Calvert Variable Series, Inc.
Ameritas Income & Growth Portfolio
Ameritas Growth Portfolio
Ameritas Small Capitalization Portfolio
Ameritas MidCap Growth Portfolio
Ameritas Emerging Growth Portfolio
Ameritas Research Portfolio
Ameritas Growth With Income Portfolio
Ameritas Index 500 Portfolio
Ameritas Money Market Portfolio
Statement of Additional Information
November 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus.
Investors should read the Statement of Additional Information in conjunction
with the Fund's Prospectus, dated November 1, 1999. The Fund's audited
financial statements included in its most recent Annual Report to
Shareholders, are expressly incorporated by reference, and made a part of
this SAI. The prospectus and the most recent shareholder report may be
obtained free of charge by calling 1-800-335-9858 or by writing the Fund at
5900 "O" Street, Lincoln, Nebraska 68510-1889.
TABLE OF CONTENTS
Investment Policies and Risks 1
Investment Restrictions 9
Purchase and Redemption of Shares 14
Net Asset Value 15
Taxes 16
Calculation of Yield and Total Return 16
Directors and Officers 17
Investment Advisor and Subadvisors 18
Portfolio Transactions 19
Method of Distribution 20
Transfer and Shareholder Servicing Agent 20
Independent Accountants and Custodians 20
General Information 21
Appendix 22
INVESTMENT POLICIES AND RISKS
The Ameritas Portfolios of Calvert Variable Series, Inc. ("the Fund") offer
investors the opportunity to invest in several professionally managed
securities portfolios which offer the opportunity for growth of capital or
current income. The Ameritas Portfolios offer investors a choice of nine
separate portfolios: Income & Growth, Growth, Small Capitalization, MidCap
Growth, Emerging Growth, Research, Growth With Income, Index 500 and Money
Market Portfolios.
Foreign Securities (Not applicable to the Index 500 and Money Market
Portfolios)
The Portfolios may invest a portion of their assets in foreign securities.
The Emerging Growth Portfolio may invest up to 15%, and the other Portfolios
may each invest up to 20% of their respective assets in the securities of
foreign issuers. The Money Market Portfolio may purchase only high quality,
U.S. dollar-denominated instruments.
Investments in foreign securities may present risks not typically involved
in domestic investments. The Fund may purchase foreign securities directly,
on foreign markets, or those represented by American Depositary Receipts
("ADRs"), or other receipts evidencing ownership of foreign securities, such
as International Depository Receipts and Global Depositary Receipts. ADRs
are U.S. dollar-denominated and traded in the U.S. on exchanges or over the
counter. By investing in ADRs rather than directly in foreign issuers'
stock, the Fund may possibly avoid some currency and some liquidity risks.
The information available for ADRs is subject to the more uniform and more
exacting accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded.
Additional costs may be incurred in connection with international investment
since foreign brokerage commissions and the custodial costs associated with
maintaining foreign portfolio securities are generally higher than in the
United States. Fee expense may also be incurred on currency exchanges when
the Fund changes investments from one country to another or converts foreign
securities holdings into U.S. dollars.
United States Government policies have at times, in the past, through
imposition of interest equalization taxes and other restrictions,
discouraged certain investments abroad by United States investors.
Investing in emerging markets in particular, those countries whose economies
and capital markets are not as developed as those of more industrialized
nations, carries its own special risks. Among other risks, the economies of
such countries may be affected to a greater extent than in other countries
by price fluctuations of a single commodity, by severe cyclical climactic
conditions, lack of significant history in operating under a market-oriented
economy, or by political instability, including risk of expropriation.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Subadvisor ordinarily will consider
the following factors: prospects for relative economic growth among foreign
countries; expected levels of inflation; relative price levels of the
various capital markets; government policies influencing business
conditions; the outlook for currency relationships and the range of
individual investment opportunities available to the global investor.
Since investments in securities of issuers domiciled in foreign countries
usually involve currencies of the foreign countries, and since the Fund may
temporarily hold funds in foreign currencies during the completion of
investment programs, the value of the assets of the Fund as measured in
United States dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. For
example, if the value of the foreign currency in which a security is
denominated increases or declines in relation to the value of the U.S.
dollar, the value of the security in U.S. dollars will increase or decline
correspondingly. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future
date which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their
customers. A forward foreign currency contract generally has no deposit
requirement, and no commissions are charged at any stage for trades.
A Portfolio may enter into forward foreign currency contracts for two
reasons. First, the Portfolio may desire to preserve the United States
dollar price of a security when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency. A Portfolio may be
able to protect itself against possible losses resulting from changes in the
relationship between the United States dollar and foreign currencies during
the period between the date the security is purchased or sold and the date
on which payment is made or received by entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of the
foreign currency involved in the underlying security transactions.
Second, when the Advisor or Subadvisor believes that the currency of a
particular foreign country may suffer a substantial decline against the
United States dollar, a Portfolio may enter into a forward foreign currency
contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the portfolio securities
denominated in such foreign currency. The precise matching of the forward
foreign currency contract amounts and the value of the portfolio securities
involved will not generally be possible since the future value of the
securities will change as a consequence of market movements between the date
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is difficult, and the successful
execution of this short-term hedging strategy is uncertain. Although forward
foreign currency 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 gain which might result should the value of such
currency increase. The Portfolios do not intend to enter into such forward
contracts under this circumstance on a regular or continuous basis.
Eurocurrency Conversion Risk
European countries that are members of the European Monetary Union have
agreed to use a common currency unit, the "Euro," beginning in 1999.
Currently, each of these countries has its own currency unit. Although the
Advisor does not anticipate any problems in conversion from the old
currencies to the Euro, there may be issues involved in settlement,
valuation, and numerous other areas that could impact the Fund. The Advisor
and Subadvisors have been reviewing all of their computer systems for
Eurocurrency conversion compliance. There can be no assurance that there
will be no negative impact on the Fund, however, the Advisor, subadvisors
and custodian have advised the Fund that they have been actively working on
any necessary changes to their computer systems to prepare for the
conversion, and expect that their systems, and those of their outside
service providers, will be adapted in time for that event.
Foreign Money Market Instruments
The Money Market Portfolio may invest without limitation in money market
instruments of banks, whether foreign or domestic, including obligations of
U.S. branches of foreign banks ("Yankee" instruments) and obligations of
foreign branches of U.S. banks ("Eurodollar" instruments). All such
instruments must be high-quality, U.S. dollar-denominated obligations. It is
an operating (i.e., nonfundamental) policy of the Money Market Portfolio
that it may invest only in foreign money market instruments if they are of
comparable quality to the obligations of domestic banks. Although these
instruments are not subject to foreign currency risk since they are U.S.
dollar-denominated, investments in foreign money market instruments may
involve risks that are different than investments in securities of U.S.
issuers. See "Foreign Securities" above.
Small Cap Issuers
The securities of small cap issuers may be less actively traded than the
securities of larger issuers, may trade in a more limited volume, and may
change in value more abruptly than securities of larger companies.
Information concerning these securities may not be readily available so that
the companies may be less actively followed by stock analysts. Small-cap
issuers do not usually participate in market rallies to the same extent as
more widely-known securities, and they tend to have a relatively higher
percentage of insider ownership.
Investing in smaller, new issuers generally involves greater risk than
investing in larger, established issuers. Companies in which the Portfolio
is likely to invest may have limited product lines, markets or financial
resources and may lack management depth. The securities in such companies
may also have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established
companies or the market averages in general.
Temporary Defensive Positions
For temporary defensive purposes - which may include a lack of adequate
purchase candidates or an unfavorable market environment - the Fund may
invest in cash or cash equivalents. Cash equivalents include instruments
such as, but not limited to, U.S. government and agency obligations,
certificates of deposit, banker's acceptances, time deposits commercial
paper, short-term corporate debt securities, and repurchase agreements.
Repurchase Agreements
Repurchase agreements are arrangements under which a Portfolio buys a
security and the seller simultaneously agrees to repurchase the security at
a specified time and price. A Portfolio may engage in repurchase agreements
in order to earn a higher rate of return than it could earn simply by
investing in the obligation which is the subject of the repurchase
agreement. Repurchase agreements are not, however, without risk. In the
event of the bankruptcy of a seller during the term of a repurchase
agreement, a legal question exists as to whether the Portfolio would be
deemed the owner of the underlying security or would be deemed only to have
a security interest in and lien upon such security. A Portfolio will only
engage in repurchase agreements with recognized securities dealers and banks
determined to present minimal credit risk by the Advisor under the direction
and supervision of the Fund's Board of Directors. In addition, a Portfolio
will only engage in repurchase agreements reasonably designed to secure
fully during the term of the agreement the seller's obligation to repurchase
the underlying security and will monitor the market value of the underlying
security during the term of the agreement. If the value of the underlying
security declines and is not at least equal to the repurchase price due the
Portfolio pursuant to the agreement, the Portfolio will require the seller
to pledge additional securities or cash to secure the seller's obligations
pursuant to the agreement. If the seller defaults on its obligation to
repurchase and the value of the underlying security declines, the Portfolio
may incur a loss and may incur expenses in selling the underlying security.
Repurchase agreements are always for periods of less than one year.
Repurchase agreements not terminable within seven days are considered
illiquid.
Reverse Repurchase Agreements
Under a reverse repurchase agreement, a Portfolio sells securities to a bank
or securities dealer and agrees to repurchase those securities from such
party at an agreed upon date and price reflecting a market rate of interest.
The Portfolio invests the proceeds from each reverse repurchase agreement in
obligations in which it is authorized to invest. The Portfolios intend to
enter into a reverse repurchase agreement only when the interest income
provided for in the obligation in which the Portfolio invests the proceeds
is expected to exceed the amount the Portfolio will pay in interest to the
other party to the agreement plus all costs associated with the
transactions. The Portfolios do not intend to borrow for leverage purposes.
A Portfolio will only be permitted to pledge assets to the extent necessary
to secure borrowings and reverse repurchase agreements.
During the time a reverse repurchase agreement is outstanding, the Portfolio
will maintain in a segregated custodial account an amount of cash, U.S.
Government securities or other liquid, high-quality debt securities equal in
value to the repurchase price. The Portfolio will mark to market the value
of assets held in the segregated account, and will place additional assets
in the account whenever the total value of the account falls below the
amount required under applicable regulations.
The use of reverse repurchase agreements involves the risk that the other
party to the agreements could become subject to bankruptcy or liquidation
proceedings during the period the agreements are outstanding. In such event,
the Portfolio may not be able to repurchase the securities it has sold to
that other party. Under those circumstances, if at the expiration of the
agreement such securities are of greater value than the proceeds obtained by
the Portfolio under the agreements, the Portfolio may have been better off
had it not entered into the agreement. However, the Portfolio will enter
into reverse repurchase agreements only with banks and dealers which the
Advisor believes present minimal credit risks under guidelines adopted by
the Fund's Board of Directors. In addition, the Portfolio bears the risk
that the market value of the securities sold by the Portfolio may decline
below the agreed-upon repurchase price, in which case the dealer may request
the Portfolio to post additional collateral.
U.S. Government-Backed Obligations
Ginnie Maes, issued by the Government National Mortgage Association, are
typically interests in pools of mortgage loans insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after approval from
GNMA, is offered to investors through various securities dealers. GNMA is a
U.S. Government corporation within the Department of Housing and Urban
Development. Ginnie Maes are backed by the full faith and credit of the
United States, which means that the U.S. Government guarantees that interest
and principal will be paid when due.
The Advisor will attempt, through careful evaluation of available GNMA
issues and prevailing market conditions, to invest in GNMA Certificates
which provide a high income return but are not subject to substantial risk
of loss of principal. Accordingly, the Advisor may forego the opportunity to
invest in certain issues of GNMA Certificates which would provide a high
current income yield if the Advisor determines that such issues would be
subject to a risk of prepayment and loss of principal over the long term
that would outweigh the short-term increment in yield.
Non-Investment Grade Debt Securities
The Emerging Growth and Research Portfolios may invest in lower quality debt
securities (generally those rated BB or lower by S&P or Ba or lower by
Moody's, known as "junk bonds"). The Emerging Growth's investment policy
provides that it may not invest more than 5%, and no more than 10% for the
Research Portfolio, of their respective net assets in securities rated below
B by either rating service, or in unrated securities determined by the
Advisor to be comparable to securities rated below B by either rating
service. There is no minimum rating standard required by either Portfolio,
which includes non-investment grade debt securities. Lower quality debt
securities, these securities have moderate to poor protection of principal
and interest payments and have speculative characteristics. (See Appendix
for a description of the ratings.) These securities involve greater risk of
default or price declines due to changes in the issuer's creditworthiness
than investment-grade debt securities. Because the market for lower-rated
securities may be thinner and less active than for higher-rated securities,
there may be market price volatility for these securities and limited
liquidity in the resale market. Market prices for these securities may
decline significantly in periods of general economic difficulty or rising
interest rates. Unrated debt securities may fall into the lower quality
category.
The quality limitation set forth in the Portfolios' investment policy is
determined immediately after a Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policy.
When purchasing high-yielding securities, rated or unrated, the Advisor
prepares its own careful credit analysis to attempt to identify those
issuers whose financial condition is adequate to meet future obligations or
is expected to be adequate in the future. Through portfolio diversification
and credit analysis, investment risk can be reduced, although there can be
no assurance that losses will not occur.
Derivatives
A Portfolio can use various techniques to increase or decrease its exposure
to changing security prices, interest rates, or other factors that affect
security values. These techniques may involve derivative transactions such
as buying and selling options and futures contracts and leveraged notes,
entering into swap agreements, and purchasing indexed securities. The
Portfolios can use these practices either as substitution or as protection
against an adverse move in the Portfolio to adjust the risk and return
characteristics of the Portfolio. If the Advisor and/or Subadvisor judges
market conditions incorrectly or employs a strategy that does not correlate
well with a Portfolio's investments, or if the counterparty to the
transaction does not perform as promised, these techniques could result in a
loss. These techniques may increase the volatility of a Portfolio and may
involve a small investment of cash relative to the magnitude of the risk
assumed. Derivatives are often illiquid.
Options and Futures Contracts
The Emerging Growth, Growth With Income and Index 500 Portfolios may, in
pursuit of their investment objectives, purchase put and call options and
engage in the writing of covered call options and secured put options on
securities, and employ a variety of other investment techniques.
Specifically, these Portfolios may also engage in the purchase and sale
of stock index future contracts, foreign currency futures contracts,
interest rate futures contracts, and options on such futures, as described
more fully below.
These Portfolios will engage in such transactions only to hedge the existing
positions in the respective Portfolios. They will not engage in such
transactions for the purposes of speculation or leverage. Such investment
policies and techniques may involve a greater degree of risk than those
inherent in more conservative investment approaches.
These Portfolios will not engage in such options or futures transactions
unless they receive appropriate regulatory approvals permitting them to
engage in such transactions. These Portfolios may write "covered options" on
securities in standard contracts traded on national securities exchanges.
These Portfolios will write such options in order to receive the premiums
from options that expire and to seek net gains from closing purchase
transactions with respect to such options.
Put and Call Options. These Portfolios may purchase put and call options, in
standard contracts traded on national securities exchanges, on securities of
issuers which meet the Portfolios' social criteria. These Portfolios will
purchase such options only to hedge against changes in the value of
securities the Portfolios hold and not for the purposes of speculation or
leverage. In buying a put, a Portfolio has the right to sell the security at
the exercise price, thus limiting its risk of loss through a decline in the
market value of the security until the put expires. The amount of any
appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and any profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the
put option plus the related transaction costs.
These Portfolios may purchase call options on securities that they may
intend to purchase and that meet the Portfolios' social criteria. Such
transactions may be entered into in order to limit the risk of a substantial
increase in the market price of the security which the Portfolio intends to
purchase. Prior to its expiration, a call option may be sold in a closing
sale transaction. Any profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call
option plus the related transaction costs.
Covered Options. These Portfolios may write only covered options on equity
and debt securities in standard contracts traded on national securities
exchanges. For call options, this means that so long as a Portfolio is
obligated as the writer of a call option, that Portfolio will own the
underlying security subject to the option and, in the case of put options,
that Portfolio will, through its custodian, deposit and maintain either cash
or securities with a market value equal to or greater than the exercise
price of the option.
When a Portfolio writes a covered call option, the Portfolio gives the
purchaser the right to purchase the security at the call option price at any
time during the life of the option. As the writer of the option, the
Portfolio receives a premium, less a commission, and in exchange foregoes
the opportunity to profit from any increase in the market value of the
security exceeding the call option price. The premium serves to mitigate the
effect of any depreciation in the market value of the security. Writing
covered call options can increase the income of the Portfolio and thus
reduce declines in the net asset value per share of the Portfolio if
securities covered by such options decline in value. Exercise of a call
option by the purchaser, however, will cause the Portfolio to forego future
appreciation of the securities covered by the option.
When a Portfolio writes a secured put option, it will gain a profit in the
amount of the premium, less a commission, so long as the price of the
underlying security remains above the exercise price. However, the Portfolio
remains obligated to purchase the underlying security from the buyer of the
put option (usually in the event the price of the security funds below the
exercise price) at any time during the option period. If the price of the
underlying security falls below the exercise price, the Portfolio may
realize a loss in the amount of the difference between the exercise price
and the sale price of the security, less the premium received.
These Portfolios may purchase securities that may be covered by call options
solely on the basis of considerations consistent with the investment
objectives and policies of the Portfolios. The Portfolio turnover rate may
increase through the exercise of a call option; this will generally occur if
the market value of a "covered" security increases and the portfolio has not
entered into a closing purchase transaction.
Risks Related to Options Transactions. The Portfolios can close out their
respective positions in exchange-traded options only on an exchange which
provides a secondary market in such options. Although these Portfolios
intend to acquire and write only such exchange-traded options for which an
active secondary market appears to exist, there can be no assurance that
such a market will exist for any particular option contract at any
particular time. This might prevent the Portfolios from closing an options
position, which could impair the Portfolios' ability to hedge effectively.
The inability to close out a call position may have an adverse effect on
liquidity because the Portfolio may be required to hold the securities
underlying the option until the option expires or is exercised.
Futures Transactions. These Portfolios may purchase and sell futures
contracts ("futures contracts") but only when, in the judgment of the
Advisor, such a position acts as a hedge against market changes which would
adversely affect the securities held by the Portfolios. These futures
contracts may include, but are not limited to, market index futures
contracts and futures contracts based on U.S. Government obligations.
A futures contract is an agreement between two parties to buy and sell a
security on a future date which has the effect of establishing the current
price for the security. Although futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Upon buying or selling a futures contract, the
Portfolio deposits initial margin with its custodian, and thereafter daily
payments of maintenance margin are made to and from the executing broker.
Payments of maintenance margin reflect changes in the value of the futures
contract, with the Portfolio being obligated to make such payments if its
futures position becomes less valuable and entitled to receive such payments
if its positions become more valuable.
These Portfolios may only invest in futures contracts to hedge their
respective existing investment positions and not for income enhancement,
speculation or leverage purposes. Although some of the securities underlying
the futures contract may not necessarily meet the Portfolios' social
criteria, any such hedge position taken by these Portfolios will not
constitute a direct ownership interest in the underlying securities.
Futures contracts have been designed by boards of trade which have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"). As series of a registered investment company, the Portfolios are
eligible for exclusion from the CFTC's definition of "commodity pool
operator," meaning that the Portfolios may invest in futures contracts under
specified conditions without registering with the CFTC. Among these
conditions are requirements that each Portfolio invest in futures only for
hedging purposes. Futures contracts trade on contracts markets in a manner
that is similar to the way a stock trades on a stock exchange and the boards
of trade, through their clearing corporations, guarantee performance of the
contracts.
Options on Futures Contracts. These Portfolios may purchase and write put or
call options and sell call options on futures contracts in which a Portfolio
could otherwise invest and which are traded on a U.S. exchange or board of
trade. The Portfolios may also enter into closing transactions with respect
to such options to terminate an existing position; that is, to sell a put
option already owned and to buy a call option to close a position where the
Portfolio has already sold a corresponding call option.
The Portfolios may only invest in options on futures contracts to hedge
their respective existing investment positions and not for income
enhancement, speculation or leverage purposes. Although some of the
securities underlying the futures contract underlying the option may not
necessarily meet the Portfolios' social criteria, any such hedge position
taken by these Portfolios will not constitute a direct ownership interest in
the underlying securities.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract - a long
position if the option is a call and a short position if the option is a put
- - at a specified exercise price at any time during the period of the option.
The Portfolios will pay a premium for such options purchased or sold. In
connection with such options bought or sold, the Portfolios will make
initial margin deposits and make or receive maintenance margin payments
which reflect changes in the market value of such options. This arrangement
is similar to the margin arrangements applicable to futures contracts
described above.
Put Options on Futures Contracts. The purchase of put options on futures
contracts is analogous to the sale of futures contracts and is used to
protect the portfolio against the risk of declining prices. These Portfolios
may purchase put options and sell put options on futures contracts that are
already owned by that Portfolio. The Portfolios will only engage in the
purchase of put options and the sale of covered put options on market index
futures for hedging purposes.
Call Options on Futures Contracts. The sale of call options on futures
contracts is analogous to the sale of futures contracts and is used to
protect the portfolio against the risk of declining prices. The purchase of
call options on futures contracts is analogous to the purchase of a futures
contract. These Portfolios may only buy call options to close an existing
position where the Portfolio has already sold a corresponding call option,
or for a cash hedge. The Portfolios will only engage in the sale of call
options and the purchase of call options to cover for hedging purposes.
Writing Call Options on Futures Contracts. The writing of call options on
futures contracts constitutes a partial hedge against declining prices of
the securities deliverable upon exercise of the futures contract. If the
futures contract price at expiration is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
securities holdings.
Risks of Options and Futures Contracts. If one of these Portfolios has sold
futures or takes options positions to hedge its portfolio against decline in
the market and the market later advances, the Portfolio may suffer a loss on
the futures contracts or options which it would not have experienced if it
had not hedged. Correlation is also imperfect between movements in the
prices of futures contracts and movements in prices of the securities which
are the subject of the hedge. Thus the price of the futures contract or
option may move more than or less than the price of the securities being
hedged. Where a Portfolio has sold futures or taken options positions to
hedge against decline in the market, the market may advance and the value of
the securities held in the Portfolio may decline. If this were to occur, the
Portfolio might lose money on the futures contracts or options and also
experience a decline in the value of its portfolio securities. However,
although this might occur for a brief period or to a slight degree, the
value of a diversified portfolio will tend to move in the direction of the
market generally.
The Portfolios can close out futures positions only on an exchange or board
of trade which provides a secondary market in such futures. Although the
Portfolios intend to purchase or sell only such futures for which an active
secondary market appears to exist, there can be no assurance that such a
market will exist for any particular futures contract at any particular
time. This might prevent the Portfolios from closing a futures position,
which could require a Portfolio to make daily cash payments with respect to
its position in the event of adverse price movements.
Options on futures transactions bear several risks apart from those inherent
in options transactions generally. The Portfolios' ability to close out
their options positions in futures contracts will depend upon whether an
active secondary market for such options develops and is in existence at the
time the Portfolios seek to close their positions. There can be no assurance
that such a market will develop or exist. Therefore, the Portfolios might be
required to exercise the options to realize any profit.
Foreign Currency Transactions
Forward Foreign Currency Exchange Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days ("Term")
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
A Portfolio will not enter into such forward contracts or maintain a net
exposure in such contracts where it would be obligated to deliver an amount
of foreign currency in excess of the value of its portfolio securities and
other assets denominated in that currency. The Advisor believes that it is
important to have the flexibility to enter into such forward contract when
it determines that to do so is in a Portfolio's best interests.
Foreign Currency Options. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at
the exercise price on or before a specified date. A call option gives its
owner the right, but not the obligation, to buy the currency, while a put
option gives its owner the right, but not the obligation, to sell the
currency. The option seller buyer may close its position any time prior to
expiration of the option period. A call rises in value if the underlying
currency appreciates. Conversely, a put rises in value if the underlying
currency depreciates. Purchasing a foreign currency option can protect a
Portfolio against adverse movement in the value of a foreign currency.
Foreign Currency Futures Transactions. A Portfolio may use foreign currency
futures contracts and options on such futures contracts. Through the
purchase or sale of such contracts, it may be able to achieve many of the
same objectives attainable through the use of foreign currency forward
contracts, but more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized
as to amount and delivery period and are traded on boards of trade and
commodities exchanges. It is anticipated that such contracts may provide
greater liquidity and lower cost than forward foreign currency exchange
contracts.
Lending Portfolio Securities
The Fund may lend its portfolio securities to member firms of the New York
Stock Exchange and commercial banks with assets of one billion dollars or
more. Any such loans must be secured continuously in the form of cash or
cash equivalents such as U.S. Treasury bills. The amount of the collateral
must on a current basis equal or exceed the market value of the loaned
securities, and the Fund must be able to terminate such loans upon notice at
any time. The Fund will exercise its right to terminate a securities loan in
order to preserve its right to vote upon matters of importance affecting
holders of the securities.
The advantage of such loans is that the Fund continues to receive the
equivalent of the interest earned or dividends paid by the issuers on the
loaned securities while at the same time earning interest on the cash or
equivalent collateral which may be invested in accordance with the Fund's
investment objective, policies and restrictions.
Securities loans are usually made to broker-dealers and other financial
institutions to facilitate their delivery of such securities. As with any
extension of credit, there may be risks of delay in recovery and possibly
loss of rights in the loaned securities should the borrower of the loaned
securities fail financially. However, the Fund will make loans of its
portfolio securities only to those firms the Advisor deems creditworthy and
only on terms the Advisor believes should compensate for such risk. On
termination of the loan, the borrower is obligated to return the securities
to the Fund. The Fund will recognize any gain or loss in the market value of
the securities during the loan period. The Fund may pay reasonable custodial
fees in connection with the loan.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, each Portfolio may
purchase securities on a when-issued or delayed delivery basis -- that is,
delivery and payment can take place a month or more after the date of the
transactions. The securities purchased in this manner are subject to market
fluctuation and no interest accrues to the purchaser during this period. At
the time a Portfolio makes a commitment to purchase securities on a
when-issued or delayed delivery basis, the price is fixed and the Portfolio
will record the transaction and thereafter reflect the value, each day, of
the security in determining the net asset value of the Portfolio. At the
time of delivery of the securities, the value may be more or less than the
purchase price.
The Portfolio will enter commitments for when-issued or delayed delivery
securities only when it intends to acquire the securities. Accordingly, when
a Portfolio purchases a when-issued security, it will maintain an amount of
cash, cash equivalents (for example, commercial paper and daily tender
adjustable notes) or short-term high-grade fixed income securities in a
segregated account with the Portfolio's custodian, so that the amount so
segregated plus the amount of initial and variation margin held in the
account of its broker equals the market value of the when-issued purchase,
thereby ensuring the transaction is unleveraged.
INVESTMENT RESTRICTIONS
Income & Growth, Growth, Small Capitalization and MidCap Growth Portfolios
The Portfolios have adopted the following fundamental investment
restrictions. These restrictions cannot be changed without the approval of
the holders of a majority of the outstanding shares of each of the
Portfolios. The Portfolios may not:
1. Purchase the securities of any issuer, other than U.S. Government
securities, if as a result more than 5% of the value of a Portfolio's total
assets would be invested in the securities of the issuer, except that up to
25% of the value of the Portfolio's total assets may be invested without
regard to this limitation.
2. Purchase more than 10% of the voting securities of any one issuer or more
than 10% of the securities of any class of any one issuer. This limitation
shall not apply to investments in U.S. Government securities.
3. Sell securities short or purchase securities on margin, except that the
Portfolio may obtain any short-term credit necessary for the clearance of
purchases and sales of securities. These restrictions shall not apply to
transactions involving selling securities "short against the box."
4. Borrow money, except that the Portfolio may borrow for temporary or
emergency (but not leveraging) purposes, including the meeting of redemption
requests that might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the value of the Portfolio's
total assets (including the amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. Whenever borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any additional
investments. Immediately after any borrowing, including reverse repurchase
agreements and mortgage-backed rolls, the Portfolio will maintain asset
coverage of not less than 300% with respect to all borrowings.
5. Pledge, hypothecate, mortgage or otherwise encumber more than 10% of the
value of the Portfolio's total assets. These restrictions shall not apply to
transactions involving reverse repurchase agreements or the purchase of
securities subject to firm commitment agreements or on a when-issued basis.
6. Underwrite the securities of other issuers, except insofar as the Portfolio
may be deemed to be an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
7. Make loans to others, except through purchasing qualified debt obligations,
lending portfolio securities or entering into repurchase agreements.
Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation, reorganization, acquisition of
assets or offer of exchange.
8. Purchase any securities that would cause more than 25% of the value of the
Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry;
provided that there shall be no limit on the purchase of U.S. Government
securities.
9. Invest in commodities.
10. Invest more than 10% of its net assets in securities which are illiquid by
virtue of legal or contractual restrictions on resale or the absence of a
readily available market. However, securities with legal and contractual
restrictions on resale may be purchased if they are determined to be liquid,
and such purchases would not be subject to the limit stated above.
11. Issue senior securities.
The Board of Directors has adopted the following nonfundamental investment
restrictions. A nonfundamental investment restriction can be changed by the
Board at any time without a shareholder vote. The Portfolios may not:
1. Purchase or sell real estate, except that the Portfolio may purchase and
sell securities secured by real estate, mortgages or interests therein and
securities that are issued by companies that invest or deal in real estate.
2. Write or sell puts, calls, straddles, spreads or combinations thereof.
3. Invest in oil, gas or other mineral exploration or development programs,
except that the Portfolio may invest in the securities of companies that
invest in or sponsor those programs.
4. Purchase any security if as a result the Portfolio would then have more than
5% of its total assets invested in securities of issuers (including
predecessors) that have been in continual operation for less than three
years. This limitation shall not apply to investments in U.S. Government
securities.
5. Make investments for the purpose of exercising control or management.
6. Invest in warrants, except that the Portfolio may invest in warrants if, as
a result, the investments (valued at the lower of cost or market) would not
exceed 5% of the value of the Portfolio's net assets, of which not more than
2% of the Portfolio's net assets may be invested in warrants not listed on a
recognized domestic stock exchange. Warrants acquired by the Portfolio as
part of a unit or attached to securities at the time of acquisition are not
subject to this limitation.
7. Purchase or retain the securities of any issuer if, to the knowledge of the
Fund, any of the officers, or directors of the Fund, Advisor or Subadvisor
individually owns more than .5% of the outstanding securities of the issuer
and together they own beneficially more than 5% of the securities.
Except in the case of the 300% limitation set forth in Fundamental
Investment Restriction No. 4, and as may be otherwise stated, the percentage
limitations contained in the foregoing restrictions and in the Fund's other
investment policies apply at the time of the purchase of the securities and
a later increase or decrease in percentage resulting from a change in the
values of the securities or in the amount of the Portfolio's assets will not
constitute a violation of the restriction.
Emerging Growth, Research and Growth With Income Portfolios
The Portfolios have adopted the following fundamental investment
restrictions. These restrictions cannot be changed without the approval of
the holders of a majority of the outstanding shares of each of the
Portfolios. The Portfolios may not:
1. Borrow amounts in excess of 33 1/3% of its assets including amounts borrowed
and then only as a temporary measure for extraordinary or emergency purposes.
2. Underwrite securities issued by other persons except insofar as the
Portfolios may technically be deemed an underwriter under the Securities Act
of 1933, as amended in selling a portfolio security.
3. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding currencies and any
type of option, futures contracts and forward contracts) in the ordinary
course of its business. The Portfolios reserve the freedom of action to hold
and to sell real estate, mineral leases, commodities or commodity contracts
(including currencies and any type of option, futures contracts and forward
contracts) acquired as a result of the ownership of securities.
4. Issue any senior securities except as permitted by the Investment Company
Act of 1940. For purposes of this restriction, collateral arrangements with
respect to any type of swap, option, forward contracts and futures contracts
and collateral arrangements with respect to initial and variation margin are
not deemed to be the issuance of a senior security.
5. Make loans to other persons. For these purposes, the purchase of commercial
paper, the purchase of a portion or all of an issue of debt securities, the
lending of portfolio securities, or the investment of the Portfolios' assets
in repurchase agreements, shall not be considered the making of a loan.
6. Purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry, except
there is no limitation with respect to obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities and repurchase
agreements collateralized by such obligations.
The Board of Directors has adopted the following nonfundamental investment
restrictions. A nonfundamental investment restriction can be changed by the
Board at any time without a shareholder vote. The Portfolios may not:
1. Invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily
available market (i.e., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists) if more than 15% of the
Portfolios' assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of the Portfolios' limitation on
investment in illiquid securities. Securities that are not registered under
the Securities Act of 1933 and sold in reliance on Rule 144A thereunder, but
are determined to be liquid by the Fund's Board of Directors (or its
delegee), will not subject to this 15% limitation.
2. Pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of swap, option, futures contracts and forward contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets. Invest for the purpose of exercising control
or management.
3. Hold obligations issued or guaranteed by any one U.S. Governmental agency or
instrumentality, at the end of any calendar quarter (or within 30 days
thereafter), to the extent such holdings would cause the Portfolios to fail
to comply with the diversification requirements imposed by Section 817(h) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
regulations issued thereunder on segregated asset accounts that fund
variable contracts.
4. Invest 25% or more of the market value of its total assets in securities of
issuers in any one industry (provided that this restriction does not limit
the exceptions set forth in Fundamental Investment Restriction No. 6).
Except for Fundamental Investment Restriction No. 1 and Nonfundamental
Investment Restriction No. 1, these investment restrictions and policies are
adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
any of the restrictions.
Index 500 Portfolio
The Portfolio has adopted the following fundamental investment restrictions.
These restrictions cannot be changed without the approval of the holders of
a majority of the outstanding shares of the Portfolio. The Portfolio may not:
1. With respect to 75% of the Portfolio's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, or securities of
other investment companies) if, as a result, (a) more than 5% of the
Portfolio's total assets would be invested in the securities of that issuer,
or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer.
2. Issue senior securities, except in connection with the insurance program
established by the Portfolio pursuant to an exemptive order issued by the
Securities and Exchange Commission or as otherwise permitted under the
Investment Company Act of 1940.
3. Borrow money, except that the Portfolio may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed this
amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33 1/3% limitation.
4. Underwrite securities issued by others, except to the extent that The
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities).
7. Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of debt securities or to repurchase agreements.
The Board of Directors has adopted the following nonfundamental investment
restrictions. A nonfundamental investment restriction can be changed by the
Board at any time without a shareholder vote.
1. The Portfolio does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities short.
2. The Portfolio does not currently intend to purchase securities on margin,
except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
3. The Portfolio may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party (reverse repurchase agreements
are treated as borrowings for purposes of Fundamental Investment Restriction
No. 3).
4. The Portfolio does not currently intend to purchase any security if, as a
result, more than 10% of its net assets would be invested in securities that
are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
5. The Portfolio does not currently intend to lend assets other than securities
to other parties, except by: (a) lending up to 5% of its net assets to a
registered investment company or portfolio for which the Advisor, Subadvisor
or an affiliate serves as investment adviser or (b) acquiring loans, loan
participations, or other forms of direct debt instruments and, in connection
therewith, assuming any associated unfunded commitments of the sellers.
(This limitation does not apply to purchases of debt securities or to
repurchase agreements.)
6. The Portfolio does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
With respect to Nonfundamental Investment Restriction No. 4, if through a
change in values, net assets, or other circumstances, a fund were in a
position where more than 10% of its net assets was invested in illiquid
securities, it would consider appropriate steps to protect liquidity.
With respect to the Portfolio's limitations on futures and options
transactions, see the section entitled "Options and Futures Contracts".
With respect to Fundamental Investment Restriction No. 5, the Portfolio may
use the industry categorizations as defined by BARRA, Inc.
Money Market Portfolio
The Portfolio has adopted the following fundamental investment restrictions.
These restrictions cannot be changed without the approval of the holders of
a majority of the outstanding shares of the Portfolio. The Portfolio may not:
1. Purchase the securities of any issuer if, as a result, the portfolio would
not comply with any applicable diversification requirements for a money
market fund under the Investment Company Act of 1940 and the rules
thereunder, as such may be amended from time to time.
2. Issue senior securities.
3. Borrow money, except that the portfolio may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii) in
combination do not exceed 33 1/3% of the portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed this amount will be reduced within three days
(not including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation.
4. Underwrite securities issued by others, except to the extent that the
portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Portfolio's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that the portfolio will
invest more than 25% of its total assets in the financial services industry.
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
5. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
6. Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of debt securities or to repurchase agreements.
Invest in companies for the purpose of exercising control or management.
The Board of Directors has adopted the following nonfundamental investment
restrictions. A nonfundamental investment restriction can be changed by the
Board at any time without a shareholder vote.
1. The Portfolio does not currently intend to purchase a security (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities or securities of other money market funds) if,
as a result, more than 5% of its total assets would be invested in
securities of a single issuer; provided that the Portfolio may invest up to
25% of its total assets in the first tier securities of a single issuer for
up to three business days.
2. The Portfolio does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities short.
3. The Portfolio does not currently intend to purchase securities on margin,
except that the portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
4. The Portfolio may borrow money only (a) from a bank or from a registered
investment company or portfolio for which the Advisor, Subadvisor or an
affiliate serves as investment adviser or (b) by engaging in reverse
repurchase agreements with any party. The Portfolio will not borrow from
other funds advised by the Advisor, Subadvisor or its affiliates if total
outstanding borrowings immediately after such borrowing would exceed
33 1/3% of the portfolio's total assets.
5. The Portfolio does not currently intend to purchase any security if, as a
result, more than 10% of its net assets would be invested insecurities that
are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
6. The Portfolio does not currently intend to purchase or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
7. The Portfolio does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
With respect to Nonfundamental Investment Restriction No. 1, certain
securities subject to guarantees (including insurance, letters of credit and
demand features) are not considered securities of their issuer, but are
subject to separate diversification requirements, in accordance with
industry standard requirements for money market funds.
With respect to Nonfundamental Investment Restriction No. 5, if through a
change in values, net assets, or other circumstances, the portfolio were in
a position where more than 10% of its net assets was invested in illiquid
securities, it would consider appropriate steps to protect liquidity.
PURCHASE AND REDEMPTION OF SHARES
The Portfolios continuously offer their shares at prices equal to the
respective net asset values of the Portfolios determined in the manner set
forth below under "Net Asset Value." The Portfolios offer their shares,
without sales charge, only for purchase by various Insurance Companies for
allocation to their Variable Accounts. It is conceivable that in the future
it may be disadvantageous for both annuity Variable Accounts and life
insurance Variable Accounts of different Insurance Companies, to invest
simultaneously in the Portfolios, although currently neither the Insurance
Companies nor the Portfolio foresee any such disadvantages to either
variable annuity or variable life insurance policy holders of any Insurance
Company. The Portfolios' Board of Directors intends to monitor events in
order to identify any material conflicts between such policyholders and to
determine what action, if any, should be taken in response to any conflicts.
The Portfolios are required to redeem all full and fractional shares for
cash. The redemption price is the net asset value per share, which may be
more or less than the original cost, depending on the investment experience
of the Portfolio. Payment for shares redeemed will generally be made within
seven days after receipt of a proper notice of redemption. The right of
redemption may be suspended or the date of payment postponed for any period
during which the New York Stock Exchange is closed (other than customary
weekend and holiday closings), when trading on the New York Stock Exchange
is restricted, or an emergency exists, as determined by the Commission, or
if the Commission has ordered such a suspension for the protection of
shareholders.
NET ASSET VALUE
The net asset value of the shares of each Portfolio of the Fund is
determined by adding the values of all securities and other assets of the
Portfolio, subtracting liabilities and expenses, and dividing by the number
of shares of the Portfolio outstanding. Expenses are accrued daily,
including the investment advisory fee. The Money Market Portfolio attempts
to maintain a constant net asset value of $1.00 per share. The net asset
values of the Income & Growth, Growth, Small Capitalization, MidCap Growth,
Emerging Growth, Research, Growth With Income and Index 500 Portfolios
fluctuate based on the respective market value of a Portfolio's investments.
The net asset value per share of each of the Portfolios is determined every
business day as of the close of the regular session of the New York Stock
Exchange (generally 4:00 p.m. Eastern time), and at such other times as may
be necessary or appropriate. The Portfolios do not determine net asset value
on certain national holidays or other days on which the New York Stock
Exchange is closed: New Year's Day, Presidents' Day, Dr. Martin Luther King,
Jr. Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day. Each Portfolio's net asset value per share is
determined by dividing that Portfolio's total net assets (the value of its
assets net of liabilities, including accrued expenses and fees) by the number
of shares outstanding.
The assets of the Income & Growth, Growth, Small Capitalization, MidCap
Growth, Emerging Growth, Research, Growth With Income and Index 500 Portfolios
are valued as follows: (a) securities for which market quotations are
readily available are valued at the most recent closing price, mean between
bid and asked price, or yield equivalent as obtained from one or more market
makers for such securities; (b) securities maturing within 60 days may be
valued at cost, plus or minus any amortized discount or premium, unless the
Board of Directors determines such method not to be appropriate under the
circumstances; and (c) all other securities and assets for which market
quotations are not readily available will be fairly valued by the Advisor in
good faith under the supervision of the Board of Directors. Securities
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values on their respective exchanges where primarily
traded. Equity options are valued at the last sale price unless the bid
price is higher or the asked price is lower, in which event such bid or
asked price is used. Exchange traded fixed income options are valued at the
last sale price unless there is no sale price, in which event current prices
provided by market makers are used. Over-the-counter fixed income options
are valued based upon current prices provided by market makers. Financial
futures are valued at the settlement price established each day by the board
of trade or exchange on which they are traded. Because of the need to obtain
prices as of the close of trading on various exchanges throughout the world,
the calculation of the Portfolio's net asset value does not take place for
contemporaneously with the determination of the prices of U.S. portfolio
securities. For purposes of determining the net asset value all assets and
liabilities initially expressed in foreign currency values will be converted
into United States dollar values at the mean between the bid and offered
quotations of such currencies against United States dollars at last quoted
by any recognized dealer. If an event were to occur after the value of an
investment was so established but before the net asset value per share was
determined which was likely to materially change the net asset value, then
the instrument would be valued using fair value consideration by the
Directors or their delegates.
The Money Market Portfolio's assets, including securities subject to
repurchase agreements, are normally valued at their amortized cost which
does not take into account unrealized capital gains or losses. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than
the price that would be received upon sale of the instrument.
TAXES
In 1999, the Portfolios intend to qualify, as a "regulated investment
company" under the provisions of Subchapter M of the Internal Revenue Code
(the "Code"). If for any reason the Fund should fail to qualify, it would be
taxed as a corporation at the Fund level, rather than passing through its
Income & gains to shareholders.
Distributions of realized net capital gains, if any, are normally paid once
a year; however, the Portfolios do not intend to make any such distributions
unless available capital loss carryovers, if any, have been used or have
expired.
Since the shareholders of the Portfolios are Insurance Companies, this
Statement of Additional Information does not contain a discussion of the
federal income tax consequences at the shareholder level. For information
concerning the federal tax consequences to purchasers of annuity or life
insurance policies, see the prospectus for the policies.
CALCULATION OF YIELD AND TOTAL RETURN
Yield (Money Market Portfolio):
From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the Money
Market Portfolio refers to the actual income generated by an investment in
the Portfolio over a particular base period of time. If the base period is
less than one year, the yield is then "annualized." That is, the net change,
exclusive of capital changes, in the value of a share during the base period
is divided by the net asset value per share at the beginning of the period,
and the result is multiplied by 365 and divided by the number of days in the
base period. Capital changes excluded from the calculation of yield are: (1)
realized gains and losses from the sale of securities, and (2) unrealized
appreciation and depreciation. The Money Market Portfolio's "effective
yield" for a seven-day period is its annualized compounded yield during the
period, calculated according to the following formula:
Effective yield = [(base period return) + 1]365/7 - 1
The "effective yield" is calculated like yield, but assumes reinvestment of
earned income. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of the Money Market Portfolio will fluctuate in response to
changes in interest rates and general economic conditions, portfolio
quality, portfolio maturity, and operating expenses. Yield is not fixed or
insured and therefore is not comparable to a savings or other similar type
of account. Yield during any particular time period should not be considered
an indication of future yield. It is, however, useful in evaluating a
Portfolio's performance in meeting its investment objective.
Total Return and Other Quotations (All Portfolios except the Money Market
Portfolio):
The Portfolios may each advertise "total return." Total return is computed
by taking the total number of shares purchased by a hypothetical $1,000
investment, adding all additional shares purchased within the period with
reinvested dividends and distributions, calculating the value of those
shares at the end of the period, and dividing the result by the initial
$1,000 investment. For periods of more than one year, the cumulative total
return is then adjusted for the number of years, taking compounding into
account, to calculate average annual total return during that period.
Total return is computed according to the following formula:
P(1 + T)n = ERV
where P = a hypothetical initial payment of $10,000; T = total return; n =
number of years; and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period. Total return is
historical in nature and is not intended to indicate future performance.
Directors and Officers
The Fund's Board of Directors supervises the Fund's activities and reviews
its contracts with companies that provide it with services. The Directors
and Officers of the Fund and their principal occupations are set forth
below. Directors and Officers who are active employees of the Investment
Advisor or its affiliates will not receive any additional compensation for
their services to the Fund.
FRANK H. BLATZ, JR., Esq., Director. Mr. Blatz is a partner in the law firm
of Snevily, Ely, Williams, Gurrieri & Blatz. He was formerly a partner with
Abrams, Blatz, Gran, Hendricks & Reina, P.A. He is also a director/trustee
of The Calvert Fund, Calvert Cash Reserves, First Variable Rate Fund,
Calvert Tax-Free Reserves, and Calvert Municipal Fund, Inc. Address: 308
East Broad Street, Westfield, New Jersey 07091. DOB: 10/29/35.
ALICE GRESHAM BULLOCK, Director. Ms. Bullock is a Dean and Professor at
Howard University School of Law. She was formerly Deputy Director of the
Association of American Law Schools. Ms. Bullock is a member of the Board of
Visitors of J. Reuben Clark Law School, Brigham Young University and the
Board of Directors of Council on Legal Education Opportunity. Address: 6127
Utah Avenue, Washington, D.C. 20015. DOB: 05/17/50.
CHARLES E. DIEHL, Director. Mr. Diehl is Vice President and Treasurer
Emeritus of the George Washington University, and has retired from
University Support Services, Inc. of Herndon, Virginia. He is also a
director of Acacia Mutual Life Insurance Company. Address: 1658 Quail Hollow
Court, McLean, Virginia 22101. DOB: 10/13/22.
*BARBARA J. KRUMSIEK, President and Director. Ms. Krumsiek serves as
President, Chief Executive Officer and Vice Chairman of Calvert Group, Ltd.
and as an officer and director of each of its affiliated companies. She is a
director of Calvert-Sloan Advisers, L.L.C., and a trustee/director of each
of the investment companies in the Calvert Group of Funds. Prior to joining
Calvert Group, Ms. Krumsiek served as Senior Vice President of Alliance
Capital LP's Mutual Fund Division. DOB: 08/09/52.
M. CHARITO KRUVANT, Director. Ms. Kruvant is President of Creative
Associates International, Inc., a firm that specializes in human resources
development, information management, public affairs and private enterprise
development. She is also a director of Acacia Federal Savings Bank. DOB:
12/08/45. Address: 5301 Wisconsin Avenue, N.W. Washington, D.C. 20015.
ARTHUR J. PUGH, Director. Mr. Pugh serves as a director of Acacia Federal
Savings Bank. Address: 4823 Prestwick Drive, Fairfax, Virginia 22030. DOB:
09/24/37.
SOUTH TRIMBLE, III, Director. Mr. Trimble is special counsel to and formerly
was a partner in the law firm of Reasoner & Fox. Address: 888 17th Street,
N.W., Suite 800, Washington, DC 20006. DOB: 06/25/25.
RONALD M. WOLFSHEIMER, CPA, Treasurer. Mr. Wolfsheimer is Senior Vice
President and Chief Financial Officer of Calvert Group, Ltd. and its
subsidiaries and an officer of each of the other investment companies in the
Calvert Group of Funds. Mr. Wolfsheimer is Vice President and Treasurer of
Calvert-Sloan Advisers, L.L.C., and a director of Calvert Distributors, Inc.
DOB: 07/24/47.
WILLIAM M. TARTIKOFF, Esq., Vice President and Secretary. Mr. Tartikoff is
General Counsel, Secretary, and Senior Vice President of Calvert Group,
Ltd., and its subsidiaries, and is an officer of each of the other
investment companies in the Calvert Group of Funds. Mr. Tartikoff is Vice
President and Secretary of Calvert-Sloan Advisers, L.L.C., a director of
Calvert Distributors, Inc., and is an officer of Acacia National Life
Insurance Company. DOB: 08/12/47.
RENO J. MARTINI, Senior Vice President. Mr. Martini is a director and Senior
Vice President of Calvert Group, Ltd., and Senior Vice President and Chief
Investment Officer of Calvert Asset Management Company, Inc. Mr. Martini is
also a director and President of Calvert-Sloan Advisers, L.L.C., and a
director and officer of Calvert New World Fund, Inc. DOB: 1/13/50.
DANIEL K. HAYES, Vice President. Mr. Hayes is Vice President of Calvert
Asset Management Company, Inc., and is an officer of each of the other
investment companies in the Calvert Group of Funds, except for Calvert New
World Fund, Inc. DOB: 09/09/50.
SUSAN WALKER BENDER, Esq., Assistant Secretary. Ms. Bender is Associate
General Counsel of Calvert Group, and an officer of each of its subsidiaries
and Calvert-Sloan Advisers, L.L.C. She is also an officer of each of the
other investment companies in the Calvert Group of Funds. DOB: 1/29/59.
IVY WAFFORD DUKE, Esq., Assistant Secretary. Ms. Duke is Associate General
Counsel of Calvert Group and an officer of each of its subsidiaries and
Calvert-Sloan Advisers, L.L.C. She is also an officer of each of the other
investment companies in the Calvert Group of Funds. Prior to working at
Calvert Group, Ms. Duke was an Associate in the Investment Management Group
of the Business and Finance Department at Drinker Biddle and Reath. DOB:
9/7/68.
VICTOR FRYE, Esq., Assistant Secretary and Compliance Officer. Mr. Frye is
Associate Counsel and Compliance Officer of Calvert Group and an officer of
each of its subsidiaries and Calvert-Sloan Advisers, L.L.C. He is also an
officer of each of the other investment companies in the Calvert Group of
Funds. Prior to working at Calvert Group, Mr. Frye was Counsel and Manager
of the Compliance Department at The Advisors Group. DOB: 10/15/58.
The address of directors and officers, unless otherwise noted, is 4550
Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814. Directors and
officers of the Fund as a group own less than 1% of the Fund's outstanding
shares. Directors marked with an *, above, are "interested persons" of the
Fund, under the Investment Company Act of 1940.
Each Director of the Fund who is not affiliated with the Advisor receives a
meeting fee of $750 for each Board meeting attended; such fees are allocated
among the Series based upon their relative net assets. Directors not on any
other Calvert Group Fund Boards receive an annual fee of $3,000.
Directors of the Fund not affiliated with the Fund's Advisor ("noninterested
persons") may elect to defer receipt of all or a percentage of their annual
fees and invest them in any fund in the Calvert Family of Funds through the
Directors/Trustees Deferred Compensation Plan (shown as "Pension or
Retirement Benefits Accrued as part of Fund Expenses," below). Deferral of
the fees is designed to maintain the parties in the same position as if the
fees were paid on a current basis. Management believes this will have a
negligible effect on the Fund's assets, liabilities, net assets, and net
income per share.
INVESTMENT ADVISOR AND SUBADVISORS
The Fund's Investment Advisor is Ameritas Investment Corp. ("AIC"), 5900 "O"
Street, 4th Floor, Lincoln, Nebraska 68510-1889. AIC is registered as an
investment advisor under the Investment Advisors Act of 1940 and also is
registered as a broker dealer under the Securities Exchange Act of 1934. AIC
serves as the underwriter of variable products issued by its affiliates,
Ameritas Variable Life Insurance Company and Ameritas Life Insurance Corp.
The Investment Advisory Agreement provides that the Advisor will not be
liable to the Portfolio or to any shareholder or policy owner for any error
of judgment or mistake of law or for any loss suffered by the Portfolio or
by any shareholder or policy owner in connection with matters to which the
Investment Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard on the part
of the advisor in the performance of its duties thereunder.
Subadvisors
AIC has retained Fred Alger Management, Inc. as Subadvisor for Income &
Growth, Growth, Small Capitalization and MidCap Growth Portfolios. Fred
Alger Management, Inc. is owned by Alger Inc. which in turn is owned by
Alger Associates, Inc., a financial services holding company. Fred M. Alger,
III and David D. Alger are the majority shareholders of Alger Associates,
Inc. and may be deemed to control that company and its subsidiaries. It
receives a subadvisory fee, paid by the Advisor, of 0.53% of each Portfolio's
net assets.
AIC has retained Massachusetts Financial Services Company as Subadvisor the
Emerging Growth, Research, and Growth With Income Portfolios. Massachusetts
Financial Services Company is a subsidiary of Sun Life of Canada (U.S.)
Financial Services Holdings, Inc., which in turn is an indirect wholly owned
subsidiary of Sun Life of Canada (an insurance company). It receives a
subadvisory fee, paid by the Advisor, of 0.50% of each Portfolio's net assets.
AIC has retained State Street Global Advisors as Subadvisor for the Index 500
Portfolio. State Street Global Advisors is a division of State Street Bank
and Trust. It receives a subadvisory fee, paid by the Advisor, of 0.05% of
the Portfolio's net assets.
AIC has retained Calvert Asset Management Company, Inc. as Subadvisor for
the Money Market Portfolio. Calvert Asset Management Company, Inc. is a
subsidiary of Calvert Group, Ltd., a subsidiary of Calvert Group Ltd., which
is a subsidiary of Acacia Mutual Life Insurance Company of Washington, D.C.
("Acacia Mutual"). Effective January 1, 1999, Acacia merged with and became
a subsidiary of Ameritas Acacia Mutual Holding Company. It receives a
subadvisory fee, paid by the Advisor, of 0.15% of the Portfolio's net assets.
Calvert Administrative Services Company ("CASC") has been retained by the
Fund to provide certain administrative services necessary to the conduct of
its affairs, including the preparation of regulatory filings and shareholder
reports. For providing such services, CASC receives an annual administrative
service fee payable monthly of 0.05% of each Portfolio's net assets.
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken on the basis of their desirability
from an investment standpoint. The Fund's Advisor and Subadvisors make
investment decisions and the choice of brokers and dealers under the
direction and supervision of the Fund's Board of Directors.
Broker-dealers who execute portfolio transactions on behalf of the Fund are
selected on the basis of their execution capability and trading expertise
considering, among other factors, the overall reasonableness of the
brokerage commissions, current market conditions, size and timing of the
order, difficulty of execution, per share price, etc.
While the Fund's Advisor and Subadvisor(s) select brokers primarily on the
basis of best execution, in some cases they may direct transactions to
brokers based on the quality and amount of the research and research-related
services which the brokers provide to them. These services are of the type
described in Section 28(e) of the Securities Exchange Act of 1934 and may
include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Other such services
are designed primarily to assist the Advisor in monitoring the investment
activities of the Subadvisor(s) of the Fund. Such services include portfolio
attribution systems, return-based style analysis, and trade-execution
analysis.
If, in the judgment of the Advisor or Subadvisor(s), the Fund or other
accounts managed by them will be benefited by supplemental research
services, they are authorized to pay brokerage commissions to a broker
furnishing such services which are in excess of commissions which another
broker may have charged for effecting the same transaction. These research
services include advice, either directly or through publications or
writings, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing of analyses and reports
concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer software used in security analyses; providing portfolio
performance evaluation and technical market analyses; and providing other
services relevant to the investment decision making process. It is the
policy of the Advisor that such research services will be used for the
benefit of the Fund as well as other Calvert Group funds and managed
accounts.
No Portfolio turnover rate can be calculated for the Money Market Portfolio
due to the short maturities of the instruments purchased. Portfolio turnover
should not affect the income or net asset value of the Money Market
Portfolio because brokerage commissions are not normally charged on the
purchase or sale of money market instruments.
METHOD OF DISTRIBUTION
AIC also serves as the principal underwriter and distributor for
the Fund. Under the terms of its underwriting agreement with
the Fund, AIC markets and distributes the Fund's shares and is responsible
for preparing advertising and sales literature, and printing and mailing
prospectuses to prospective investors. AIC is entitled to compensation for
services performed and expenses assumed. Payments to AIC may be authorized
by the Fund's Board of Directors from time to time in accordance with
applicable law. AIC is responsible for paying (i) all commissions or other
fees to its associated persons which are due for the sale of the Policies,
and (ii) any compensation to other broker-dealers and their associated
persons due under the terms of any sales agreement between AIC and the
broker-dealers. As the Advisor and Distributor, AIC, at its own expense, may
incur costs or pay expenses associated with the distribution of the Fund's
shares.
TRANSFER AND SHAREHOLDER SERVICING AGENT
National Financial Data Services, Inc. ("NFDS"), 1004 Baltimore, 6th Floor,
Kansas City, Missouri 64105, a subsidiary of State Street Bank & Trust, has
been retained by the Fund to act as transfer agent and dividend disbursing
agent. These responsibilities include: responding to certain shareholder
inquiries and instructions, crediting and debiting shareholder accounts for
purchases and redemptions of Fund shares and confirming such transactions,
and daily updating of shareholder accounts to reflect declaration and
payment of dividends.
Calvert Shareholder Services, Inc. ("CSSI"), 4550 Montgomery Avenue, Suite
1000N, Bethesda, Maryland 20814, a subsidiary of Calvert Group, Ltd. and
Acacia Mutual, has been retained by the Fund to act as shareholder servicing
agent. Shareholder servicing responsibilities include responding to
shareholder inquiries and instructions concerning their accounts, entering
any telephoned purchases or redemptions into the NFDS system, maintenance of
broker-dealer data, and preparing and distributing statements to
shareholders regarding their accounts.
For these services, CSSI and NFDS receive a fee based on the number of
shareholder accounts and transactions.
INDEPENDENT ACCOUNTANTS AND CUSTODIANS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, has been selected by the Board of Directors to serve as independent
accountants for fiscal year 1999. State Street Bank and Trust Company, N.A.,
225 Franklin Street, Boston, Massachusetts 02110, serves as custodian of the
Fund's investments. First National Bank of Maryland, 25 South Charles
Street, Baltimore, Maryland 21203 also serves as custodian of certain of the
Fund's cash assets. The custodians have no part in deciding the Fund's
investment policies or the choice of securities that are to be purchased or
sold for the Fund's Portfolios.
GENERAL INFORMATION
The Fund is an open-end, management investment company, incorporated in
Maryland on September 27, 1982. The Income & Growth, Growth, Small
Capitalization, MidCap Growth, Emerging Growth Portfolios are diversified.
The Research, Growth With Income, Index 500 and Money Market Portfolios are
non-diversified. The Fund issues separate stock for each Portfolio. Shares
of each of the Portfolios have equal rights with regard to voting,
redemptions, dividends, distributions, and liquidations. No Portfolio has
preference over another Portfolio. The Insurance Companies and the Fund's
shareholders will vote Fund shares allocated to registered separate accounts
in accordance with instructions received from policyholders. Under certain
circumstances, which are described in the accompanying prospectus of the
variable life or annuity policy, the voting instructions received from
variable life or annuity policyholders may be disregarded.
All shares of common stock have equal voting rights (regardless of the net
asset value per share) except that only shares of the respective portfolio
are entitled to vote on matters concerning only that portfolio. Pursuant to
the Investment Company Act of 1940 and the rules and regulations thereunder,
certain matters approved by a vote of all shareholders of the Fund may not
be binding on a portfolio whose shareholders have not approved that matter.
Each issued and outstanding share is entitled to one vote and to participate
equally in dividends and distributions declared by the respective portfolio
and, upon liquidation or dissolution, in net assets of such portfolio
remaining after satisfaction of outstanding liabilities. The shares of each
portfolio, when issued, will be fully paid and non-assessable and have no
preemptive or conversion rights. Holders of shares of any portfolio are
entitled to redeem their shares as set forth above under "Purchase and
Redemption of Shares." The 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 the holders of the remaining shares would
not be able to elect any directors.
The Fund's Board of Directors has adopted a "proportionate voting" policy,
meaning that Insurance Companies will vote all of the Fund's shares,
including shares the Insurance Companies hold, in return for providing the
Fund with its capital and in payment of charges made against the variable
annuity or variable life separate accounts, in proportion to the votes
received from contractholders or policyowners.
The Fund is not required to hold annual policyholder meetings, but special
meetings may be called for certain purposes such as electing Directors,
changing fundamental policies, or approving a management contract. As a
policyholder, you receive one vote for each share you own.
APPENDIX
Corporate Bond Ratings
Moody's Investors Service Inc.'s/Standard & Poor's municipal bond ratings:
Aaa/AAA: Best quality. These bonds carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. This rating indicates an extremely strong capacity to pay principal
and interest.
Aa/AA: Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A/A: Upper-medium grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which make
the bond somewhat more susceptible to the adverse effects of circumstances
and economic conditions.
Baa/BBB: Medium grade obligations; adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
Ba/BB, B/B, Caa/CCC, Ca/CC: Debt rated in these categories is regarded as
predominantly speculative with respect to capacity to pay interest and repay
principal. There may be some large uncertainties and major risk exposure to
adverse conditions. The higher the degree of speculation, the lower the
rating.
C/C: This rating is only for no-interest income bonds.
D: Debt in default; payment of interest and/or principal is in arrears.
Commercial Paper Ratings
Moody's Investors Services, Inc.
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. Issuers rated Prime are further referred to by use
of numbers 1, 2, and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings
for an issuer are the following: (1) management; (2) economic evaluation of
the inherent uncertain areas; (3) competition and customer acceptance of
products; (4) liquidity; (5) amount and quality of long-term debt; (6) ten
year earnings trends; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations.
Standard & Poor's Corporation
Commercial paper rated A by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are better than the industry average. Long
term senior debt rating is "A" or better. In some cases BBB credits may be
acceptable. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established, the issuer has a strong position within its industry and the
reliability and quality of management is unquestioned. Issuers rated A are
further referred to by use of numbers 1, 2, and 3 to denote relative
strength within this classification.
