons from Treasury bonds and notes and resold
them in custodial receipt programs with a number of different
names. The underlying Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities, in trust on behalf of the owners
thereof.
Publicly filed documents state that counsel to the
underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that for
Federal tax and securities purposes, purchasers of such
certificates most likely will be deemed the beneficial holders
of the underlying U.S. Government securities. In addition,
such documents state that the terms of custody for the
custodial receipt programs generally provide that the
underlying debt obligations will be held separate from the
general assets of the custodian and will not be subject to any
right, charge, security interest, lien, or claim of any kind
in favor of the custodian or any person claiming through the
custodian, and the custodian will be responsible for applying
all payments received on these underlying debt obligations, if
any, to the related receipts or certificates without making
any deductions other than applicable tax withholding. The
custodian is required to maintain insurance in customary
amounts to protect the holders of the receipts or certificates
against losses resulting from the custody arrangement. The
holders of receipts or certificates, as the real parties in
interest, are entitled to the rights and privileges of owners
of the underlying debt obligations, including the right, in
the event of default, to proceed directly and individually
against the U.S. Government without acting in concert with
other holders of such receipts or the custodian.
