<PAGE>
Registration No. 2-94479
811-4161
As filed with the Securities and Exchange Commission on April 22, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
----------------------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-effective Amendment No.
Post-effective Amendment No. 23 /X/
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 /X/
----------------------
Jefferson Pilot Variable Fund, Inc.
(Exact name of Registrant as Specified in Charter)
One Granite Place
Concord, New Hampshire 03301
(Address of Principal Executive Offices)
603-226-5000
(Registrant's Telephone Number)
Ronald R. Angarella, President
One Granite Place
Concord, New Hampshire 03301
(Name and Address of Agent for Service)
Copies To:
SHARI J. LEASE, Esq. JOAN BOROS, Esq.
Jefferson Pilot Variable Fund, Inc. Jorden, Burt, Boros,
One Granite Place Ciochetti, Berenson & Johnson LLP
Concord, NH 03301 1025 Thomas Jefferson Street, N.W.,
Suite 400 East
Washington, D.C. 20007-0805
It is proposed that this filing will become effective on December 31, 1997
pursuant to Rule 485 (b).
The Registrant has registered an indefinite number or amount of its shares of
common stock under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The Registrant filed a Rule 24f-2 Notice on
March 31, 1998.
<PAGE>
JEFFERSON PILOT VARIABLE FUND, INC.
CROSS REFERENCE SHEET
Cross reference sheet showing location in the Prospectus of information
required by the Items in Part A of Form N-1A.
Item
Number Heading In Prospectus
- -------
1 Cover Page
2 *(Synopsis)
3 Financial Highlights
4 Investment Objectives and Policies, Capital Stock
5 Management of the Fund
6 Capital Stock, Taxes and Dividends
7 Offering and Redemption of Shares
8 Offering and Redemption of Shares
9 *(Legal Proceedings)
- --------------
* Indicates inapplicable or negative.
<PAGE>
- --------------------------------------------------------------------------------
JEFFERSON PILOT VARIABLE FUND, INC.
ONE GRANITE PLACE
CONCORD, NEW HAMPSHIRE 03301
(603) 226-5000
- --------------------------------------------------------------------------------
Jefferson Pilot Variable Fund, Inc., formerly The Chubb America Fund,
Inc., (the "Fund") is an open-end management investment company which was
incorporated in Maryland on October 19, 1984. The Fund is composed of twelve
separate Portfolios which operate as distinct investment vehicles. The names and
investment objectives of the Portfolios currently offered are as follows:
World Growth Stock Portfolio: seeks to achieve long-term capital growth
through a policy of investing primarily in stocks of companies organized in the
United States or in any foreign nation. A portion of the Portfolio may also be
invested in debt obligations of companies and governments of any nation. Any
income realized will be incidental.
International Equity Portfolio: seeks long-term growth of capital through
investments in securities whose primary trading markets are outside the United
States.
Money Market Portfolio: seeks to achieve as high a level of current income
as is consistent with preservation of capital and liquidity. AN INVESTMENT IN
THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S
GOVERNMENT.
Global Hard Assets Portfolio (formerly "Gold Stock Portfolio"): seeks
long-term capital appreciation by investing globally, primarily in "Hard Asset
Securities." Income is a secondary consideration.
High Yield Bond Portfolio: seeks a high level of current income by
investing primarily in corporate obligations with emphasis on higher yielding,
higher risk, lower-rated or unrated securities. These securities may be
considered speculative and involve greater risks, including risk of default,
than higher rated securities. Investors should carefully consider these risks
before investing.
Domestic Growth Stock Portfolio: to achieve reasonable income and growth
of capital by investing primarily in a diversified portfolio of equity
securities issued by companies organized in the U.S. and considered by the
Sub-Investment Manager to be undervalued in light of the company's earning power
and growth potential.
Growth Portfolio: seeks capital growth by investing primarily in equity
securities that the Sub-Investment Manager believes have above-average growth
prospects.
Growth and Income Portfolio: to seek long-term growth of capital by
investing primarily in a wide range of equity issues that may offer capital
appreciation and, secondarily, to seek a reasonable level of current income.
Capital Growth Portfolio: to seek capital growth. Realization of income is
not a significant investment consideration and any income realized will be
incidental.
Balanced Portfolio: to seek reasonable current income and long-term
capital growth, consistent with conservation of capital, by investing primarily
in common stocks and fixed income securities.
Emerging Growth Portfolio: seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental to
the Portfolio's investment objective of long-term growth. THE PORTFOLIO IS
INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT RISKS ENTAILED
IN SEEKING LONG-TERM GROWTH OF CAPITAL.
The World Growth Stock Portfolio, International Equity Portfolio, the
Global Hard Assets Portfolio, High Yield Bond Portfolio, the Growth and Income
Portfolio, the Growth Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio and the Emerging Growth Portfolio permit investments in any nation,
and investments in these Portfolios involve special considerations and risks.
1
<PAGE>
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE UNITED STATES GOVERNMENT. INVESTMENTS IN THE PORTFOLIOS ARE
NOT BANK DEPOSITS AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF, OR
OTHERWISE SUPPORTED BY THE FDIC OR ANY BANK. AN INVESTMENT IN ANY OF THE
PORTFOLIOS IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE INVESTMENT TO
FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE HIGHER OR LOWER
THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
This Prospectus sets forth concisely the information about the Fund and
its Portfolios that a prospective investor should know before investing. This
Prospectus should be read and retained for future reference.
A Statement of Additional Information for the Fund, dated May 1, 1998, has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. This Statement of Additional Information is available upon
request, and without charge, from the Fund by calling 1-800-452-4822 or at the
address or telephone number above. Inquiries about the Fund should be directed
to the Fund at the same address or telephone number.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
FINANCIAL HIGHLIGHTS......................................................................................
PERFORMANCE AND YIELD INFORMATION.........................................................................
PORTFOLIOS................................................................................................
INVESTMENT OBJECTIVES AND POLICIES........................................................................
World Growth Stock Portfolio...........................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
International Equity Portfolio.........................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Money Market Portfolio.................................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Global Hard Assets Portfolio...........................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
High Yield Bond Portfolio..............................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Domestic Growth Stock Portfolio........................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Growth Portfolio.......................................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Growth and Income Portfolio............................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Capital Growth Portfolio...............................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Balanced Portfolio.....................................................................................
Investment Objectives...............................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Emerging Growth Portfolio..............................................................................
Investment Objective................................................................................
Investment Policies.................................................................................
Risk Factors........................................................................................
Additional Risk Factors................................................................................
Convertible Securities.................................................................................
Foreign Securities.....................................................................................
</TABLE>
3
<PAGE>
<TABLE>
PAGE
----
<S> <C>
Foreign Currencies.....................................................................................
Brady Bonds............................................................................................
Non-Diversified Status.................................................................................
Emerging Market Securities.............................................................................
Depository Receipts....................................................................................
Forward Foreign Currency Exchange Contracts............................................................
Repurchase Agreements..................................................................................
High Yield Securities..................................................................................
Zero Coupon Bonds......................................................................................
Securities and Index Options...........................................................................
Purchasing Put and Call Options........................................................................
Futures Contracts......................................................................................
Lending of Securities..................................................................................
When Issued Securities.................................................................................
Mortgage Backed and Corporate Asset-Backed Securities..................................................
Stripped Mortgage-Backed Securities....................................................................
Borrowing..............................................................................................
Warrants...............................................................................................
Restricted and Illiquid Securities.....................................................................
Dollar Roll Transactions...............................................................................
Swap Transactions......................................................................................
Loan Participations and Other Direct Indebtedness......................................................
INVESTMENT RESTRICTIONS...................................................................................
Portfolio Turnover.....................................................................................
MANAGEMENT OF THE FUND....................................................................................
CAPITAL STOCK.............................................................................................
TAXES AND DIVIDENDS.......................................................................................
OFFERING AND REDEMPTION OF SHARES.........................................................................
OTHER INFORMATION.........................................................................................
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, IN THE STATEMENT OF ADDITIONAL INFORMATION, AND IN THE
ATTACHED PROSPECTUS FOR THE POLICY.
4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables include selected data for a share of capital stock
outstanding for each portfolio throughout the periods indicated. The related
financial statements and report of Ernst & Young LLP, independent auditors are
incorporated by reference into the Statement of Additional Information and both
are available upon request and without charge by calling 1-800-452-4822.
For a share outstanding throughout the year:
WORLD GROWTH STOCK PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Net asset value, beginning of year $21.31 $21.20 $19.00 $20.89
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.49 0.45 0.25
Net gains and losses on securities and foreign
currencies (both realized and unrealized) 2.97 3.56 2.65 (0.89)
---- ---- ---- ------
Total from investment operations 3.50 4.05 3.10 (0.64)
LESS DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income (0.53) (0.48) (0.43) (0.25)
Dividends in excess of net investment income (0.03)
Distributions from capital gains (2.76) (1.46) (0.47) (0.81)
Distributions in excess of capital gains (0.21) (0.19)
Returns of capital
Total distributions (3.53) (1.94) (0.90) (1.25)
Net asset value, end of period $23.28 $23.31 $21.20 $19.00
====== ====== ====== ======
Total Return (A) 15.33% 19.22% 16.35% (3.05%)
Ratios to Average Net Assets:
Expenses .91% 0.88% 0.96% 1.00%
Net investment income 2.33% 2.20% 2.31% 1.56%
Portfolio Turnover Rate 30.22% 27.50% 18.09% 18.47%
Average Commission Rate Paid $0.0120 $0.0155
Net Assets, At end of period $105,567,503 $91,995,634 $73,692,357 $52,903,768
</TABLE>
(A) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges that apply to the
separate account or related insurance policies. Investment returns and
principal values will fluctuate and shares, when redeemed, may be worth
more or less than the original cost.
6
<PAGE>
WORLD GROWTH STOCK PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
$16.73 $16.45 $13.70 $16.07 $12.77 $11.48
0.24 0.35 0.34 0.36 0.32 0.18
5.40 0.65 2.75 (2.00) 3.34 1.32
---- ---- ---- ----- ---- ----
5.64 1.00 3.09 (1.64) 3.66 1.50
(0.24) (0.35) (0.34) (0.37) (0.36) (0.18)
(1.24) (0.37) (0.36) (0.03)
(1.48) (0.72) (0.34) (0.73) (0.36) (0.21)
$20.89 $16.73 $16.45 $13.70 $16.07 $12.77
====== ====== ====== ====== ====== ======
33.73% 6.10% 22.53% (10.38%) (28.62%) 13.10%
1.04% 1.17% 1.14% 1.22% 1.42% 1.60%
1.64% 2.19% 2.40% 2.65% 2.46% 1.80%
34.90% 32.27% 50.06% 25.79% 5.73% 14.75%
$42,031,141 $25,416,357 $22,659,930 $16,052,089 $14,467,050 $8,781,827
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
MONEY MARKET PORTFOLIO (A)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Net asset value, beginning of year $10.25 $10.27 $10.25 $10.26
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.52 0.50 0.50 0.35
Net gains and losses on securities (both
realized and unrealized) (0.02) (0.02) 0.02 (0.01)
------ ------ ---- ------
Total from investment operations 0.50 0.48 0.52 0.34
LESS DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income (0.52) (0.50) (0.50) (0.35)
Dividends in excess of net investment income
Distributions from capital gains
Distributions in excess of capital gains
Returns of capital
------ ------ ---- ------
Total distributions (0.52) (0.50) (0.50) (0.35)
Net asset value, end of period $10.23 $10.25 $10.27 $10.25
====== ====== ====== ======
Total Return (B) 4.86% 4.65% 5.06% 3.28%
Ratios to Average Net Assets:
Expenses 0.60% 0.62% 0.63% 0.65%
Net investment income 4.74% 4.54% 4.89% 3.31%
Portfolio Turnover Rate (C) N/A N/A N/A N/A
Average Commission Rate Paid (D) N/A N/A N/A N/A
Net Assets, At end of period $9,435,454 $7,896,257 $8,312,676 $7,680,485
</TABLE>
(A) The per share amounts which are shown have been computed based on the
average number of shares outstanding during each period.
(B) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges that apply to the
separate account or related insurance policies. Investment returns and
principal values will fluctuate and shares, when redeemed, may be worth more
or less than the original cost.
8
<PAGE>
(C) There were no purchase and/or sales of securities other than short term
obligations during the year. Therefore, the portfolio turnover rate has
not been calculated.
(D) During the period, the portfolio held less than 10% of the value of
average net assets in equity securities. Therefore, the Average
Commission Rate Paid has not been calculated.
9
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
$10.22 $10.22 $10.21 $10.18 $10.16 $10.09
0.20 0.29 0.52 0.73 0.78 0.63
0.04 0.01
---- ----
0.24 0.29 0.53 0.73 0.78 0.63
(0.20) (0.29) (0.52) (0.70) (0.76) (0.56)
------ ------ ------ ------ ------ ------
(0.20) (0.29) (0.52) (0.70) (0.76) (0.56)
$10.26 $10.22 $10.22 $10.21 $10.18 $10.16
====== ====== ====== ====== ====== ======
2.32% 2.83% 5.18% 7.15% 7.63% 6.33%
0.74% 0.85% 0.85% 1.09% 1.37% 1.79%
2.32% 2.81% 4.95% 6.90% 7.35% 6.16%
N/A N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A N/A
$5,061,181 $3,956,152 $3,672,941 $2,910,677 $2,496,140 $2,228,190
</TABLE>
10
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
GLOBAL HARD ASSETS PORTFOLIO (formerly Gold Stock Portfolio)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Net asset value, beginning of year $16.60 $16.61 $16.25 $19.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.02 (0.03) 0.05 0.03
Net gains and losses on securities and foreign
currency (both realized and unrealized) (7.30) 0.45 0.40 (2.65)
------ ---- ---- ------
Total from investment operations (7.28) 0.42 0.45 (2.62)
LESS DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income (0.02) (0.05) (0.03)
Dividends in excess of net investment income (0.07) (0.04)
Distributions from capital gains (0.43)
Distributions in excess of capital gains (0.31) (0.10)
Returns of capital
Total distributions (0.40) (0.43) (0.09) (0.13)
Net asset value, end of period $8.92 $16.60 $16.61 $16.25
===== ====== ====== ======
Total Return (A) (44.63%) 2.57% 2.76% (13.77%)
Ratios to Average Net Assets:
Expenses 1.07% 1.04% 1.01% 0.99%
Net investment income 0.63% (0.11%) 0.24% 0.18%
Portfolio Turnover Rate 19.70% 64.78% 23.98% 11.12%
Average Commission Rate Paid $0.0181 $0.0151
Net Assets, At end of period $5,204,654 $7,554,427 $6,867,645 $7,351,625
</TABLE>
(A) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges that apply to the
separate account or related insurance policies. Investment returns and
principal values will fluctuate and shares, when redeemed, may be worth
more or less than the original cost.
11
<PAGE>
GLOBAL HARD ASSETS PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
$11.57 $11.99 $12.76 $16.95 $14.37 $18.24
0.02 0.03 0.07 0.07 0.06 (0.03)
7.43 (0.42) (0.77) (4.19) 2.70 (3.84)
---- ------ ------ ------ ---- ------
7.45 (0.39) (0.70) (4.12) 2.76 (3.87)
(0.02) (0.03) (0.07) (0.07) (0.05)
(0.12)
(0.01)
(0.02) (0.03) (0.07) (0.07) (0.18)
$19.00 $11.57 $11.99 $12.76 $16.95 $14.37
====== ====== ====== ====== ====== ======
63.90% (3.29%) (5.48%) (24.28%) 19.24% (21.24%)
1.01% 1.13% 1.16% 1.36% 1.39% 1.62%
0.14% 0.24% 0.57% 0.59% 0.39% (0.38%)
7.32% 7.78% 14.23% 17.61% 3.05% 9.92%
$7,863,581 $4,338,297 $4,646,951 $5,390,279 $5,969,256 $4,258,297
</TABLE>
12
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
<TABLE>
DOMESTIC GROWTH STOCK PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Net asset value, beginning of year $18.19 $17.87 $15.94 $16.14
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.09 0.06 0.15 0.09
Net gains and losses on securities (both
realized and unrealized) 4.17 2.85 4.48 1.12
---- ---- ---- ----
Total from investment operations 4.26 2.91 4.63 1.21
LESS DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income (0.09) (0.06) (0.15) (0.09)
Dividends in excess of net investment income
Distributions from capital gains (1.93) (2.53) (2.55) (1.32)
Distributions in excess of capital gains
Returns of capital
Total distributions (2.02) (2.59) (2.70) (1.41)
Net asset value, end of period $20.43 $18.19 $17.87 $15.94
====== ====== ====== ======
Total Return (A) 23.60% 16.46% 29.72% 7.66%
Ratios to Average Net Assets:
Expenses 0.83% 0.85% 0.87% 0.89%
Net investment income 0.47% 0.31% 0.95% 0.63%
Portfolio Turnover Rate 52.92% 49.75% 64.17% 46.65%
Average Commission Rate Paid $0.0554 $0.0555
Net Assets, At end of period $81,505,107 $62,166,366 $48,517,886 $31,458,666
</TABLE>
(A) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges that apply to the
separate account or related insurance policies. Investment returns and
principal values will fluctuate and shares, when redeemed, may be worth
more or less than the original cost.
13
<PAGE>
DOMESTIC GROWTH STOCK PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
$15.16 $12.96 $10.15 $13.25 $11.71 $9.54
0.12 0.14 0.24 0.26 0.18 0.11
2.29 3.27 3.13 (2.71) 2.06 2.40
---- ---- ---- ------ ---- ----
2.41 3.41 3.37 (2.45) 2.24 2.51
(0.12) (0.14) (0.24) (0.26) (0.21) (0.10)
(1.31) (1.07) (0.32) (0.39) (0.49) (0.24)
(1.43) (1.21) (0.56) (0.65) (0.70) (0.34)
$16.14 $15.16 $12.96 $10.15 $13.25 $11.71
====== ====== ====== ====== ====== ======
15.89% 26.50% 33.18% (18.55%) 19.36% 26.31%
0.97% 1.07% 1.13% 1.25% 1.45% 1.70%
0.76% 1.07% 2.02% 2.38% 1.59% 1.26%
49.47% 41.36% 40.93% 15.17% 10.32% 22.69%
$25,072,289 $19,985,838 $15,583,806 $10,517,783 $11,320,279 $6,893,776
</TABLE>
14
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED ENDED ENDED MAY 1, 1992 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992 (A)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $16.91 $14.41 $11.22 $12.35 $11.10 $10.27
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.15 0.18 0.15 0.13 0.12 0.02
Net gains and losses on securities
(both realized and unrealized) 4.67 3.12 3.62 (0.65) 1.53 0.83
---- ---- ---- ------ ---- ----
Total from investment operations 4.82 3.30 3.77 (0.52) 1.65 0.85
LESS DISTRIBUTIONS TO
SHAREHOLDERS
Dividends from net investment income (0.15) (0.18) (0.15) (0.13) (0.12) (0.02)
Dividends in excess of net investment
income
Distributions from capital gains (4.21) (0.62) (0.29) (0.48) (0.28)
Distributions in excess of capital gains (0.26) (0.14)
Returns of capital
Total distributions (4.62) (0.80) (0.58) (0.61) (0.40) (0.02)
Net asset value, end of period $17.11 $16.91 $14.41 $11.22 $12.35 $11.10
====== ====== ====== ====== ====== ======
Total Return (B) 28.92% 22.88% 33.58% (4.24%) 14.94% 12.48%(C)
Ratios to Average Net Assets:
Expenses 0.85% 0.88% 0.92% 1.10% 1.35% 2.09%(C)
Net investment income 1.03% 1.39% 1.50% 1.52% 1.38% 0.36%(C)
Portfolio Turnover Rate 129.53% 35.69% 32.30% 38.17% 77.68% 54.11%
Average Commission Rate Paid $0.0604 $0.0700
Net Assets, At end of period $39,678,076 $23,711,696 $13,126,023 $5,610,472 $2,831,442 $1,489,179
</TABLE>
(A) Per share data calculated from the initial offering date, May 1, 1992, for
sale to Chubb Separate Account A.
(B) Total return assumes reinvestment of all dividends during the year and does
not reflect deduction of account fees and charges that apply to the separate
accounts or related insurance policies and annuity contracts. Investment
returns and principal values will fluctuate and shares, when redeemed, may
be worth more or less than the original cost.
(C) Per share data and ratios calculated on an annualized basis.
15
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
CAPITAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
YEAR YEAR YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED ENDED ENDED MAY 1, 1992 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $17.26 $17.38 $13.38 $14.26 $12.42 $9.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.03 0.03 (0.01)
Net gains and losses on securities
(both realized and unrealized) 4.99 3.24 5.56 (0.49) 3.03 2.69
Total from investment operations 4.99 3.29 5.59 (0.46) 3.03 2.68
LESS DISTRIBUTIONS TO
SHAREHOLDERS
Dividends from net investment income (0.05) (0.03) (0.03)
Dividends in excess of net investment
income
Distributions from capital gains (0.81) (3.36) (1.56) (0.33) (1.19) (0.21)
Distributions in excess of capital gains (0.21) (0.06)
Returns of capital
Total distributions (1.02) (3.41) (1.59) (0.42) (1.19) (0.21)
Net asset value, end of period $21.23 $17.26 $17.38 $13.38 $14.26 $12.42
====== ====== ====== ====== ====== ======
Total Return (B) 29.41% 19.25% 41.74% (3.26%) 24.73% 40.40%(C)
Ratios to Average Net Assets:
Expenses 1.09% 1.13% 1.15% 1.22% 1.33% 1.96% (C)
Net investment income 0.02% 0.30% 0.21% 0.25% (0.11%) (0.37%)(C)
Portfolio Turnover Rate 91.66% 147.82% 170.32% 202.04% 162.79% 104.76%
Average Commission Rate Paid $0.0568 $0.0502
Net Assets, At end of period $124,123,995 $70,832,162 $49,853,029 $27,564,086 $15,373,489 $5,343,734
</TABLE>
(A) Per share data calculated from the initial offering date, May 1, 1992 for
sale to Chubb Separate Account A.
(B) Total return assumes reinvestment of all dividends during the year and does
not reflect deduction of account fees and charges that apply to the
separate accounts or related insurance policies and annuity contracts.
Investment returns and principal values will fluctuate and shares, when
redeemed, may be worth more or less than the original cost.
(C) Per share data and ratios calculated on an annualized basis.
16
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED ENDED ENDED MAY 1, 1992 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992 (A)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.07 $11.91 $10.62 $11.22 $10.77 $10.10
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.30 0.26 0.37 0.32 0.25 0.16
Net gains and losses on securities
(both realized and unrealized) 1.60 0.99 1.99 (0.47) 0.74 0.67
Total from investment operations 1.90 1.25 2.36 (0.15) 0.99 0.83
LESS DISTRIBUTIONS TO
SHAREHOLDERS
Dividends from net investment income (0.30) (0.26) (0.37) (0.32) (0.25) (0.16)
Dividends in excess of net investment
income
Distributions from capital gains (1.64) (0.83) (0.70) (0.13) (0.25)
Distributions in excess of capital gains (0.28) (0.04)
Returns of capital
Total distributions (2.22) (1.09) (1.07) (0.45) (0.54) (0.16)
Net asset value, end of period $11.75 $12.07 $11.91 $10.62 $11.22 $10.77
====== ====== ====== ====== ====== ======
Total Return (B) 16.33% 10.56% 22.35% (1.33%) 9.27% 12.33%(C)
Ratios to Average Net Assets:
Expenses 0.97% 0.97% 0.99% 1.01% 1.07% 1.43%(C)
Net investment income 2.60% 2.20% 3.20% 3.34% 2.79% 2.80%(C)
Portfolio Turnover Rate 254.04% 222.35% 164.70% 103.68% 65.49% 77.33%
Average Commission Rate Paid $0.0351 $0.0601
Net Assets, At end of period $22,637,577 $18,256,430 $14,532,268 $14,764,853 $11,703,898 $6,944,437
</TABLE>
(A) Per share data calculated from the initial offering date, May 1, 1992, for
sale to Chubb Separate Account A.
(B) Total return assumes reinvestment of all dividends during the year and does
not reflect deduction of account fees and charges that apply to the separate
accounts or related insurance policies and annuity contracts. Investment
returns and principal values will fluctuate and shares, when redeemed, may
be worth more or less than the original cost.
(C) Per share data and ratios calculated on an annualized basis.
17
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
For a share outstanding throughout the year:
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM
ENDED ENDED MAY 1, 1995 THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 (A)
<S> <C> <C> <C>
Net asset value, beginning of year $15.23 $13.29 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.07) (0.05) (0.04)
Net gain on securities (both realized and unrealized) 3.19 2.48 3.33
Total from investment operations 3.12 2.43 3.29
LESS DISTRIBUTIONS TO SHAREHOLDERS Dividends from
net investment income
Dividends in excess of net investment income
Distributions from capital gains (0.88) (0.49)
Distributions in excess of capital gains
Returns of capital
Total distributions (0.88) (0.49) 0.00
Net asset value, end of period $17.47 $15.23 $13.29
====== ====== ======
Total Return (B) 20.47% 18.30% 32.91%
Ratios to Average Net Assets:
Expenses 1.00% 1.16% 1.63% (C)
Net investment income (0.61%) (0.48%) (0.84%)(C)
Portfolio Turnover Rate 122.85% 94.58% 30.31%
Average Commission Rate Paid $0.0688 $0.0390
Net Assets, At end of period $56,229,175 $30,794,030 $11,439,524
</TABLE>
(A) Per share data calculated from the initial offering date, May 1, 1995, for
sale to Chubb Separate Account A.
(B) Total return assumes reinvestment of all dividends during the year and does
not reflect deduction of account fees and charges that apply to the separate
accounts or related insurance policies and annuity contracts. Investment
returns and principal values will fluctuate and shares, when redeemed, may
be worth more or less than the original cost. Total return figures for
periods less than one year have not been annualized.
(C) Per share data and ratios calculated on an annualized basis.
18
<PAGE>
PERFORMANCE AND YIELD INFORMATION
From time to time the Fund may advertise the yield and/or the average
annual total return of some or all of its twelve investment portfolios. These
figures are based on historical earnings and are not intended to indicate future
performance. Shares of the portfolios are presently offered only to
corresponding divisions of separate accounts established by Jefferson Pilot
Financial Insurance Company ("JPF", "JP Financial" or "Jefferson Pilot
Financial") (formerly Chubb Life Insurance Company of America ("Chubb Life"),
Jefferson Pilot Life Insurance Company ("Jefferson Pilot"), Alexander Hamilton
Life ("Hamilton") or their affiliated insurance companies, to fund variable
annuities and flexible premium life insurance policies. None of these
performance figures reflect fees and charges imposed under such variable
annuities or flexible premium life insurance policies, which fees and charges
will reduce the yield and total return to policyowners; therefore, these
performance figures may be of limited use for comparative purposes.
The Money Market Portfolio's yield quotations represent the Portfolio's
investment income, less expenses, expressed as a percentage of assets on an
annualized basis for a seven-day period. The yield is expressed as both a simple
annualized yield and a compounded effective yield. The yield for the non-money
market portfolios is calculated by dividing the portfolio's net investment
income per share during a recent 30-day period by the maximum offering price per
share of that Portfolio (which is the net asset value of that Portfolio) on the
last day of the period.
The average annual total return quotations of the non-money market
portfolios are determined by computing the average annual percentage change in
value of a $1,000 investment, made at the maximum public offering price (which
is net asset value) for certain specified periods. This computation assumes
reinvestment of all dividends and distributions.
PORTFOLIOS
The Fund currently consists of twelve investment portfolios, eleven of
which are currently available, namely the World Growth Stock Portfolio, the
International Equity Portfolio, the Money Market Portfolio, the Global Hard
Assets Portfolio, the High Yield Bond Portfolio, the Domestic Growth Stock
Portfolio, the Growth Portfolio, the Growth and Income Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio and the Emerging Growth Portfolio (the
"Portfolios").
The separate accounts established by JPF, Jefferson Pilot, Hamilton or
their affiliated insurance companies are used for the purpose of funding
variable annuities and Flexible Premium Variable Life Insurance Policies (the
"Policies") issued by JPF, Jefferson Pilot, Hamilton or their affiliated
insurance companies and their successors or assigns. The owner of a Policy may
allocate among the Portfolios the amounts available for investment under the
Policy. JPF, Jefferson Pilot and Hamilton (the "Affiliates") are wholly-owned
subsidiaries of Jefferson-Pilot Corporation, a North Carolina Corporation.
In the future, the Fund may sell its shares to other separate accounts,
funding variable annuities and variable life insurance policies, established by
JP Financial, its affiliates, successors or assigns, or by other insurance
companies with which JP Financial may or may not be affiliated, and the Fund may
add or delete Portfolios.
Shares of each Portfolio are both offered and redeemed at their net asset
value without the addition of any sales load or redemption charge. See "OFFERING
AND REDEMPTION OF SHARES" in the Prospectus.
The investment manager to the Fund is Jefferson Pilot Investment Advisory
Corporation (the "Investment Manager" or "Jefferson Pilot Investment Advisory"),
formerly Chubb Investment Advisory Corporation, a wholly-owned subsidiary of
JP Financial. Jefferson Pilot Investment Advisory and the Fund have contracted
with nine unaffiliated companies, Templeton Global Advisors, Limited
("Templeton"), Lombard Odier International Portfolio Management Limited
("Lombard Odier"), Van Eck Associates Corporation ("Van Eck Associates"),
Pioneering Management Corporation ("Pioneer"), Janus Capital Corporation
("Janus"), J.P. Morgan Investment Management Inc. ("Morgan"), Massachusetts
Financial Services Company ("MFS"), Strong Capital Management, Inc. ("Strong"),
and Warburg Pincus Asset Management, Inc. ("Warburg") to act as sub-investment
advisers or managers to the World Growth Stock, International Equity, Global
Hard Assets, Domestic Growth Stock, Capital Growth, Balanced, High Yield Bond,
Emerging Growth, Money Market, Growth, and Growth and Income Portfolios,
respectively, (Collectively the "Sub-Investment Managers"). The fees of the Sub-
Investment Managers are paid directly by the Investment Manager.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Portfolio are described
below. The investment objectives of a Portfolio, and certain investment
restrictions discussed in the Statement of Additional Information, may be
changed only with the approval of
19
<PAGE>
the stockholders of each Portfolio that are affected by such change. The
investment policies of a Portfolio, used to achieve the Portfolio's objectives,
may be changed by the Fund's Board of Directors without the approval of the
Portfolio's stockholders.
Because investment involves both opportunities for gain and risks of loss,
no assurance can be given that the Portfolios will achieve their objectives. The
difference in objectives and policies among the various Portfolios can be
expected to affect each Portfolio's investment return as well as the degree of
market and financial risks to which each Portfolio is subject. Prospective
purchasers of Policies should carefully review the objectives and policies of
the Portfolios and consider their ability to assume the risks involved before
purchasing Policies and allocating amounts thereunder to particular Portfolios.
World Growth Stock Portfolio
Investment Objectives. The investment objective of the World Growth Stock
Portfolio is long-term capital growth, which it seeks to achieve through a
flexible policy of investing primarily in stocks of companies organized in the
United States or in any foreign nation. A portion of the Portfolio may also be
invested in debt obligations of companies and governments of any nation. Any
income realized will be incidental.
The Portfolio invests primarily in securities of companies of any size
that are (i) believed to be well-managed and possessing good growth potential or
(ii) are considered by Templeton, the Sub-Investment Manager, to be undervalued.
See "Foreign Securities," in the Prospectus.
Investment Policies. The Portfolio believes that in a world where
investment opportunities change rapidly, not only from company to company and
from industry to industry but also from one national economy to another, its
objective is more likely to be achieved through an investment policy that is
flexible and mobile. Accordingly, the Portfolio seeks investment opportunities
in all types of securities issued by companies or governments of any nation.
Investments are usually made in common stocks, but may also include preferred
stocks and certain debt securities, rated or unrated, such as convertible bonds
and bonds selling at a discount; all of these debt securities will have credit
ratings in the four highest rating categories of Standard & Poor's Rating
Service Corporation ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's") or other nationally recognized statistical rating organizations
("NRSROs") or, if not rated, will be of comparable quality to obligations so
rated in the judgment of Templeton. Securities rated BBB or Baa by Standard &
Poor's or Moody's are considered investment-grade obligations and are regarded
as having adequate capacity to pay interest and repay principal, although
adverse economic conditions or changing circumstances are more likely to lead to
a weakening of such capacity than for higher grade bonds. Such securities may be
considered to have speculative characteristics. See "DESCRIPTION OF CERTAIN
INVESTMENTS" in the Statement of Additional Information for a more complete
description of investment ratings. In the event that the ratings of securities
held by the Portfolio fall below investment grade, the Portfolio will not be
obligated to dispose of such securities and may continue to hold such securities
if, in the opinion of the Sub-Investment Manager, such investment is considered
appropriate under the circumstances.
Notwithstanding the investment objective of long-term capital growth, the
Portfolio may on occasion, for defensive purposes and without limitation as to
amount, invest in debt obligations of the U.S. Government, its agencies or
instrumentalities for the purpose of earning income; hold cash and time deposits
with banks in the U.S. or Canadian currencies or currencies of other nations;
acquire repurchase agreements with respect to U.S. or Canadian government
obligations; or invest in high-grade commercial paper. For a more complete
description of obligations of the U.S. Government, its agencies or
instrumentalities, see the DESCRIPTION OF CERTAIN INVESTMENTS. The Portfolio may
also invest in warrants, which are rights to buy certain securities at set
prices during specified time periods. See "DESCRIPTION OF CERTAIN INVESTMENTS"
in the Statement of Additional Information for more information concerning
repurchase agreements, warrants, and commercial paper. See also "Repurchase
Agreements" in the Prospectus.
The Portfolio may enter into agreements with banks or broker-dealers to
purchase some securities on a "forward commitment," "when issued" or on a
"delayed delivery" basis. Such agreements involve a commitment to purchase
securities at a price, which is fixed at the time of commitment, for delivery at
a future date, which may be up to three months in the future. The Portfolio will
not pay for the securities or begin earning interest on them until the
securities are paid for and received. The securities so purchased are subject to
market fluctuations so that at the time of delivery, the value of such
securities may be more or less than the purchase price.
The Portfolio will generally be composed of investments from among many
different industries. Although management may invest up to 25% of the
Portfolio's assets in a single industry, it has no present intention of doing
so. As a general matter, the Portfolio will be invested in a minimum of five
different foreign countries at all times.
20
<PAGE>
Risk Factors. All or a significant portion of this Portfolio may be
invested in foreign securities, including Depository Receipts, and investors
should understand the special considerations and risks related to such an
investment emphasis. See "Foreign Securities" and "Depository Receipts" in the
Prospectus.
International Equity Portfolio
Investment Objective. The International Equity Portfolio's investment
objective is long-term capital appreciation. The Portfolio will seek to achieve
its objective by investing substantially all, and at least 65%, of its total
assets in equity and equity-related securities of companies from countries
outside of the United States. The Portfolio will be "non-diversified" as defined
in the 1940 Act. See "Non-Diversified Status." The International Equity
Portfolio is intended for investors who can accept the risks involved in
investments in equity and equity-related securities of non-U.S. issuers, as well
as in foreign currencies and in the active management techniques, that the Fund
generally employs.
Investment Policies. The equity and equity-related securities in which the
International Equity Portfolio will primarily invest are common stock, preferred
stock, convertible debt obligations, convertible preferred stock and warrants or
other rights to acquire stock that Lombard Odier International Portfolio
Management Limited ("Lombard Odier"), the sub-investment manager, believes offer
the potential for long-term capital appreciation. Issuers of such securities may
include smaller, emerging companies. The Portfolio also may invest in securities
of foreign issuers in the form of sponsored and unsponsored ADRs, EDRs, GDRs
(see "Depository Receipts" below), or other similar instruments representing
securities of foreign issuers. The Portfolio may purchase securities on a
when-issued basis. See "Investment Methods and Risks."
While the investment policy of the Portfolio is to be broadly diversified
as to both countries and individual issuers, Lombard Odier selects individual
countries and securities on the basis of several factors. Investments are
allocated among issuers in countries selected based on a comparison of values
between the equity markets in those countries. This comparison is based upon
criteria such as return on equity, book value, earnings, dividends, and interest
rates in each market. After evaluating these factors and others for each country
and comparing opportunities among countries, the sub-adviser selects those
countries which in its opinion, have the most attractive equity markets. This
evaluation is influential in deciding the amount of investment in each equity
market. Individual equity securities are selected within each market. The
International Equity Portfolio will invest in individual equity securities based
on factors such as book value, earnings per share and other financial data. The
sub-adviser will also endeavor to identify industry, political, and geographical
trends which may affect equity values within individual countries or among a
group of countries. The Portfolio may also invest cash temporarily in short-term
debt instruments to maintain liquidity or pending other investment.
The International Equity Portfolio may purchase and sell foreign currency
on a spot basis in connection with the settlement of transactions in securities
traded in such foreign currency. The Portfolio will not purchase and sell
foreign currencies for speculative purposes. The Portfolio may enter into
forward foreign currency contacts and foreign currency futures contracts for
hedging purposes only. This includes entering into forward currency contracts
and foreign currency futures contracts as an anticipatory hedge.
The International Equity Portfolio may invest cash, held to meet
redemption requests and expenses, in obligations of the United States and of
foreign governments (including their political subdivisions), commercial paper,
bankers' acceptances, certificates of deposit and other short-term evidences of
indebtedness. The Portfolio will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's. The Portfolio
also may invest cash held for such purposes in short-term, high grade foreign
debt securities. The Portfolio may lend portfolio securities to unaffiliated
brokers, dealers and financial institutions provided that (a) immediately after
any such loan, the value of the securities loaned does not exceed 15% of the
total value of the Portfolio's assets, and (b) any securities loan is
collateralized in accordance with applicable regulatory requirements.
The International Equity Portfolio may invest up to 15% of its assets in
illiquid securities. The Portfolio also may make short sales and short sales
"against the box". The Portfolio may not make short sales or maintain a short
position if to do so would cause more than 25% of its total assets, taken at
market value, to be held as collateral for such sales.
The International Equity Portfolio's investments may include U.S.
Government Securities, restricted securities, mortgage-backed obligations,
repurchase agreements, debt obligations of corporate and asset-backed issuers
debt obligations of foreign
21
<PAGE>
governments and their respective agencies, instrumentalities, political
subdivisions and authorities and debt obligations issued or guaranteed by
international or supranational entities that, in the opinion of Lombard Odier,
offer the potential to enhance total return. The timing of purchase and sale
transactions in debt obligations may result in capital appreciation or
depreciation because the value of debt obligations varies inversely with
prevailing interest rates. Under normal circumstances, the Portfolio will not
invest more than 35% of its total assets in such debt obligations. The debt
obligations in which the Portfolio may invest will be rated BBB or higher by S&P
or Baa or higher by Moody's or if unrated, determined by the sub-adviser to be
of comparable credit quality. The Portfolio will limit its investment in
corporate debt obligations to less than 35% of its total assets. A detailed
discussion of the risks associated with lower rated corporate debt obligations
is found in "Investment Methods and Risks" under "Lower Rated Corporate Debt
Obligations" and in the SAI. See Appendix A to the SAI for a description of the
corporate bond ratings assigned by Standard & Poor's and Moody's.
Notwithstanding the International Equity Portfolio's investment objective
of long-term capital appreciation through investment in equity and
equity-related securities of non-U.S. issuers or of companies whose securities
are principally traded outside the United States, the Portfolio may on occasion,
for temporary defensive purposes to preserve capital, hold part of all of its
assets in cash, money market instruments, non-convertible preferred stocks, or,
subject to certain tax restrictions, foreign currencies. The Portfolio may
assume a temporary defensive posture only when political and economic factors
affect foreign equity markets to such an extent that the sub-adviser believes
there to be extraordinary risks in being substantially invested in such markets.
Money Market Portfolio
Investment Objectives. The primary objective of the Money Market Portfolio
is to seek as high a level of current income as is consistent with preservation
of capital and liquidity.
Investment Policies. The Portfolio invests exclusively in (1) obligations
whose timely payment of principal and interest is backed by the full faith and
credit of the U.S. Government or that of its agencies or instrumentalities
("U.S. Government Obligations") or which are secured or collateralized by such
obligations, (2) short-term obligations of U.S. banks which are members of the
Federal Deposit Insurance Corporation ("FDIC"), (3) U.S. dollar obligations of
foreign branches of U.S. banks, or (4) instruments fully secured or
collateralized by such bank obligations. Some of the obligations which the
Portfolio buys are insured by the FDIC up to $100,000. The Portfolio may also
invest in commercial paper, and may buy corporate or other notes if such notes
are guaranteed as to the payment of principal and interest by U.S. banks'
letters of credit or collateralized by U.S. Government Obligations.
The Portfolio will invest only in securities which present minimal credit
risk and (1) which have been rated or whose issuer has received a rating at the
time of acquisition in one of the two highest rating categories for short-term
debt obligations by any two Nationally Recognized Securities Rating Organization
("NRSROs"), or by one NRSRO if it is the only NRSRO to have issued a rating,
("Requisite NRSROs") or (2) which are unrated securities of comparable quality.
The Portfolio will invest no more than 5% of the value of its total assets, at
time of acquisition, in the securities of any one issuer, other than U.S.
Government Obligations, except that the Portfolio may invest more than 5% of its
total assets in securities of a single issuer rated in the highest rating
category by the Requisite NRSROs for up to three business days after purchase.
The Portfolio will also invest no more than 5% of its total assets, at time of
acquisition, in securities rated in the second highest rating category by the
Requisite NRSROs, with investment in any one issuer limited to no more than the
greater of 1% of the Portfolio's total assets or $1,000,000.
MFS, the Sub-Investment Manager, under the supervision of Jefferson Pilot
Investment Advisory, will use its best judgment in selecting investments, taking
into consideration rates, terms, and marketability of obligations as well as the
capitalization, earnings, liquidity, and other indicators of the financial
condition of their issuers. Because the market value of debt obligations
fluctuates as an inverse function of changing interest rates, the Portfolio
seeks to minimize the effect of such fluctuations by investing in instruments
with a remaining maturity of 397 calendar days or less at the time of
investment, except for U.S. government obligations which may have a remaining
maturity of 762 calendar days or less. The Portfolio will maintain a dollar-
weighted average portfolio maturity of 90 days or less.
The Portfolio may enter into repurchase agreements whereby it purchases
securities, subject to agreement by the other party to repurchase the
obligations at a specified price and date. Repurchase agreements may involve
certain additional risks. See "Repurchase Agreements" in the Prospectus and
"RISK CONSIDERATIONS" in the Statement of Additional Information for a
discussion of these risks. See "DESCRIPTION OF CERTAIN INVESTMENTS" in the
Statement of Additional Information for a more complete description of
repurchase agreements.
22
<PAGE>
Risk Factors. The principal risk factors associated with investment in the
Money Market Portfolio are the risk of fluctuations in short-term interest rates
and the risk of default among one or more issuers of securities which comprise
the Portfolio's assets. Compared with the other available Portfolios, the Money
Market Portfolio could be considered the least risky of all the Fund's
Portfolios. See "RISK CONSIDERATIONS" in the Statement of Additional Information
for a description of the risks associated with investment in U.S. dollar
obligations of foreign branches of U.S. banks.
Global Hard Assets Portfolio (formerly, Gold Stock Portfolio)
Objective. The Portfolio seeks long-term capital appreciation by globally
investing primarily in "Hard Asset Securities." Income is a secondary
consideration.
Investment Policies. The Sub-Investment Manager believes "Hard Asset
Securities" (as defined below) offer an opportunity to achieve long-term capital
appreciation and to protect wealth against eroding monetary values during
periods of cyclical economic expansions. Since the market action of Hard Asset
Securities may move against or independently of the market trend of industrial
shares, the addition of such securities to an overall portfolio may increase the
return and reduce the price fluctuations of such a portfolio. There can be no
assurance that an increased rate of return or a reduction in price fluctuations
of a portfolio will be achieved. An investment in the Portfolio's shares should
be considered part of an overall investment program rather than a complete
investment program.
Hard Asset Securities include equity and debt securities of "Hard Asset
Companies" and securities, including structured notes, whose value is linked to
the price of a Hard Asset commodity or a commodity index. "Hard Asset Companies"
includes companies that are directly or indirectly (whether through supplier
relationships, servicing agreements or otherwise) engaged to a significant
extent in the exploration, development, production or distribution of one or
more of the following (together "Hard Assets"): (i) precious metals, (ii)
ferrous and non-ferrous metals, (iii) oil and gas, petroleum, petrochemicals or
other hydrocarbons, (iv) forest productions, (v) real estate and (vi) other
basic non-agricultural commodities.
Under normal market conditions, the Portfolio will invest at least 65% of
its total assets in "Hard Asset Securities" and the Portfolio will invest at
least 5% of its assets in each of the first five sectors listed above. The
Portfolio has a fundamental policy of concentrating in such industries and may
invest up to 50% of its assets in any one of the above sectors during periods
when the Sub-Investment Manager believes that a particular sector offers highly
attractive opportunities based upon valuations, industry timeliness, important
technological developments or other appropriate considerations. Therefore, it
may be subject to greater risks and market fluctuations than other investment
companies with more diversified portfolios. Hard Asset Securities entail certain
risks including, but not limited to greater volatility of energy and basic
materials prices; possible instability of the supply of various Hard Assets; the
risks generally associated with extraction of natural resources; actions and
changes in government which could affect the production and marketing of Hard
Assets.
The Portfolio seeks investment opportunities worldwide. Under normal
conditions, the Portfolio will invest its assets in at least three countries
including the United States. There is no limitation or restriction on the amount
of assets to be invested in any one country, developed or underdeveloped. Global
investing involves economic and political conditions not typically applicable to
the U.S. markets.
The Portfolio may invest in common stocks; preferred stocks (either
convertible or non-convertible); debt securities rights; warrants; direct equity
interests in trusts, partnerships, joint ventures and other incorporated
entities or enterprises; and special classes of shares available only to foreign
persons in those markets that restrict ownership of certain classes of equity to
nationals or residents of that country. Direct investments are generally
considered illiquid and will be aggregated with other illiquid investments for
purposes of the limitation on illiquid investments. The Portfolio may invest up
to 10% of its net assets, taken at market value at the time of investment, in
precious metals, either in bullion or coins.
The Fund may invest in lower quality, high-yielding debt securities (commonly
referred to as "junk bonds") of Hard Asset Companies rated as low as CCC by S&P
or Caa by Moody's. These debt instruments have some "equity" characteristics in
that, while not directly linked, their value may increase or decrease with the
value of a Hard Asset, reflecting the ability of the Hard Asset Company to make
scheduled payments of interest and principal. Lower rated debt securities are
considered speculative and involve greater risk of loss than higher rated debt
securities and are more sensitive to changes in the issuer's capacity to pay.
Debt rated Caa or CCC presents a significantly greater risk of default than do
higher rated securities and, in times of poor business or economic conditions,
the Fund may lose interest and/or principal on such securities. In addition to
sensitivity to interest rates,
23
<PAGE>
debt securities of Hard Asset Companies may fluctuate in price in connection
with changes in the price of the relevant Hard Asset. The Fund will not invest
more than 25% of its assets in debt securities rated below BBB by S&P or Baa by
Moody's.
The Portfolio may invest in derivatives. Derivatives in which the Portfolio
may invest include future contracts, forward contracts, options, swaps and
structured notes and other similar securities as may become available in the
market. The Portfolio may invest in indexed securities whose value is linked to
one or more currencies, interest rates, commodities, or financial or commodity
indices. An indexed security enables the investor to purchase a note whose
coupons and/or principal redemption are linked to the performance of an
underlying asset. Indexed securities may be publicly traded or may be two-party
contracts (such two-party agreements are structured notes). When the Portfolio
purchases a structured note it will make a payment of principal to the
counterparty. The Portfolio will purchase structured notes only from
counterparties rated A or better by S&P, Moody's or another nationally
recognized statistical rating organization. The Sub-Investment Manager will
monitor the liquidity of structured notes under the supervision of the Board of
Directors and structured notes determined to be illiquid will be aggregated with
other illiquid securities and limited to 15% of the net assets of the Portfolio.
Indexed securities may be more volatile than the underlying instrument itself,
and present many of the same risks as investing in futures and options. Indexed
securities are also subject to credit risks associated with the issuer of the
security with respect to both principal and interest. In addition, the Portfolio
may invest in futures and forward contracts and options on precious metals and
other Hard Assets.
The Portfolio may invest up to 5% of its net assets in premiums for options
on equity securities and equity indexes and up to 5% of its net assets in
warrants, including options and warrants traded in over-the-counter markets.
Warrants received as dividends on securities held by the Portfolio and warrants
acquired in units or attached to securities are not included in this
restriction. The Portfolio may buy and sell financial futures contracts and
options in financial futures contracts. The Portfolio may purchase or sell puts
and calls on foreign currencies and securities; invest in "when-issued"
securities, "partly paid" securities (securities paid for over a period of time)
and securities of foreign issuers; and may lend its portfolio securities and
borrow money for investment purposes.
The Portfolio may invest up to 35% of its net assets in debt securities
whose value is not linked to the value of a Hard Asset or a Hard Asset Company
and securities of companies which are not Hard Asset Companies. Non-Hard Asset
debt securities include, but are not limited to, high grade, liquid debt
securities of foreign companies, foreign governments and the U.S. Government and
their respective agencies, instrumentalities, political subdivisions and
authorities, as well as in money market instruments denominated in U.S. dollars
or a foreign currency.
The Sub-Investment Manager believes the Portfolio may offer a hedge against
inflation, particularly commodity price driven inflation. However, there is no
assurance that rising commodity (or other hard asset) prices will result in
higher earnings or share prices for the Hard Asset Companies held by the
Portfolio. Hard Asset Company equities are affected by many factors, including
movements in the overall stock market. Inflation may cause a decline in the
overall stock market, including the stocks of Hard Asset Companies.
The assets of the Portfolio invested in fixed income securities, excluding
fixed income securities whose value is linked to the value of a Hard Asset and
of Hard Asset Companies, will consist of securities which are believed by the
Sub-Investment Manager to be high grade, that is rated A or better by Standard &
Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's),
Fitch-1 by Fitch or Duff-1 by Duff & Phelps ("D&P") or if unrated, of comparable
quality in the judgment of the Sub-Investment Manager, subject to the
supervision of the Board of Directors. The assets of the Portfolio invested in
short-term instruments will consist primarily of securities rated in the highest
category (for example, commercial paper rated "Prime-1" or "A-1" by Moody's and
S&P, respectively) or if unrated, in instruments that are determined to be of
comparable quality in the judgment of the Sub-Investment Manager, subject to the
ultimate supervision of the Board of Directors, or are insured by foreign or
U.S. governments, their agencies or instrumentalities as to payment of principal
and interest. The Portfolio may invest up to 10% of its assets in asset-backed
securities such as collateralized mortgage obligations and other mortgage and
non-mortgage asset-backed securities. Asset-backed securities backed by Hard
Assets and whose value is expected to be linked to underlying Hard Assets are
excluded from the 10% limitation.
Although the Portfolio will not invest in real estate directly, it may
invest up to 50% of its assets in equity securities of real estate investment
trusts ("REIT's") and other real estate industry companies or companies with
substantial real estate investments. REITs are pooled investment vehicles which
invest primarily in income producing real estate or real estate related loans or
interests. REIT's and other real estate investments of the Portfolio are subject
to certain risks (See "Real Estate Securities").
24
<PAGE>
High Yield Bond Portfolio
Investment Objectives. The High Yield Bond Portfolio seeks a high level of
current income. The Portfolio will seek to achieve its objective by investing
primarily in corporate obligations with emphasis on higher-yielding, higher
risk, lower-rated or unrated securities.
Investment Policies. Under normal conditions, Massachusetts Financial
Services Company ("MFS"), the Sub-Investment Manager, expects that the
Portfolio's assets will primarily consist of a diversified portfolio of
high-yielding bonds, convertible securities and preferred stock of both domestic
and foreign issuers. The Portfolio may purchase securities on a when-issued
basis and on a forward commitment basis.
The debt securities in which the High Yield Bond Portfolio may invest
include bonds, debentures, notes, equipment lease certificates, equipment trust
certificates (including interests in trusts or other entities representing such
obligations), conditional sales contracts, commercial paper and U.S. Government
Securities, mortgage-backed securities including CMOs, stripped mortgage-backed
securities, asset-backed bonds, collateralized bond or loan obligations, bonds
on which interest is payable in kind, deferred interest bonds and zero coupon
bonds. The Fund may also invest in parallel pay CMOs and PAC Bonds. The High
Yield Bond Portfolio also may invest in common stocks, warrants, loan
participation, assignments, securities sold through private placements and ADRs,
EDRs and GDRs. See "Depository Receipts" below. The sub-adviser believes that
these investments will increase the Fund's diversification and enhance return,
but also involve certain risks, described below. These investments and
techniques and their attendant risks are described in "Investment Methods and
Risks."
The High Yield Bond Portfolio may also invest in other instruments or
utilize investment techniques that involve special risks. These include:
emerging market securities, Brady Bonds, interest rate swaps, currency swaps,
other types of available swap agreements, mortgage dollar roll transactions,
options on securities and securities indices, forward foreign currency exchange
contracts, options on foreign currency, futures contracts and options thereon,
repurchase agreements, borrowing from a bank and lending portfolio securities.
The Portfolio may invest up to 15% of its assets in illiquid securities. The
Portfolio may also invest up to 50% (and MFS expects generally to invest between
0% and 20%) of its total assets in foreign securities (not including ADRs). The
Portfolio may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the sub-advisor, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. The Portfolio may also hold
foreign currency in anticipation of purchasing foreign securities.
The Portfolio may invest in futures contracts for hedging purposes only.
The Portfolio has adopted the additional restriction that it will not enter into
a futures contract if, immediately thereafter, the value of securities and other
obligations underlying all such futures contracts would exceed 50% of the value
of the Portfolio's total assets.
The High Yield Bond Portfolio may sell a security short as a hedge against
portfolio holdings whose credit is deteriorating. The Fund's short sales are
limited to situations where the Portfolio owns a debt security of a company and
sells short a different type of security issued by the same company such as
common or preferred stock or a senior or junior debt security. The total market
value of all securities sold short may not exceed 2% of the Portfolio's net
assets.
During periods of unusual market conditions when the Sub-Investment
Manager believes that investing for temporary defensive purposes is appropriate,
part or all of the assets of the Fund may be invested in cash (including foreign
currency) or short-term money market instruments.
When and if available, fixed-income securities may be purchased at a
discount from face value. However, the Portfolio does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive. From time to time
the Portfolio may purchase securities not paying interest at the time acquired
if, in the opinion of the Sub-Investment Manager, such securities have the
potential for future income or capital appreciation.
Securities offering the high current income sought by the High Yield Bond
Portfolio are ordinarily in the lower rating categories of recognized rating
agencies (that is, ratings of Baa or lower by Moody's or BBB by Standard &
Poor's) or are unrated and generally involve greater volatility of price and
risk of principal and income than securities in the higher rating categories.
The Portfolio may invest in securities rated Baa by Moody's or BBB by Standard &
Poor's as well as securities rated Ba or lower by Moody's or BB or lower by
Standard & Poor's. No minimum rating standard is required by the Portfolio. A
detailed discussion of the risks associated with lower rated corporate debt
obligations is found in "High Yield Securities" below. See the SAI for a
description of corporate bond ratings assigned by Standard & Poor's and Moody's.
25
<PAGE>
While the Sub-Investment Manager may refer to ratings issued by
established credit rating agencies, it is not the Portfolio's policy to rely
exclusively on ratings issued by these rating agencies, but rather to supplement
such ratings with MFS's own independent ongoing review of the credit quality.
The Portfolio's achievement of its investment objective may be more dependent on
the sub-adviser's own credit analysis than in the case of an investment company
primarily investing in higher quality fixed-income securities. Since shares of
the Portfolio represent an investment in securities with fluctuating market
prices, the value of shares of the Portfolio will vary as the aggregate value of
the portfolio securities of the Portfolio increases or decreases. However,
changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity to the Portfolio.
Risk Factors. The Portfolio seeks to maximize the return on its portfolio
by taking advantage of market developments, yield disparities and variations in
the creditworthiness of issuers. This may result in increases or decreases in
the holding by the Fund of debt securities which sell at moderate to substantial
premiums or discounts from face value. Moreover, if the sub-adviser's
expectations of changes in interest rates or its evaluation of the normal yield
relationship between two securities proves to be incorrect, the income, net
asset value and potential capital gain of the Portfolio may be decreased or its
potential capital loss may be increased. The Portfolio will be diversified as
defined under the Investment Company Act of 1940.
Domestic Growth Stock Portfolio
Investment Objectives. The investment objective of the Domestic Growth
Stock Portfolio is to achieve reasonable income and growth of capital by
investing primarily in a diversified portfolio of equity securities issued by
companies organized in the U.S. and considered to be undervalued in light of the
company's earning power and growth potential.
Investment Policies. The mix of assets of the Portfolio will vary with
prevailing economic and market conditions. Generally, at least 80% of the
Portfolio's assets are invested in common stocks and other equity related
securities such as preferred stocks and securities convertible into common
stock. The Portfolio may also invest up to 20% of its assets in both U.S.
Government Obligations and corporate debt securities, of which at least 75% of
which will be rated within the top four rating categories of Standard & Poor's
or Moody's or other NRSROs or, if unrated, are considered by the Portfolio's
Sub-Investment Manager to be of comparable quality and cash equivalent
investments, such as certificates of deposit, bankers' acceptances, and
commercial paper, having ratings of A-1 or Prime-1 by Standard & Poor's or
Moody's or other NRSROs or, if unrated, are considered by the Portfolio's
Sub-Investment Manager to be of comparable quality. Securities rated BBB or Baa
by Standard & Poor's or Moody's are considered investment-grade obligations and
are regarded as having adequate capacity to pay interest and repay principal,
although adverse economic conditions or changing circumstances are more likely
to lead to a weakening of such capacity than for higher grade bonds. No more
than 5% of the Portfolio's assets may be invested in non-investment grade debt.
Such securities may be considered to have speculative characteristics. In the
event that the ratings of securities purchased held by the Portfolio fall below
to more than 5% of net assets investment grade, the Portfolio will not be
obligated to dispose of such securities and may continue to hold such securities
if, in the opinion of the Sub-Investment Manager, such investment is considered
appropriate under the circumstances regardless of. Generally, at least 60% of
the Portfolio's assets will be invested in securities which have paid dividends
or interest within the preceding 12 months, but non-income producing securities
will be held for anticipated increases in value. The Portfolio may also invest
in warrants, which are rights to buy certain securities at set prices during
specified time periods. See "Warrants" below.
This Portfolio invests primarily in stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent, in
stocks that are traded over-the-counter. Securities are selected principally for
their potential appreciation and anticipated income. Assets of the Portfolio
will be substantially fully invested at all times.
Risk Factors. The prices of the types of securities usually purchased for
the Domestic Growth Stock Portfolio will tend to fluctuate more than the prices
of the securities usually purchased for the Money Market Portfolio. As a result,
the net asset value of the Domestic Growth Stock Portfolio may experience
greater short-term and long-term variations than Portfolios that invest
primarily in fixed income securities.
Growth Portfolio
Investment Objectives. The Growth Portfolio seeks capital growth. The
Portfolio invests primarily in equity securities that Strong Capital Management,
Inc. ("Strong"), the Growth Portfolio's Sub-Adviser, believes have above-average
growth prospects. Under normal market conditions, the Portfolio will invest at
least 65% of its total assets in equity securities, including common stocks,
preferred stocks and securities that are convertible into common or preferred
stocks, such as warrants and convertible bonds. While the emphasis of the Growth
Portfolio is clearly on equity securities, the Growth Portfolio may invest a
limited portion of its assets in debt obligations when the Portfolio's
sub-adviser perceives that they are more
26
<PAGE>
attractive than stocks on a long-term basis. When the sub-adviser determines
that market conditions warrant a temporary defensive position, the Growth
Portfolio may invest without limitation in cash and short-term fixed-income
securities.
Investment Policies. Strong will generally invest Portfolio assets in
companies whose earnings are believed to be in a relatively strong growth trend,
and, to a lesser extent, in companies in which significant further growth is not
anticipated but whose market value is thought to be undervalued. In identifying
companies with favorable growth prospects, the sub-adviser ordinarily looks to
certain other characteristics, such as the following: (1) prospects for
above-average sales and earnings growth; (2) high return on invested capital;
(3) overall financial strength, including sound financial and accounting
policies and a strong balance sheet; (4) competitive advantages, including
innovative products and service; (5) effective research, product development,
and marketing; and (6) stable, capable management.
The Growth Portfolio may invest up to 35% of its total assets in debt
obligations that are considered investment grade or, if not rated, of equivalent
investment quality as determined by Strong, including intermediate to long-term
corporate, U.S. Government or agency debt securities, bank obligations or
commercial paper. When Strong determines that market conditions warrant a
temporary defensive position, the Growth Portfolio may invest without
limitations in cash and short-term fixed income securities. Although the debt
obligations in which it invests will be primarily investment grade, the Fund may
invest up to 5% of its net assets in non-investment grade debt obligations (debt
securities rated Ba or lower by Moody's or BB or lower by Standard & Poor's). A
detailed discussion of the risks associated with lower rated debt obligations is
found in "High Yield Securities" and in the SAI. See the SAI for a description
of the bond ratings assigned by Standard & Poor's and Moody's.
The Growth Portfolio may invest up to 25% of its net assets in foreign
securities, including both direct investments and investments made through
depositary receipts. See "Foreign Securities" and "Depository Receipts" for the
special risks associated with foreign investments.
The Portfolio may purchase obligations on a when-issued or forward
commitment basis, enter into repurchase, reverse repurchase and mortgage dollar
roll agreements, swap agreements, foreign currency transactions, loan its
portfolio securities, purchase restricted securities, forward foreign currency
contracts, options and futures contracts and borrow from banks. The Portfolio
may purchase zero coupon bonds, mortgage and other asset backed securities,
bonds with interests payable in kind, foreign government securities and the
securities of unsecured issuers. The Portfolio may also purchase the securities
of other investment companies and small capitalization companies. The Growth
Portfolio may make short sales and invest up to 15% of its assets in illiquid
securities. These investments and techniques and their attendant risks are more
fully described in "Investment Methods and Risks." The Portfolio will be a
diversified investment company.
Growth and Income Portfolio
Investment Objectives. The objective of the Growth and Income Portfolio is
to seek long-term growth of capital by investing primarily in a wide range of
equity issues that may offer capital appreciation and, secondarily, to seek a
reasonable level of current income.
Investment Policies. The Growth and Income Portfolio invests at least 80%
of its assets in common stocks and other equity securities such as preferred
stocks and securities convertible into common stock that are either listed on
the New York Stock Exchange, traded over-the-counter or, to a lesser extent,
listed on other national securities exchanges. Securities are selected
principally for potential capital appreciation, based upon such criteria as
relatively low price to earnings ratio and relatively low price to book value
ratio, as compared to such ratios for the market in general and, secondarily,
for current income and increasing future dividends. While the Growth and Income
Portfolio intends to invest at least 60% of its assets in securities which have
paid dividends or interest within the preceding 12 months, the Portfolio may
invest in securities not currently paying dividends where Warburg the
Sub-Investment Manager anticipates that they will increase in value. The
Portfolio may invest up to 10% of its assets in fixed income securities
(including Convertible Bonds rated below investment grade ("Junk Bonds")) and up
to an additional 10% of its assets in convertible securities rated below
investment grade at the time of purchase.
The Growth and Income Portfolio may also invest for temporary or defensive
purposes in high-grade debt securities and money market securities, including
U.S. Government Obligations, commercial paper and bank obligations, and
repurchase agreements.
The Growth and Income Portfolio will invest primarily in U.S. companies,
but may, when deemed appropriate by Warburg, invest in and hold up to 20% of the
Portfolio's total assets in foreign securities, which are either traded in the
U.S. or securities of foreign issuers purchased directly in foreign markets or
foreign securities represented by Depository Receipts. The Portfolio's
27
<PAGE>
investments in foreign securities will primarily be in equity securities of
companies organized outside the U.S., but may also include debt obligations of
foreign companies and governments. See "Foreign Securities" and "Depository
Receipts" in the Prospectus and "DESCRIPTION OF CERTAIN INVESTMENTS--Depository
Receipts" in the Statement of Additional Information.
The Growth and Income Portfolio may write covered call options or purchase
put and call options with respect to certain of its portfolio securities or
purchase stock index options for hedging purposes or to enhance income. The
Growth and Income Portfolio may also purchase or write futures contracts,
including stock index futures contracts. The Portfolio may also enter into
closing transactions with respect to such options and futures contracts. See
"Securities and Index Options" and "Futures Contracts" in this Prospectus.
Risk Factors. The prices of the securities purchased for the Growth and
Income Portfolio will tend to fluctuate more than the prices of securities
purchased for the Bond Portfolio or the Money Market Portfolio. As a result, the
net asset value of the Growth and Income Portfolio may experience greater
short-term and long-term variations than Portfolios that invest primarily in
fixed income securities.
Capital Growth Portfolio
Investment Objectives. The investment objective of the Capital Growth
Portfolio is to seek capital growth. Realization of income is not a significant
investment consideration and any income realized will be incidental.
Investment Policies. The Capital Growth Portfolio will invest primarily in
common stocks when Janus, the Sub-Investment Manager believes that the market
environment favors investment in those securities. Common stock investments are
selected in industries and companies that Janus believes are experiencing
favorable demand for their products and services and that operate in a favorable
environment from a competitive and regulatory standpoint.
It is the policy of the Capital Growth Portfolio to purchase and hold
securities for capital growth. If the Sub-Investment Manager is satisfied with
the performance of a security and anticipates continued appreciation, the
Portfolio will generally retain such security. However, changes in the Portfolio
will generally be made whenever the Sub-Investment Manager believes they are
advisable, either as a result of securities having reached a price objective, or
by reason of developments not foreseen at the time of the investment decision.
Since investment changes usually will be made without reference to the length of
time a security has been held, a significant number of short-term transactions
may result. To a limited extent, the Portfolio may also purchase individual
securities in anticipation of relatively short-term price gains, and the rate of
portfolio turnover will not be a determining factor in the sale of such
securities.
Although the Portfolio expects that under normal conditions its assets
will be primarily invested in common stocks, to the extent that it is not so
invested, the Capital Growth Portfolio may also invest in other securities,
including: U.S. Government Obligations, corporate bonds and debentures, high
grade commercial paper, preferred stocks, convertible securities, warrants or
other securities of U.S. issuers when the Sub-Investment Manager perceives an
opportunity for capital growth from such securities or so that the Portfolio may
receive a return on its idle cash. Pursuant to an exemptive order received by
the Sub-Investment Manager from the SEC, the Portfolio may also invest in money
market funds managed by the Sub-Investment Manager as a means of receiving a
return on idle cash. The Portfolio's cash position may increase when the
Sub-Investment Manager is unable to locate investment opportunities that it
believes have desirable risk/reward characteristics. Investments in debt
securities will be limited to securities of U.S. companies, the U.S. Government
and foreign governments and foreign governmental entities. Foreign governmental
entities include supranational organizations, such as the European Economic
Community and the World Bank, that are chartered to promote economic development
and are supported by various governments and governmental entities. All debt
securities in which the Portfolio invests, except as noted below, will have
credit ratings in the four highest rating categories of Standard & Poor's or
Moody's or other NRSROs or, if not rated, will be of comparable quality to
obligations so rated in the judgment of the Sub-Investment Manager. The Capital
Growth Portfolio may invest up to 5% of its assets in high-yield/high-risk
bonds. Such securities include debt securities that are below investment grade
(securities rated Ba or lower by Moody's or BB or lower by Standard & Poor's)
and unrated securities of comparable quality as determined by the Sub-Investment
Manager.
Investments may also be made in foreign equity securities and in Depository
Receipts. The Portfolio will not invest more than 25% of its assets in foreign
securities denominated in foreign currencies and not publicly traded in the U.S.
See "Foreign Securities" and "Depository Receipts" in the Prospectus.
Additionally, in order to manage exchange rate risks, the Portfolio may
28
<PAGE>
enter into foreign currency exchange contracts (agreements to exchange one
currency for another at a future date). See "Forward Foreign Currency Exchange
Contracts" in the Prospectus.
The Portfolio may purchase and sell futures contracts as more fully
described under "Futures Contracts" in this Prospectus and may write covered
call options and purchase call and put options as described under "Securities
and Index Options" in this Prospectus.
The Portfolio may invest in "special situations" from time to time. A
special situation arises when, in the Sub-Investment Manager's opinion, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough or a new
product, at that company.
The Portfolio expects that its securities will primarily be traded on U.S.
and foreign securities exchanges and established over-the-counter markets.
Risk Factors. The foreign securities and ADRs, EDRs and GDRs in which the
Portfolio may invest involve special considerations and risks. See "Foreign
Securities" and "Depository Receipts" in this Prospectus. Investing in foreign
currency exchange contracts involves certain risks since shifting the
Portfolio's currency exposure from one currency to another removes the
Portfolio's opportunity to profit from increases in the value of the original
currency and involves a risk of increased losses if the Sub-Investment Manager's
projection of future exchange rates is inaccurate. Investment in special
situations may carry an additional risk of loss in the event that the
anticipated development does not occur or does not attract the expected
attention. The price of the securities purchased by the Capital Growth Portfolio
will tend to fluctuate more than the prices of securities purchased by the Money
Market Portfolio.
Balanced Portfolio
Investment Objectives. The investment objective of the Balanced Portfolio
is to seek reasonable current income and long-term capital growth, consistent
with conservation of capital, by investing primarily in common stocks and fixed
income securities.
Investment Policies. The Balanced Portfolio intends to invest based on
combined considerations of risk, income, capital enhancement and protection of
capital value. The Balanced Portfolio may invest in any type or class of
security. Normally, the Balanced Portfolio will invest in common stocks and
fixed income securities; however, it may also invest in warrants and in
securities convertible into common stocks. At least 25% of the value of its
assets will be invested in high-grade fixed income senior securities which are
rated in the three highest rating categories by any NRSRO or, if unrated, are
considered by Morgan, the Portfolio's Sub-Investment Manager, to be of
comparable quality. The Portfolio may purchase and sell futures contracts as
more fully described under "Futures Contracts" in this Prospectus and may write
covered call options and purchase call and put options as described under
"Securities and Index Options" in this Prospectus. The Portfolio may also invest
in zero coupon debt obligations. In order to provide additional diversification
the Portfolio may invest in equity and debt securities of foreign issuers
limited to 15% of the Portfolio's total assets and in Depository Receipts. See
"Foreign Securities" and "Depository Receipts" in this Prospectus.
In implementing the investment objectives of the Balanced Portfolio,
Morgan will select securities believed to have potential for the production of
current income, with emphasis on securities that also have potential for capital
enhancement. In an effort to protect its assets against major market declines,
or for other temporary defensive purposes, the Balanced Portfolio may actively
pursue a policy of retaining cash or investing part or all of its assets in cash
equivalents, such as U.S. Government Obligations, high grade commercial paper
and U.S. dollar obligations of foreign branches of U.S. banks.
Risk Factors. The prices of equity securities in which the Balanced
Portfolio invests will fluctuate day to day and, as a result, the value of an
investment in the Balanced Portfolio will vary based upon such market
conditions. The value of the Balanced Portfolio's investment in fixed income
securities will vary depending on various factors including prevailing interest
rates. Fixed income securities are also subject to the ability of the issuer to
make payments of principal and interest when due. Although the Balanced
Portfolio seeks to reduce both financial and market risks associated with any
one investment medium, performance of the Balanced Portfolio will depend on such
additional factors as timing the mix of investments and the ability of Morgan to
predict and react to changing market conditions. Investment in foreign
securities and ADRs involve special considerations and risks. See "Foreign
Securities" and "Depository Receipts" in this Prospectus.
Emerging Growth Portfolio
29
<PAGE>
Investment Objective. The Emerging Growth Portfolio seeks to provide
long-term growth of capital. Dividend and interest income from portfolio
securities, if any, is incidental to the Portfolio's investment objective of
long term growth of capital.
Investment Policies. The Portfolio's policy is to invest primarily (i.e.,
at least 80% of its assets under normal circumstances) in common stocks of
companies that are early in their life cycle but which have the potential to
become major enterprises (emerging growth companies). Such companies generally
would be expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and would have the
products, technologies, management and market and other opportunities which are
usually necessary to become more widely recognized as growth companies. Emerging
growth companies can be of any size and the Portfolio may also invest in larger
or more established companies whose rates of earnings growth are expected to
accelerate because of special factors, such as rejuvenated management, new
products, changes in consumer demand, or basic changes in the economic
environment.
While the Portfolio will invest primarily in common stocks, the Portfolio
may, to a limited extent, seek appreciation in other types of securities such as
fixed income securities (which may be unrated), convertible securities and
warrants when relative values make such purchases appear attractive either as
individual issues or as types of securities in certain economic environments.
The Portfolio may also enter into forward foreign currency exchange contracts
for the purchase or sale of foreign currency for hedging purposes and
non-hedging purposes, including transactions entered into for the purpose of
profiting from anticipated changes in foreign currency exchange rates, as well
as options on foreign currencies. The Portfolio may also hold foreign currency
(see "Risk Factors" below). The Portfolio may invest up to 25% (and generally
expects to invest between 0% and 10%) of its total assets in foreign securities
(not including American Depository Receipts ("ADRs") (see "American Depository
Receipts" below)), which may be traded on foreign exchanges (see "Risk Factors"
and "Foreign Securities" below). The Portfolio may hold cash equivalents or
other forms of debt securities as a reserve for future purchases of common stock
or to meet liquidity needs. The Portfolio may also invest in emerging market
securities.
The Portfolio may invest in corporate asset-backed securities (see
"Corporate Asset-Backed Securities" below). The Portfolio may write covered call
and put options and purchase call and put options on securities and stock
indices in an effort to increase current income and for hedging purposes. The
Portfolio may also purchase and sell stock index futures contracts and may write
and purchase options thereon for hedging purposes and for non-hedging purposes,
subject to applicable law (see "Futures Contracts" below and the Statement of
Additional Information). In addition, the Portfolio may purchase portfolio
securities on a "when-issued" or on a "forward delivery" basis (See "When-Issued
Securities" below). The Portfolio may also invest a portion of its assets in
"loan participations" (see "Loan Participations and Other Direct Indebtedness"
below and in the Statement of Additional Information).
While it is not generally the Portfolio's policy to invest or trade for
short-term profits, the Portfolio may dispose of a portfolio security whenever
MFS, the Sub-Investment Manager, is of the opinion that such security no longer
has an appropriate appreciation potential or when another security appears to
offer relatively greater appreciation potential. Subject to tax requirements,
portfolio changes are made without regard to the length of time a security has
been held, or whether a sale would result in a profit or loss.
During periods of unusual market conditions when MFS, believes that
investing for temporary defensive purposes is appropriate, or in order to meet
anticipated redemption requests, a large portion or all of the assets of the
Portfolio may be invested in cash or cash equivalents including, but not limited
to, obligations of banks (including certificates of deposit, bankers'
acceptances and repurchases agreements) with assets of $1 billion or more,
commercial paper, short-term notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies, authorities or instrumentalities and related
repurchase agreements. U.S. Government securities also include interests in
trust or other entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
Risk Factors. The nature of investing in emerging growth companies
involves greater risk than is customarily associated with investments in more
established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. In addition, there may be less research available on many promising
small and medium sized emerging growth companies. The securities of emerging
growth companies may have limited marketability and may be subject to more
abrupt or erratic market movements than securities of larger, more established
growth companies or the market averages in general. Shares of the Portfolio,
therefore, are subject to greater fluctuation in value than shares of a
conservative equity Portfolio or of a growth Portfolio which invests entirely in
proven growth stocks.
The Portfolio may invest up to 5% of its assets in lower rated fixed
income securities or comparable unrated securities. Investments in lower rated
income securities, while offering generally high current income and generally
providing greater
30
<PAGE>
income and opportunity for gain than investments in higher rated securities,
usually entail greater risk of principal and income (including the possibility
of default or bankruptcy of the issuers of such securities), and involve greater
volatility of price (especially during periods of economic uncertainty or
change) than investments in higher rated securities and because yields may vary
over time, no specified level of income can ever be assured. In particular,
securities rated lower than Baa by Moody's Investors Service, Inc. ("Moody's")
or BBB by Standard & Poor's Rating Service or comparable unrated securities
(commonly known as "junk bonds") are considered speculative. These lower rated
high yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Portfolio's lower rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility of
default or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Portfolio may continue to earn the same level
of interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Portfolio's yield despite the actual
loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. An effect of such rules may be to
depress the prices of outstanding lower rated high yielding fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Portfolio but will be
reflected in the net asset value of shares of the Portfolio. The market for
these lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of these
lower rated securities may be affected by the market's perception of their
credit quality. Therefore, the Sub-Investment Manager's judgment may at times
play a greater role in valuing these securities than in the case of investment
grade fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities at their
fair value to meet redemption requests or to respond to changes in the market.
No minimum rating standard is required by the Portfolio. To the extent the
Portfolio invests in these lower rated fixed income securities, the achievement
of its investment objective may be more dependent on the Sub-Investment
Manager's own credit analysis than in the case of a Portfolio investing in
higher quality bonds. While the Sub-Investment Manager may refer to ratings
issued by established credit rating agencies, it is not a policy of the
Portfolio to rely exclusively on ratings issued by these agencies, but rather to
supplement such ratings with the Sub-Investment Manager's own independent and
ongoing review of credit quality.
The Portfolio may also invest in fixed income securities rated Baa by
Moody's or BBB by S&P and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher rated securities.
Additional Risk Factors
The net asset value of the shares of an open-end investment company which
may invest to a limited extent in fixed income securities changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
fixed income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed income portfolio can be expected to decline.
Although changes in the value of securities subsequent to their
acquisition are reflected in the net asset value of shares of the Portfolio,
such changes will not affect the income received by the Portfolios from such
securities. However, the dividends paid by the Portfolios, if any, will increase
or decrease in relation to the income received by the Portfolio from its
investments, which would in any case be reduced by the Portfolio's expenses
before it is distributed to shareholders.
In addition, the use of options, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies may result in the
loss of principal, particularly where such instruments are traded for other than
hedging purposes (e.g., to enhance current yield).
The Emerging Growth Portfolio is aggressively managed and, therefore, the
value of its shares is subject to greater fluctuation and investments in its
shares involve the assumption of a higher degree of risk than would be the case
with an investment in a conservative equity portfolio or a growth portfolio
investing entirely in proven growth equities.
31
<PAGE>
See the Statement of Additional Information for further discussion of
foreign securities and the holding of foreign currency as well as the associated
risks.
Given the above average investment risk inherent to the Emerging Growth
Portfolio, investment in shares of the Emerging Growth Portfolio should not be
considered a complete investment program and may not be appropriate for all
investors.
Governmental Securities
U.S. Governmental Obligations consist of marketable securities issued or
guaranteed as to the timely payment of both principal and interest by the U.S.
Government, its agencies or instrumentalities. Federal agency securities are
debt obligations issued by agencies of the U.S. Government established under
authority grated by Congress. Such obligations include, but are not limited to,
those issued by the Federal Housing Authority, Maritime Administration,
Governmental National Mortgage Association, the Tennessee Valley Authority, and
the General Services Administration. Instrumentalities include, for example,
each of the Federal Home Loan Banks, the National Bank for Cooperatives, the
Federal Home Loan Mortgage Corporation, the Farm Credit Banks, the National
Mortgage Association, and the U.S. Postal Service. These U.S. Government
Obligations are either (i) backed by the full faith and by conversion of fixed
income securities or by the exercise of related warrants.
The Portfolio may enter into agreements with banks or broker-dealers to
purchase some securities on a "forward commitment," "when -issued" or on a
"delayed delivery" basis. Such agreements involve a commitment to purchase
securities at a price, which is fixed at the time of commitment, for delivery at
a future date, which may be up to three months in the future. The Portfolio will
not pay for the securities or begin earning interest on them until the
securities are paid for and received. The securities so purchased are subject to
market fluctuations so that at the time of delivery, the value of such
securities may be more or less than the purchase price.
Convertible Securities
All Funds except the Money Market Portfolio may invest in convertible
securities, Convertible securities may include corporate notes or preferred
stock but are ordinarily a long-term debt obligation of the issuer convertible
at a stated price or at a stated exchange rate into common stock of the issuer.
As with all debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities generally rank senior to common stocks in
an issuer's capital structure and are consequently of higher quality and entail
less risk of declines in market value than the issuer's common stock. However,
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed-income
security. The convertible debt securities in which a Fund may invest are subject
to the same rating criteria as that Fund's investment in non-convertible debt
securities.
Foreign Securities
The World Growth Stock Portfolio, the International Equity Portfolio, the
High Yield Bond Portfolio, the Growth Portfolio, the Capital Growth Portfolio,
the Global Hard Assets Portfolio and the Emerging Growth Portfolio intend to
purchase securities that are listed on stock exchanges in foreign countries.
They may also, to a limited extent, purchase unlisted foreign securities. The
Growth and Income Portfolio, the Capital Growth Portfolio, the Global Hard
Assets Portfolio and the Balanced Portfolio may also invest in listed and
unlisted foreign securities. Foreign investments may involve greater risks than
are present in domestic investments. Compared to domestic companies, there is
generally less publicly available information about foreign companies, less
comprehensive accounting, reporting and disclosure requirements, and there may
be less governmental regulation and supervision of foreign stock exchanges,
brokers and listed companies. Investments in foreign securities also involve the
risk of expropriation or confiscatory taxation that could affect investments,
currency blockages which would prevent cash from being brought back into the
United States, generally higher brokerage and custodial costs than those of
domestic securities and settlement of transactions with respect to such
securities may sometimes be delayed beyond periods customary in the United
States. The Sub-Investment Managers, under the supervision of Jefferson Pilot
Investment Advisory, consider possible political and financial instability
abroad, as well as the liquidity and volatility of foreign investments.
32
<PAGE>
Investing in foreign securities or on foreign exchanges may present a
greater degree of risk than investing in domestic issuers. These risks include
changes in currency rates, exchange control regulations, governmental
administration, economic or monetary policy (in this country or abroad), war or
expropriation. In particular, the dollar value of portfolio securities of
non-U.S. issuers fluctuates with changes in market and economic conditions
abroad and with changes in relative currency values (when the value of the
dollar increases as compared to a foreign currency, the dollar value of a
foreign-denominated security decreases, and vice versa). Costs may be incurred
in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including confiscatory
taxation and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods. Therefore, an investment in
shares of a Portfolio may be subject to a greater degree of risk than
investments in other investment companies which invest exclusively in domestic
securities.
Foreign Currencies
As a result of its investments in foreign securities, the Portfolios may
receive interest or dividend payments, or the proceeds of the sale or redemption
of such securities, in the foreign currencies in which such securities are
denominated. In that event, a Portfolio may promptly convert such currencies
into dollars at the then current exchange rate. Under certain circumstances,
however, such as where the Sub-Investment Manager believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Sub-Investment Manager anticipates, for any other reason, that the exchange rate
will improve, a Portfolio may hold such currencies for an indefinite period of
time.
In addition, a Portfolio may be required to receive delivery of the
foreign currency underlying forward currency contracts it has entered into. This
could occur, for example, if an option written by the Portfolio is exercised or
is unable to close out a forward contract it has entered into. A Portfolio may
also hold foreign currency in anticipation of purchasing foreign securities. A
Portfolio may also elect to take delivery of the currencies underlying options
or forward contracts if, in the judgment of the Sub-Investment Manager, it is in
the best interest of the Portfolio to do so. In such instances as well, a
Portfolio may promptly convert the foreign currencies to dollars at the then
current exchange rate, or may hold such currencies for an indefinite period of
time.
While the holding of currencies will permit a Portfolio to take advantage
of favorable movements in the applicable exchange rate, it also exposes a
Portfolio to risk of loss if such rates move in a direction adverse to the
Portfolio's position. Such losses could reduce any profits or increase any
losses sustained by the Portfolio from the sale or redemption of securities, and
could reduce the dollar value of interest or dividend payments received. In
addition, the holding of currencies could adversely affect the Portfolio's
profit or loss on currency options or forward contracts, as well as its hedging
strategies.
Prior to investing in foreign securities, a Portfolio may hold funds
temporarily in foreign currencies. The value of the assets of that Portfolio may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. The Portfolio may also incur costs in
connection with conversions between various currencies. The Portfolios will,
therefore, consider foreign exchange rates in making investment decisions, but,
other than the Capital Growth Portfolio and the Emerging Growth Portfolio, will
not actively hedge foreign currency fluctuations by entering into contracts to
purchase or sell foreign currencies at a future date or options or futures
contracts on foreign currencies. See "RISK CONSIDERATIONS--Foreign Securities"
in the Statement of Additional Information.
Brady Bonds
Certain of the Portfolios consistent with their objectives and policies
may invest in Brady Bonds, which are securities created through exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructuring have been
implemented to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia,
Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. Dollar) and are actively traded in the over-the-counter
markets. U.S. dollar denominated, collateralized Brady Bonds, which may be
fixed-rate bonds, or floating rate bonds, are generally collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayments of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady
33
<PAGE>
Bonds with respect to the commercial bank loans by public and private entities,
investments in Brady Bonds may be viewed as speculative.
34
<PAGE>
Non-Diversified Status
Since the International Equity Portfolio is not "diversified" as defined
by the Investment Company Act of 1940, as amended ("ICA") it may invest a
greater percentage of its assets in any single issuer or on a single industry
than otherwise permissible for a diversified investment company, and it will be
more susceptible to adverse developments affecting any single issuer or
industry. Nonetheless, this "non-diversified" Portfolio is still subject to the
diversification requirements that arise under the federal tax laws.
Precious Metals
The Global Hard Assets Portfolio may invest in precious metal coins, which
have no numismatic value, and bullion. The value of such coins and bullion is
based primarily on their precious metal content. Since such investments do not
generate any investment income, the sole source of return from such investments
would be from gains or losses realized on their sale. The Portfolio incurs
additional costs in storing gold bullion and coins. These storage costs are
generally higher than custodial costs for securities. Although subject to
substantial fluctuations in value, management believes such investments could be
beneficial to the investment performance of the Portfolio and could be a
potential hedge against inflation, as well as an investment with possible growth
potential. In addition, at the appropriate time, investments in precious metal
coins or bullion could help to moderate fluctuations in the Portfolio's value,
as at times the prices of precious metals have tended not to fluctuate as widely
as shares of issues engaged in the mining of such precious metals. In view of
the established world market for precious metals, the daily value of such coins
is readily ascertainable and their liquidity is assured. The Portfolio will
maintain its precious metal coins and bullion with Wilmington Trust Company.
Precious metal trading is a speculative activity and its markets at times
volatile. Prices of precious metals are affected by factors such as cyclical
economic conditions, political events and monetary policies of various
countries. Markets are, therefore, volatile at times and there may be sharp
fluctuations in prices, even during periods of rising prices. Under current U.S.
tax law, the Fund may not receive more than 10% of its yearly income from gains
resulting from the sale of precious metals or any other physical commodity. The
Portfolio may be required, therefore, to hold its precious metals or sell them
at a loss, or to sell its portfolio securities at a gain, when it would not
otherwise do so for investment reasons.
Emerging Market Securities
Consistent with the Portfolios' objectives and policies the Portfolios may
invest in securities of issuers whose principal activities are located in
emerging market countries. Emerging market countries include any country
determined by the Sub-Investment Manager to have an emerging market economy,
taking into account a number of factors including whether the country has a low
to middle economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Sub-Investment Manager determines whether an issuer's principal activities are
located in an emerging market country by considering such factors as country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of the country or any of its agencies, authorities,
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenue from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
Depository Receipts
The World Growth Portfolio, the International Equity Portfolio, the Global
Hard Assets Portfolio, the Growth Portfolio, the Growth and Income Portfolio,
the Capital Growth Portfolio, the Balanced Portfolio, the High Yield Bond
Portfolio and the Emerging Growth Portfolio may also invest in Depository
Receipts, (ADRs, GDRs and EDRs.) ADRs are certificates issued by a United States
bank representing the right to receive securities of a foreign issuer deposited
in a foreign branch of a United States bank and traded on a United States
exchange or over-the-counter. European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs") are typically issued by foreign banks or trust
companies, although they may be by US banks or trust companies, and also
evidence ownership of underlying securities issued by a foreign or U.S.
securities market. Generally, Depository Receipts in registered form are
designed for use in the U.S. securities market and Depository Receipts in bearer
form are designed for use in securities markets outside the United States.
Depository Receipts may not necessarily be denominated in the same currency as
the underlying securities in to which they may be converted. Depository Receipts
may be issued pursuant to sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
35
<PAGE>
form of Depository Receipts. In unsponsored programs the issuer may not be
directly involved in the creation of the program. In some cases it may be easier
to obtain financial information from an issuer that has participated in the
creation of the sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Securities. Brokerage commissions will be incurred if ADRs are purchased
through brokers on the U.S. stock exchanges.
Depository Receipts also involve the risks of other investment in foreign
securities; for purposes of each Fund's investment policies, a Fund's investment
in Depository Receipts will be deemed to be investments in the underlying
securities.
Forward Foreign Currency Exchange Contracts
The Portfolios (except the Money Market Portfolio) may utilize forward
foreign currency exchange contracts ("forward currency contracts"). A forward
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
forward currency contract agreed upon by the parties, at a price set at the time
of the contract. These forward currency contracts are principally traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The Portfolios will enter into forward
currency contracts only under two circumstances. First, when a Portfolio has
entered into a contract to purchase or sell a security denominated in or exposed
to a foreign currency, the Portfolio may be able to protect itself against a
possible loss, between trade date and settlement date for such security,
resulting from an adverse change in the relationship between the U.S. dollar and
the foreign currency in which such security is denominated or exposed, by
entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of the foreign currency involved in the underlying security
transaction. However, this tends to limit potential gains which might result
from a positive change in such currency relationships. Second, when management
of a Portfolio believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against the U.S. dollar (or another
currency), the Portfolio may enter into a forward currency contract to sell or
buy an amount of foreign currency approximating the value of some or all of the
Portfolio's securities denominated in or exposed to such foreign currency, or a
proxy currency whose performance is expected to correlate to the currency. The
forecasting of short-term currency market movement is extremely difficult and
whether such a short-term hedging strategy will be successful is highly
uncertain.
Repurchase Agreements
All of the Portfolios may enter into repurchase agreements, whereby the
Portfolio purchases securities (referred to as "underlying securities") from
well-established securities dealers or banks, subject to agreement by the seller
to repurchase the securities at a stated price on a specified date. Repurchase
agreements involve certain risks not associated with direct investment in
securities, including the risk that the original seller will default on its
obligations to repurchase, as a result of bankruptcy or otherwise. To minimize
this risk, a Portfolio will enter into repurchase agreements only if the
repurchase agreement is structured in a manner reasonably designed to
collateralize fully the value of a Portfolio's investment during the entire term
of the agreement and in accordance with guidelines regarding the
creditworthiness of the seller determined by the Board of Directors of the Fund.
As a general matter, if the seller of the repurchase agreement is a bank it must
have assets of at least $1,000,000,000; if the seller is a broker-dealer it must
have a net worth of at least $25,000,000. The underlying securities, held as
collateral, will be marked to market on a daily basis, and must be high-quality
short-term securities. In addition, the securities underlying repurchase
agreements must be either U.S. Government Obligations or securities that, at the
time the repurchase agreement is made, are rated in the highest rating category
by the Requisite NRSROs. Nevertheless, in the event that the other party to the
agreement fails to repurchase the securities subject to the agreement, a
Portfolio could suffer a loss to the extent proceeds from the sale of the
underlying securities held as collateral were less than the price specified in
the repurchase agreement.
Real Estate Securities
Although the Global Hard Assets Portfolio will not invest in real estate
directly, it may invest up to 50% of its assets in equity securities of Real
Estate Investment Trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. Investment in real estate
related securities are subject to certain risks associated with the real estate
industry in general and REITs in particular. REITs are subject to interest rate
risk, heavy cash flow dependency, default by borrowers, self-liquidation and the
possibilities of failing to qualify for the exemption from tax for distributed
income under the Code. See "Real Estate Securities" in the Statement of
Additional Information.
36
<PAGE>
Short Sales
The Global Hard Assets Portfolio may make short sales of equity
securities. A short sale occurs when the Portfolio sells a security which it
does not own by borrowing it from broker. In the event that the value of the
security that the Portfolio sold short declines, the Portfolio will gain as it
repurchases the security in the market at the lower price. If the price of the
security increases, the Portfolio will suffer a loss as it will have to
repurchase the security at the higher price. Short sales may incur higher
transaction costs than regular securities transactions.
The Portfolio will establish a segregated account with respect to is short
sales and maintain in such account cash not available for investment, U.S.
Government securities or other liquid, high-quality debt securities or liquid
equity securities having a value equal to the difference between (i) the market
value of the securities sold short at the time they were sold short and (ii) any
cash, U.S. Government securities or other liquid, high-quality securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). Such segregated
account will be marked to market daily, so that (i) the amount in the segregated
account plus the amount deposited with the broker as collateral equals the
current market value of the securities sold short and (ii) in no event will the
amount in the segregated account plus the amount deposited with the broker as
collateral fall below the original value of the securities at the time they were
sold short. The total value of the assets deposited as collateral with the
broker and deposited in the segregated account will not exceed 50% of the
Portfolio's net assets. (See "Short Sales" in the Statement of Additional
Information.)
High Yield Securities
The High Yield securities in which the High Yield Bond Portfolio and other
Portfolios, may invest may be rated below investment grade by Standard & Poor's
or by Moody's (i.e., bonds rated BB or below by Standard & Poor's or Ba or below
by Moody's) or be unrated. The High Yield Bond Portfolio may invest 100% of its
net assets in lower rated corporate debt obligations. Securities rated BB or
below by Standard & Poor's or Ba or below by Moody's (or comparable unrated
securities), commonly known as "high yield, high risk," are considered, on
balance, speculative with respect to capacity to pay interest, dividends and
repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. As a result, investment in such securities will entail greater
speculative risks than those associated with investment-grade securities (i.e.,
bonds rated BBB or higher by Standard & Poor's or Baa or higher by Moody's). The
Securities and Exchange Commission takes the position that securities rated BB
or below by Standard and Poor's or Ba or below by Moody's (or comparable unrated
securities) may be classified as "junk" or "junk bonds." No minimum rating
standard is required for a purchase of securities by the High Yield Bond, Growth
and Income or Growth Portfolios. See SAI for a description of the ratings issued
by investment rating services.
An economic downturn could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay their obligations upon
maturity. Factors having an adverse impact on the market value of lower rated
securities will have an adverse effect on a Portfolio's net asset value to the
extent it invests in such securities. In addition, a Portfolio may incur
additional expenses to the extent it is required to seek recovery upon a default
in payment of principal or interest on its portfolio holdings The secondary
market for high yield, high risk bond securities, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities, a factor which may have an adverse effect on a
Portfolio's ability to dispose of a particular security when necessary to meet
its liquidity needs. Under adverse market or economic conditions, the secondary
market for high yield, high risk bond securities could contract further,
independent of any specified adverse changes in the condition of a particular
issuer. As a result, a Portfolio could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating a Portfolio's net asset value.
Since investors generally perceive that there are greater risks associated
with lower-rated debt securities, the yields and prices of such securities may
tend to fluctuate more than those for higher-rated securities. In the lower
quality segments of the fixed-income securities market, changes in perceptions
of issuers' creditworthiness tend to occur more frequently and in a more
pronounced manner than do changes in higher quality segments of the fixed-income
securities market resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisitions will not affect cash income from such securities but will
be reflected in a Portfolio's net asset value.
37
<PAGE>
Lower-rated (and comparable non-rated) securities tend to offer higher
yields than higher-rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. In addition to the risk of default,
there are the related costs of recovery on defaulted issues. The sub-advisers
will attempt to reduce these risks through diversification of these Portfolio's
portfolios and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends in corporate
developments.
Zero Coupon Bonds
The Portfolios may invest in zero coupon bonds which are debt obligations
that do not make any interest payments for a specified period of time prior to
maturity or until maturity. The value of these obligations fluctuates more in
response to interest rate changes than does the value of debt obligations that
make current interest payments.
Securities and Index Options
The Growth Portfolio, the Growth and Income Portfolio, the High Yield Bond
Portfolio, the Capital Growth Portfolio, the Global Hard Assets Portfolio, the
Balanced Portfolio and the Emerging Growth Portfolio may write covered call
options and purchase call and put options on securities and stock indices. The
Growth Portfolio, the High Yield Bond Portfolio, the International Equity
Portfolio, the Capital Growth Portfolio, the Global Hard Assets Portfolio and
the Emerging Growth Portfolio may also utilize options on foreign currencies.
See the Statement of Additional Information for a more detailed description of
these options.
Writing (Selling) Call Options. In order to earn additional income or to
protect partially against declines in the value of its securities, the
Portfolios noted above may write (sell) covered call options. A Portfolio may
also purchase call options to the extent necessary to close out call option
positions previously written by the Portfolio. A call option gives the holder
(purchaser) the right to buy and obligates the writer (seller) to sell, in
return for a premium paid to the writer, the underlying security at the exercise
price at any time during the option period. A call option on a securities index
is similar to a call option on an individual security, except that the value of
the option depends on the weighted value of the group of securities comprising
the index and all settlements are made in cash rather than by delivery of a
particular security.
The writing of call options on securities and securities indices involves
the following risks: (1) during the option period the writer of a call option
gives up the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase, but retains the
risk of loss should the price of the underlying security or index decline and
(ii) the inability to close out options previously written, which would require
the Portfolio to retain the option and the securities covering the option until
its exercise or expiration.
Purchasing Put and Call Options
In order to hedge against changes in the market value of their portfolio
securities, the Growth Portfolio, the High Yield Bond Portfolio, the
International Equity Portfolio, the Growth and Income Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio, the Global Hard Assets Portfolio and
the Emerging Growth Portfolio may also purchase put and call options with
respect to equity securities, bonds, and stock and bond indices which correlate
with their portfolio securities, provided that the premiums paid for such
options are limited in each case to no more than 5% of the Portfolio's total
assets. A put option on a security gives the purchaser of the option, in return
for the premium paid to the writer (seller), the right to sell the underlying
security at the exercise price at any time during the option period. Upon
exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. A put option on a
securities index is similar to a put option on an individual security, except
that the value of the option depends on the weighted value of the group of
securities comprising the index and all settlements are made in cash, rather
than by delivery of a particular security.
Purchasing a put or call option on securities and securities indices
involves the risk that the Portfolio may lose the premium it paid plus
transaction costs.
Futures Contracts
The Growth and Income Portfolio, the Growth Portfolio, the High Yield Bond
Portfolio, the International Equity Portfolio, the Capital Growth Portfolio, the
Balanced Portfolio, the Global Hard Assets Portfolio and the Emerging Growth
Portfolio may purchase and sell futures contracts on debt securities and indexes
of debt securities (i.e., interest rate futures contracts) as a hedge
38
<PAGE>
against or to minimize adverse principal fluctuations resulting from anticipated
interest rate changes. They may also, where appropriate, enter into stock index
futures contracts to provide a hedge for a portion of a Portfolio's equity
holdings. Stock index futures contracts may be used as a way to implement either
an increase or decrease in portfolio exposure to the equity markets in response
to changing market conditions. The Capital Growth Portfolio, the Growth
Portfolio, the Global Hard Assets Portfolio and the Emerging Growth Portfolio
may also enter into currency futures contracts to hedge the currency
fluctuations of its foreign securities. A Portfolio may also write covered call
options and purchase put or call options on futures contracts of the type which
that Portfolio is permitted to purchase or sell. The Portfolios will not enter
into futures contracts for speculation and will only enter into futures
contracts that are traded on national futures exchanges. No Portfolio will enter
into futures contracts or options thereon for purposes other than bona fide
hedging if immediately thereafter the sum of the amounts of initial margin
deposits on the Portfolio's existing futures contracts and premiums paid for
options on unexpired futures contracts would exceed 5% of the value of the
Portfolio's total assets.
The use of futures contracts by the Growth Portfolio, the High Yield Bond
Portfolio, the Global Hard Assets Portfolio, the International Equity Portfolio,
the Growth and Income Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio and the Emerging Growth Portfolio entails certain risks, including but
not limited to the following: no assurance that futures contracts transactions
can be offset in closing transactions at favorable prices or at all unless a
liquid secondary market exists; possible reduction of the Portfolio's income due
to the use of hedging; possible reduction in value of both the securities hedged
and the hedging instrument; possible lack of liquidity due to daily limits on
price fluctuation; imperfect correlation between the contract and the securities
being hedged; and potential losses well in excess of the amount invested in
futures contracts themselves. If a Sub-Investment Manager's forecasts regarding
movements in securities prices or interest rates are incorrect, the Portfolio's
investment results may have been better without the hedge. Futures contracts and
their associated risks are described in more detail in the Statement of
Additional Information.
Lending of Securities
The Emerging Growth Portfolio, the Growth Portfolio, the High Yield Bond
Portfolio, the Global Hard Assets Portfolio and the International Equity
Portfolio may make loans of their portfolio securities. Such loans will usually
be made to member banks of the Federal Reserve System and member firms (and
subsidiaries thereof) of the New York Stock Exchange and would be required to be
secured continuously by collateral in cash, U.S. Government securities or an
irrevocable letter of credit maintained on a current basis at an amount at least
equal to the market value of the securities loaned. The Portfolio would continue
to collect the equivalent of the interest on the securities loaned and would
receive either interest (through investment of cash collateral) or a fee (if the
collateral is U.S. Government securities or a letter of credit).
When-Issued Securities
In order to help ensure the availability of suitable securities the Growth
Portfolio, Domestic Growth Stock Portfolio, High Yield Bond Portfolio, Global
Hard Assets Portfolio, International Equity Portfolio, Balanced Portfolio,
Capital Growth Portfolio, World Growth Stock Portfolio and Emerging Growth
Portfolio may purchase securities on a "when-issued" or on a "forward delivery"
basis, which means that the obligations will be delivered to the Portfolios at a
future date usually beyond customary settlement time. It is expected that, under
normal circumstances, the Portfolios will take delivery of such securities. In
general, the Portfolios do not pay for the securities until received and do not
start earning interest on the obligations until the contractual settlement date.
While awaiting delivery of the obligations purchased on such basis, the
Portfolios will establish a segregated account consisting of liquid assets equal
to the amount of the commitments to purchase "when-issued" securities. See the
Statement of Additional Information.
Mortgage Backed and Corporate Asset-Backed Securities
The Growth Portfolio, the High Yield Bond Portfolio, the Global Hard
Assets Portfolio, the International Equity Portfolio and the Emerging Growth
Portfolio may invest in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, such as credit card or automobile loan receivables, representing the
obligations of a number of different parties. Corporate asset-backed securities
present certain risks. For instance, in the case of credit card receivables,
these securities may not have the benefit of any security interest in the
related collateral. See the Statement of Additional Information for further
information on these securities.
The International Equity Portfolio, the High Yield Bond Portfolio, the
Growth Portfolio, the Growth and Income, the Global Hard Assets Portfolio and
the Emerging Growth Portfolios may invest in mortgage-backed securities, which
represent direct or indirect participation in, or are collateralized by and
payable from mortgage loans secured by real property.
39
<PAGE>
Mortgage backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. This can occur when interest
rates decline significantly. A Portfolio's ability to maintain positions in such
securities will be affected by reductions in the principal amount of such
securities resulting from prepayments and its ability to reinvest the returns or
principal at comparable yields is subject to generally prevailing interest rates
at that time. To the extent that a Portfolio invests in mortgage-backed
securities, the values of its securities will vary with changes in market
interest rates generally and the differentials in yields among various U.S.
Government Securities and other mortgage-backed securities.
Stripped Mortgage-Backed Securities
Certain of the Portfolios may invest a portion of their assets in stripped
mortgage-backed securities which are derivative multi-class mortgage securities
issued by agencies and instrumentalities of the United States Government or by
private originators of or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks and investment banks.
Stripped mortgage-backed securities are usually structured with two classes that
receive different proportions of interest and principal distributions from a
pool of mortgage assets. A common type of stripped mortgage-backed securities
will have one class receiving some of the interest and most of the principal
from the mortgage assets, while the other class will receive most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest (the interest only or "IO" Class) and the other
class will receive all of the principal (the principal only of "PO" Class). The
yield to maturity on an IO is extremely sensitive to the rate of principal
payments (including prepayments on the related underlying mortgage assets) and a
rapid rate of principal payments may have a material adverse effect on such
securities' yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayment of principal, the Portfolios may fail to
fully recoup their initial investment in these securities. The market value of
the class consisting primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates. Because stripped
mortgage-backed securities were only recently introduced, established trading
markets for these securities have not yet fully developed, although the
securities are traded among institutional investors and investment banking
firms.
Borrowing
Certain of the Portfolios may borrow money but only from banks and only
for temporary or short-term purposes. These Portfolios will not borrow for
leveraging purposes. The Global Hard Assets Portfolio may borrow for investment
purposes and all Portfolios will maintain continuous asset coverage of at least
300% (as defined in the Investment Company Act of 1940) with respect to all of
its borrowings. The Portfolio may be required to sell its assets within three
days to reduce debt and restore 300% asset coverage. Borrowing involves interest
costs. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
which may or may not exceed the investment return received from the securities
purchased with borrowed funds. It is anticipated that such borrowings would be
pursuant to a negotiated loan agreement with a commercial bank or other
institutional lender.
Warrants
All of the Portfolios except the Money Market Portfolio, may invest in
warrants, which are rights to buy certain securities at set prices during
specified time periods. If, prior to the expiration date, the Portfolio is not
able to exercise a warrant at a cost lower than underlying securities, the
Portfolio will suffer a loss of its entire investment in the warrant.
Restricted and Illiquid Securities
All of the Portfolios may to some extent purchase certain restricted
securities (those that are not registered under the Securities Act of 1933 ("33
Act") but can be offered and sold to "qualified institutional buyers under Rule
144A of the 33 Act) and limited amounts of illiquid securities including
illiquid restricted securities. Limitations on illiquid securities and other
illiquid investments for each Portfolio are described in the Portfolio's
investment restrictions in the Statement of Additional Information incorporated
herein by reference.
Illiquid investments include many restricted securities, repurchase
agreements that mature in more than seven days or that have a notice or demand
feature more than seven days, certain over-the-counter option contracts and
participation interests in loans.
40
<PAGE>
Certain repurchase agreements which provide for settlement in more than
seven days, however, can be liquidated before nominal fixed term on seven day or
less notice. The Portfolios will consider such repurchase agreements as liquid.
Likewise, restricted securities (including commercial paper issued pursuant to 4
(2) of the 33 Act) that the Board of Directors or the Sub-Investment Managers
have determined to be liquid will be treated as such.
A detailed discussion of the limitations on illiquid investments is found
in "Restricted and Illiquid Securities" in the SAI.
Dollar Roll Transactions
All Portfolios except the Money Market Portfolio and the International
Equity Portfolio may enter into mortgage "dollar roll" transactions with
selected banks and broker-dealers pursuant to which a Portfolio sells
mortgage-backed securities for delivery in the future (generally within 30 days)
and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. A Portfolio will
only enter into covered rolls. A covered roll is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction. In the event that the party with whom the Portfolio contracts
to replace substantially similar securities on a future date fails to deliver
such securities, the Portfolio may not be able to obtain such securities at the
prices specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
Swap Transactions
The High Yield Bond Portfolio, Global Hard Assets Portfolio, Growth
Portfolio and Capital Growth Portfolio may, to the extent permitted by the SEC,
enter into privately negotiated "swap" transactions with other financial
institutions in order to take advantage of investment opportunities generally
not available in public markets. In general, these transactions involve
"swapping" a return based on certain securities, instruments, or financial
indexes with another party, such as a commercial bank in exchange for a return
based on different securities, instruments, or financial indexes.
By entering into swap transactions, a Portfolio may be able to protect the
value of a portion of its securities against declines in market values. A
Portfolio may also enter into swap transactions to facilitate implementation of
allocation strategies between different market segments or to take advantage of
market opportunities which may arise from time to time. A Portfolio may be able
to enhance its overall performance if the return offered by the other party to
the swap transaction exceeds the return swapped by the Portfolio. However, there
can be no assurance that the return a Portfolio receives from the counterparty
to the swap transaction will exceed the return it swaps to that party.
While a Portfolio will only enter into swap transactions with
counterparties it considers creditworthy (and will monitor creditworthiness of
parties with which it enters into swap transactions), a risk inherent in swap
transactions is that the other party to the transaction may default on its
obligations under the swap agreement. If the other party to the swap transaction
defaults on its obligations, a Portfolio would be limited to contractual
remedies under the swap agreement. There can be no assurance that a Portfolio
will succeed when pursuing its contractual remedies. To minimize a Portfolio's
exposure in the event of a default, the Portfolio will usually enter into swap
transactions on a net basis (i.e., the parties to the transaction will net the
payments payable to each other before such payments are made). When a Portfolio
enters into swap transactions on a net basis, the net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with respect to each
such swap agreement will be accrued on a daily basis and an amount of liquid
assets having an aggregate market value at least equal to the accrued excess
will be segregated by the Portfolio's custodian. To the extent a Portfolio
enters into swap transactions other than on a net basis, the amount segregated
will be the full amount of the Portfolio's obligations, if any, with respect to
each such swap agreement, accrued on a daily basis.
Interest Rate Swaps. The High Yield Bond Portfolio, Global Hard Assets
Portfolio, Growth Portfolio and Capital Growth Portfolio may enter into interest
rate swaps for hedging purposes and non-hedging purposes. Since swaps are
entered into for good faith hedging purposes or are offset by a segregated
account, the sub-advisors believe that swaps do not constitute senior securities
as defined in the 1940 Act and, accordingly, will not treat than as being
subjected to each Portfolio's borrowing restrictions. The net amount of the
excess, if any, of a Portfolio's obligations over its "entitlement" with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or liquid high grade debt securities (i.e., securities rated in one of the
top three rating categories by Moody's or Standard & Poor's, or, if unrated,
deemed by the sub-adviser to be of comparable credit quality) or liquid equity
securities having an aggregate net asset value at least equal to such accrued
excess will be maintained in a segregated account by the custodian. A Portfolio
will not enter into any interest rate swap unless the credit quality of the
unsecured senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by the sub-
41
<PAGE>
adviser. If there is a default by the other party to such a transaction, a
Portfolio will have contractual remedies pursuant to the agreement. The swap
market has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
Currency and Asset Swaps
Certain of the Portfolios may enter into currency swaps for hedging
purposes. Currency swaps involve the exchange of rights to make or receive
payments of the entire principal value in specified currencies. Since currency
swaps are individually negotiated, the Portfolio may expect to achieve an
acceptable degree of correlation between its portfolio investments and its
currency swap positions. The entire principal value of a currency swap is
subject to the risk that the other party to the swap will default on its
contractual delivery obligations. The Portfolio may also enter into other asset
swaps. Asset swaps are similar to currency swaps in that the performance of a
Hard Asset (e.g., gold) may be "swapped" for another (e.g., energy).
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio transactions. If the Sub-Investment Manager is incorrect in its
forecasts of market values and currency exchange rates and Hard Assets values,
the investment performance of the Portfolio would be less favorable than it
would have been if this investment technique were not used. Swaps are generally
considered illiquid and will be aggregated with other illiquid positions for
purposes of the limitation on illiquid investments.
Loan Participations and Other Direct Indebtedness
The Growth Portfolio, Capital Growth Portfolio, High Yield Bond Portfolio,
Global Hard Assets Portfolio and International Equity Portfolio and the Emerging
Growth Portfolio may invest a portion of their assets in "Loan Participations"
and other direct indebtedness. By purchasing a loan participation, the
Portfolios acquire some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower. Many such loans are secured, and
impose restrictive covenants which must be met by the borrower. These loans are
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans may
be in default at the time of purchase. The Portfolios may also purchase other
direct indebtedness such as trade or other claims against companies, which
generally represent money owed by the company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the loan participations and other direct indebtedness
acquired by the Portfolios may involve revolving credit facilities or other
standby financing commitments which obligate the Portfolios to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct
indebtedness may make such loans especially vulnerable to adverse changes in
economic or market conditions. Loan participations and other direct indebtedness
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, the Portfolios may be unable to sell such investments at an
opportune time or may have to resell them at less than fair market value. For a
further discussion of loan participations, other direct indebtedness and the
risks related to transactions therein, see the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
Investments of the Portfolios are further restricted by certain policies
that may not be changed without a vote of stockholders. See "INVESTMENT
RESTRICTIONS" in the Statement of Additional Information.
Portfolio Turnover
Portfolio turnover may vary and from year to year or within a year
depending upon economic, market and business conditions. The annual portfolio
turnover rates for the Portfolios in 1997 and 1996 were as follows: 30.22% and
27.50% for the World Growth Stock Portfolio; 19.70% and 64.78% for the Global
Hard Assets Portfolio; 52.92% and 49.75% for the Domestic Growth Stock
Portfolio; 129.53% and 35.69%, 64.38 (1997) for the Growth and Income Portfolio;
91.66% and 147.82% for the Capital Growth Portfolio; 122.85% and 94.58% for the
Emerging Growth Portfolio and 254.04 and 222.35% for the Balanced Portfolio. In
addition, the portfolio turnover rate for the Balanced Portfolio for such
periods can be broken down into rates of 276.54% and 233.29%, respectively, for
the common stock portion of the Portfolio and 220.70% and 202.08%, respectively,
for the fixed income portion. Portfolios having higher turnover rates may
realize larger amounts of gains and losses relative to a portfolio having a
lower turnover rate and will generally incur correspondingly greater brokerage
commissions. Excessive short-term trading may result in excessive "short-short"
income under the Internal Revenue Code ("IRC") which, in turn, could affect the
status of such Portfolios as regulated investment companies and the tax status
of the
42
<PAGE>
contracts invested in the Portfolio. See "TAXES AND DIVIDENDS" in this
Prospectus and "PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS" in the
Statement of Additional Information.
43
<PAGE>
MANAGEMENT OF THE FUND
The Board of Directors of the Fund is responsible for the administration
of the affairs of the Fund.
The Fund's Investment Manager is Jefferson Pilot Investment Advisory
Corporation (Jefferson Pilot Investment Advisory), a registered investment
adviser, a wholly-owned subsidiary of Jefferson Pilot Financial ("JPF") which,
in turn, is a wholly-owned Subsidiary of Jefferson Pilot Corporation. Its
address is One Granite Place, Concord, NH 03301. It provides supervisory
investment advice, and provides certain administrative services for all of the
Fund's Portfolios. Its investment advisory responsibilities include, among other
things, recommending, evaluating, monitoring and overseeing the activities of
the Sub-Investment Managers and reviewing the practices of broker-dealers
selected by the Sub-Investment Managers. Jefferson Pilot Investment Advisory
also provides office space and related utilities, including telephones,
necessary for the Fund's operations; recommends auditors, counsel and
custodians; maintains records not otherwise maintained by other parties; and
provides personnel, data processing services, and supplies to the Fund. The cost
of such facilities, supplies and services is included in the investment
management fee described below. Jefferson Pilot Investment Advisory also acts as
transfer agent and dividend disbursing agent for the Fund.
Investment management fees are paid to Jefferson Pilot Investment Advisory
monthly at an annual rate based on a percentage of the average daily net asset
value of each Portfolio as shown below:
<TABLE>
<CAPTION>
WORLD GROWTH STOCK,
GLOBAL HARD ASSETS
DOMESTIC GROWTH STOCK, HIGH YIELD
MONEY MARKET GROWTH AND INCOME, CAPITAL EMERGING BOND AND INTERNATIONAL
AVERAGE DAILY NET ASSETS AND BOND AND BALANCED GROWTH GROWTH GROWTH EQUITY
<S> <C> <C> <C> <C> <C> <C>
First $200 Million .50% .75% 1.00% .80% .75% 1.00%
Next $1.1 Billion .45% .70% .95% .75% 75% 1.00%
Over $1.3 Billion .40% .65% .90% .70% .75% 1.00%
</TABLE>
The Sub-Investment Managers for the Portfolios are Templeton Global
Advisors Limited, Lyford Cay, Nassau, Bahamas for the World Growth Stock
Portfolio; Lombard Odier International Portfolio Management Limited ("Lombard
Odier"), Norfolk House, 13 South Hampton Place, London, WC1A2AJ, UK for the
International Equity Portfolio; Van Eck Associates Corporation, 99 Park Avenue,
New York, New York 10016 for the Global Hard Assets Portfolio; Pioneering
Management Corporation, 60 State Street, Boston, Massachusetts 02109 for the
Domestic Growth Stock Portfolio; Janus Capital Corporation, 100 Fillmore Street,
Suite 300, Denver, Colorado 80206 for the Capital Growth Portfolio; J.P. Morgan
Investment Management, Inc. ("Morgan") 522 Fifth Avenue, New York, New York
10036 for the Balanced Portfolio; Warburg Pincus Asset Management, Inc., 466
Lexington Avenue, New York, New York 10017-3147 for the Growth and Income
Portfolio; Massachusetts Financial Services Company, 500 Boylston Street,
Boston, Massachusetts 02116 for the Money Market High Yield Bond, and Emerging
Growth Portfolios; and Strong Capital Management, Inc. ("Strong") P.O. Box 2936,
Milwaukee, Wisconsin 53201 for the Growth Portfolio.
Templeton, Sub-Adviser to the World Growth Stock Portfolio, is a
registered investment adviser, organized under the laws of the Bahamas.
Templeton is an indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"), a Delaware corporation. Franklin is a publicly traded company
whose ordinary shares of common stock are listed on the New York Stock Exchange.
Templeton serves as an investment adviser or sub-adviser to various investment
companies registered under the Investment Company Act of 1940, subject to the
supervision and direction of each company's Board of Directors and, where
appropriate, the company's investment adviser, as well as to investment
companies registered in foreign jurisdictions. In this capacity, Templeton is
responsible on a daily basis for managing the companies' investments, making
investment decisions on behalf of the companies and supplying research services.
Templeton may also provide investment research and advice to certain common
trust vehicles. Templeton is also an adviser or sub-adviser to several private
accounts. Templeton and its affiliates currently serve as investment manager to
175 U.S. registered investment companies. Ms. Cindy Sweeting is primarily
responsible for the day to day management of the World Growth Stock Portfolio.
Previously Ms. Sweeting was a Vice President of investments at McDermott
International Investments Company. Ms. Sweeting who has been Vice President of
Templeton, a portfolio manager and research analyst at Templeton since 1997 when
she joined Templeton as a portfolio manager.
Van Eck Associates, a registered investment adviser and a Delaware
corporation is Investment Manager to the Global Hard Assets Portfolio. It acts
as an adviser to two other registered investment companies, Van Eck Funds and
Van Eck Worldwide Insurance Trust and as a sub-adviser to two other registered
investment
44
<PAGE>
companies, PIMCO Funds Multi-Manager Series--Precious Metals Fund and The GCG
Trust--Hard Assets Series, and manages or advises managers of portfolios of
pension plans and other accounts. Mr. John C. van Eck and members of his
immediate family own 100% of the outstanding voting securities of Van Eck
Associates. Since May 1, 1998, Derek van Eck and Kevin L. Reid have been
primarily responsible for the day-to-day management of the Global Hard Assets
Portfolio. Mr. Van Eck has been associated with Van Eck Associates as a
portfolio manager since 1988 and is currently Director of Global Investments and
an Executive Vice President of Van Eck as well as an officer and/or portfolio
manager of other mutual funds advised by Van Eck. Kevin L. Reid now serves as
Co-Portfolio Manager of Worldwide Hard Assets Fund with Derek van Eck. Messrs.
van Eck and Reid are jointly responsible for managing this Fund's portfolio of
investments.
Pioneer, the sub-adviser of the Domestic Growth Stock Portfolio, is a
registered investment adviser, is a Delaware corporation. It is a wholly-owned
subsidiary of The Pioneer Group, Inc., a Delaware corporation. Pioneer currently
acts as a manager and investment adviser of twenty-two other registered
investment companies. Robert W. Benson, Senior Vice President of Pioneer, has
been primarily responsible for the day-to-day management of the Domestic Growth
Stock Portfolio since 1986. Mr. Benson has been employed as a portfolio manager
by Pioneer since 1974.
Janus, a registered investment adviser, is a Colorado corporation. It
serves as investment adviser or sub-adviser to the Janus Funds, as well as
several other mutual funds and individual, corporate and pension and
profit-sharing accounts. Kansas City Southern Industries, Inc. ("KCSI") owns
approximately 83% of the outstanding voting stock of Janus, most of which it
acquired in 1984. KCSI is a publicly-traded holding company whose primary
subsidiaries are engaged in transportation, financial services and real estate.
Mr. Marc Pinto has been primarily responsible for the day-to-day management of
the Capital Growth Fund since 1994. Mr. Pinto has been a portfolio manager for
Janus since 1994, previously he was employed by a family firm and as an
Associate in the Investment Banking Division of Goldman Sachs.
Warburg Pincus Asset Management, Inc. ("Warburg"), Sub-investment manager
to the Growth and Income Portfolio, is indirectly controlled by Warburg, Pincus
& Co. ("W.P.& Co."), a New York partnership which has no business other than
being a holding company for Warburg and its affiliates. Lionel I. Pincus, the
Managing Director of W.P. & Co. may be deemed to control both W.P. & Co. and
Warburg. Warburg, organized in 1970, is a professional investment advisoryfirm
which provides investment services to investment companies, employee benefit
plans, endowment funds, foundations, and other institutions and individuals. As
of January 31, 1998 Warburg managed nearly $19.9 billion in assets. Brian
Posner, a managing Director of Warburg, has been with Warburg since January 1997
and since May 1, 1997 has been chief investment officer. Prior to joining
Warburg, Mr. Posner had been a portfolio manager with Fidelity Investments since
1987, most recently the Vice President and portfolio manager of Fidelity Equity-
Income II Fund.
J.P. Morgan Investment Management Inc. ("Morgan") is the sub-adviser to
the Balanced Portfolio. Morgan is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("JPM & Co."), a bank holding company organized in Delaware. Morgan
offers a wide range of investment management services and acts as investment
adviser to corporate and institutional clients. As of December 31, 1997 JPM &
Co. through Morgan and its other subsidiaries, had assets under management of
approximately $255 Billion. Michael J. Kelley, Vice President, (employed by
Morgan since 1985) and Harriet T. Huber, Vice President (employed by Morgan
since 1989) are primarily responsible for the day to day management of and
implementation of Morgan's investment process for the Balanced Portfolio.
Massachusetts Financial Services Company ("MFS") is Sub-Investment Manager
to the Money Market, Emerging Growth and High Yield Bond Portfolio. MFS is
America's oldest mutual fund organization. MFS and its predecessor organizations
have a history of money management dating from 1924 and the founding of the
first mutual fund in the United States, Massachusetts Investors Trust. Net
assets under the management of the MFS organization were approximately $77.6
Billion on behalf of approximately 2.9 million investor accounts as of February
28, 1998. As of such date, the MFS organization manages approximately $52.6
Billion of assets invested in equity securities and approximately $20.4 Billion
of assets invested in fixed income securities. Approximately $4.0 Billion of the
assets managed by MFS are invested in securities of foreign issuers and non-U.S.
dollar denominated securities of U.S. issuers. MFS is a subsidiary of Sun Life
of Canada (U.S.)
45
<PAGE>
Financial Services Holdings, Inc., which in turn is an indirect
wholly owned subsidiary of Sun Life.
MFS also serves as investment adviser to each of the other funds in the
MFS Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable
Insurance Trust, MFS Institutional Trust, MFS/Sun Life Series Trust, and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"), in connection with the sale of various
combination fixed/variable annuity contracts. MFS and its wholly owned
subsidiary, MFS Institutional Advisors, Inc., provide investment advice to
substantial private clients.
John W. Ballen and Toni Y. Shimura are the Emerging Growth Portfolio's
portfolio managers. Mr. Ballen, an Executive Vice President of MFS, has been
employed as a portfolio manager by MFS since 1984. Ms. Shimura, a Vice President
of MFS, has been employed as a portfolio manager by MFS since 1987.
Bernard Scozzafava, a Vice President of MFS is primarily responsible for
the day-to-day management of the High Yield Bond Portfolio. Mr. Scozzafava has
been employed as a portfolio manager by MFS since 1989.
Strong Capital Management, Inc. ("Strong") the sub-adviser to the Growth
Portfolio, was organized in 1974. Since then, Strong's principal business has
been providing investment supervision for individuals and institutional
accounts, such as pension funds and profit sharing plans. The sub-adviser also
acts as adviser for its own proprietary mutual funds. As of February 28, 1998,
Strong managed over $29.8 Billion in assets.
Subject to the supervision of the Board of Directors and the Adviser,
Strong manages the Growth Portfolio in accordance with its stated investment
objective and policies, makes investment decisions for the Portfolio, places
orders to purchase and sell securities on its behalf. The portfolio manager for
the Growth Portfolio is Mr. Ronald Ognar. Mr. Ognar, a Chartered Financial
Analyst with more than 25 years of investment experience joined Strong in April
1993, after two years as a principal and portfolio manager with RCM Capital
Management. For approximately three years prior to that, he was a portfolio
manager at Kemper Financial Services in Chicago. In addition to his duties as
portfolio manager of the Growth Portfolio he also manages the Strong Growth
Fund, the Strong Growth 20 Fund, and co-manages the Strong Total Return Fund.
Lombard Odier, the sub-adviser to the International Equity Portfolio,
provides investment advisory services with respect to the Portfolio's investment
in foreign securities, including recommending optimal geographic and equity
allocation. Lombard Odier is wholly-owned by Lombard, Odier & Cie ("LOC"), one
of the largest and oldest private banks in Switzerland, established in 1798. Mr.
Jean Bonna, a Managing Partner of LOC is Chairman of Lombard Odier. Lombard
Odier presently serves as investment sub-adviser to one open-end investment
company and one closed-end investment company.
The Portfolio retains Lombard Odier to manage the investments of its
assets and to place orders for the purchase and sale of portfolio securities.
Lombard Odier will be primarily responsible for recommending the allocation of
investments among various international markets and currencies, recommendation
and selection of particular securities in the international markets and
placement of portfolio transactions in the foreign equity markets. Although,
over-all strategy is set by the Lombard Odier Strategy Committee, Mr. Ronald
Armist (15 years of investment experience) and Mr. Omid Kamshad (20 years of
investment experience) will primarily be responsible for the day-to-day
management of the International Equity Portfolio.
The compensation of the Sub-Investment Managers is paid directly from the
investment management fees of Jefferson Pilot Investment Advisory and is set
forth in the table below as an annual percentage of the average daily net asset
value of the Portfolio managed:
SUB-INVESTMENT MANAGER
<TABLE>
<CAPTION>
AVERAGE
DAILY NET ASSETS JANUS TEMPLETON VAN ECK PIONEER
<S> <C> <C> <C> <C>
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
First $200 Million .75% .50% .50% .50%
Next $1.1 Billion .70% .45% .45% .45%
Over $1.3 Billion .65% .40% .40% .40%
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
MFS MFS MFS WARBURG &
NET ASSETS EMERGING GROWTH MONEY MARKET HIGH YIELD MORGAN
<S> <C> <C> <C> <C>
First $100 Million .50% .40% .30% .45%
Next $100 Million .50% .40% .30% .40%
Next $200 Million .50% .40% .25% .35%
Over $400 Million .50% .40% .25% .30%
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS STRONG LOMBARD ODIER
<S> <C> <C>
First $25 Million .60% .50%
Next $75 Million .50% .50%
Next $50 Million .40% .50%
Over $150 Million .30% .50%
</TABLE>
As noted above, under the Investment Management Agreement Jefferson Pilot
Investment Advisory acts as transfer agent and dividend paying agent for the
Fund and assumes a number of administrative functions in addition to its
investment management services. For example, Jefferson Pilot Investment Advisory
prepares and distributes proxy statements, prospectuses, Statements of
Additional Information, reports and other communications with stockholders;
schedules, plans the agenda for, and conducts the meetings of the Fund's
directors and stockholders; and prepares and files tax returns and reports which
federal, state, local or foreign laws may require. The cost of preparing,
printing and distributing all materials and holding such meetings is borne by
the Fund. The Fund also pays certain other expenses which are described under
the heading "INVESTMENT ADVISORY AND OTHER SERVICES--Payment of Expenses" in the
Statement of Additional Information.
For the year ended December 31, 1997, all investment management fees paid
to Jefferson Pilot Investment Advisory totalled: .75%, .50%, .75%, .75%, .50%,
.75%, 1.00%, .75% and .80%, respectively, of the average daily net assets of the
World Growth Stock Portfolio, Money Market Portfolio, Global Hard Assets
Portfolio, Domestic Growth Stock Portfolio, Growth and Income Portfolio, Capital
Growth Portfolio, Balanced Portfolio and Emerging Growth Portfolio. For the year
ended December 31, 1997 the ratio of operating expenses to average net assets
was .91%, .60%, 1.07%, .83%, .60%, 1.09%, .97%, and 1.00% respectively, for the
World Growth Stock Portfolio, the Money Market Portfolio, the Global Hard Assets
Portfolio, the Domestic Growth Stock Portfolio, the Growth and Income Portfolio,
the Capital Growth Portfolio, the Balanced Portfolio and Emerging Growth
Portfolio. Jefferson Pilot Investment advisory paid each of its current
Sub-Investment Managers a sub-advisory fee equal to the fee levels above for the
first $200 million of assets.
CAPITAL STOCK
The Fund issues a separate series of capital stock for each Portfolio.
Each share of capital stock issued with respect to a Portfolio has a pro rata
interest in the assets of that Portfolio. Each share of capital stock is
entitled to one vote on all matters submitted to a vote of all stockholders of
the Fund, and fractional shares are entitled to a corresponding fractional vote.
Shares of a Portfolio will be voted separately from shares of other Portfolios
on matters affecting only that Portfolio, including approval of the investment
management agreement, a sub-investment management agreement, and changes in
fundamental investment policies of that Portfolio. The assets of each Portfolio
are charged with the liabilities of that Portfolio and a proportionate share of
the general liabilities of the Fund. All shares may be redeemed at any time.
As a Maryland corporate entity, the Fund is not required to hold regular
annual shareholder meetings and, in the normal course, does not expect to hold
such meetings. The Fund is, however, required to hold shareholder meetings for
such purposes as, for example: (i) approving certain agreements as required by
the 1940 Act; (ii) changing fundamental investment objectives and restrictions
of the Portfolios; and (iii) filling vacancies on the Board of Directors in the
event that less than a majority of the directors were elected by shareholders.
The Fund expects that there will be no meetings of shareholders for the purpose
of electing directors unless and until such time as less than a majority of the
directors holding office have been elected by shareholders. At such time, the
directors then in office will call a shareholder meeting for the election of
directors. In addition, holders of record of not less than two-thirds of the
outstanding shares of the Fund may remove a director from office by a vote cast
in person or by proxy at a shareholder meeting called for that purpose at the
request of holders of 10% or more of the outstanding shares of the Fund. The
Fund has the obligation to assist in such shareholder communications. Except as
set forth above, directors will continue in office and may appoint successor
directors.
48
<PAGE>
Jefferson Pilot Financial initially purchased 100,000 shares of the
capital stock of each Portfolio, other than the Balanced Portfolio, High Yield
Bond Portfolio, International Equity Portfolio, Growth Portfolio and the
Emerging Growth Portfolio, for its general account. Jefferson Pilot Financial
initially purchased 500,000 shares of the capital stock of the Balanced
Portfolio and 300,000 shares of capital stock of the Emerging Growth Portfolio
for its general account. The purchase price of each share was $10.00. All other
shares are offered only to corresponding divisions of separate accounts
established by Jefferson Pilot Financial or its affiliated insurance companies.
As of March 24, 1998 Jefferson Pilot Financial and its affiliates did not own
more than 25% of any portfolio. The shares held in a separate account which are
attributable to Policies will be voted by Jefferson Pilot Financial or its
affiliated insurance companies in accordance with instructions received from the
owners of Policies. The shares held by Jefferson Pilot Financial or its
affiliated insurance companies, including shares for which no voting
instructions have been received, shares held in the separate account
representing charges imposed by Jefferson Pilot Financial or its affiliated
insurance companies against the separate account and shares held by Jefferson
Pilot Financial or its affiliated insurance companies that are not otherwise
attributable to Policies, will also be voted by Jefferson Pilot Financial or its
affiliated insurance companies in proportion to instructions received from the
owners of Policies. Jefferson Pilot Financial and its affiliated insurance
companies reserve the right to vote any or all such shares at their discretion
to the extent consistent with then current interpretations of the Investment
Company Act of 1940 and rules thereunder.
TAXES AND DIVIDENDS
Each Portfolio intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code ("Code"). It is the Fund's
policy to comply with the provisions of the Code regarding distribution of
investment income. Under those provisions, a Portfolio will not be subject to
federal income tax on that portion of its ordinary income and net capital gains
distributed to shareholders.
The Fund expects that each Portfolio will declare and distribute by the
end of each calendar year all or substantially all ordinary income and net
capital gains. Failure to distribute substantially all ordinary and net capital
gains, as described, may subject the Fund to an excise tax.
Dividends from ordinary income will be declared and distributed with
respect to each Portfolio at least once each year. Ordinary income of each
Portfolio is the investment company taxable income as defined in Section 852(b)
of the Code. All dividends and distributions will be automatically reinvested in
additional shares of the Portfolio with respect to which dividends have been
declared, at net asset value, as of the ex-dividend date of such dividends.
Section 817(h) of the Code and regulations thereunder set standards for
diversification of the investments underlying variable life insurance policies
in order for such policies to be treated as life insurance. These requirements,
which are in addition to diversification requirements applicable to the
Portfolios under Subchapter M and the Investment Company Act of 1940, may affect
the composition of a Portfolio's investments. Since the shares of the Fund are
currently sold to segregated asset accounts underlying such variable life
insurance policies, the Fund intends to comply with the diversification
requirements as set forth in the regulations.
The Secretary of the Treasury may in the future issue additional
regulations or revenue rulings that will prescribe the circumstances in which a
policyowner's control of the investments of a separate account may cause the
policyowner, rather than the insurance company, to be treated as the owner of
the assets of the separate account. Failure to comply with Section 817(h) of the
Code or any regulations thereunder, or with any regulations or revenue rulings
on policyowner control, if promulgated, would cause earnings on a policyowner's
interest in the separate account to be includible in the policyowner's gross
income in the year earned.
OFFERING AND REDEMPTION OF SHARES
Shares of capital stock of each Portfolio of the Fund are offered only to
the corresponding division of a separate account to which premiums have been
allocated by the owner of a Policy. Shares are sold and redeemed at their net
asset value as next determined following receipt by the separate account of
premium payments, surrender requests under Policies, loan payments, transfer
requests, and similar or related transactions through the separate account. The
Fund's principal underwriter and distributor is Jefferson Pilot Variable
Corporation, One Granite Place, Concord, New Hampshire 03301. Jefferson Pilot
Variable Corporation is an affiliate of Jefferson Pilot Investment Advisory and
a wholly-owned subsidiary of Jefferson Pilot Corporation. No selling commission
or redemption charge is made with respect to the purchase or sale of Fund
shares.
49
<PAGE>
Net asset value is normally determined as of the close of regular trading
on the New York Stock Exchange (presently 4:00 p.m. New York Time) on each day
during which the New York Stock Exchange is open for trading. The net asset
value of each Portfolio will not be calculated on the Friday following
Thanksgiving, the Friday following Christmas if Christmas falls on a Thursday
and Monday before Christmas if Christmas falls on a Tuesday.
An equity security listed on a stock exchange is valued at the closing
sale price on the exchange on which such security is principally traded. If no
sale took place, the mean of the bid and asked prices at the close of trading is
used. A security not listed on a stock exchange is valued at the closing sale
price as reported on a readily available market quotation system, or, if no
sales took place, the mean of the bid and asked prices at the close of trading
in the over-the-counter market. Quotations of foreign securities in foreign
currencies are converted to United States dollar equivalents using appropriately
translated foreign market prices.
Trading in securities on exchanges in European and Far Eastern countries,
and in over-the-counter markets in such other nations, is normally completed
well before the close of trading on the New York Stock Exchange. Trading of
European and Far Eastern securities, either generally or in a particular country
or countries, may not take place on every day on which the New York Stock
Exchange is open. Furthermore, trading takes place in Japanese markets on
certain Saturdays, and in various foreign markets on days which are not business
days in New York and on which the Fund's net asset value is not normally
calculated. The calculation of the net asset value of those Portfolios which do
such trading, therefore, may not take place contemporaneously with the
determination of the prices of many of the securities of each such Portfolio
which are used in making the calculation of net asset value. Occasionally,
events affecting the values of such securities may occur between the times at
which they are determined and the close of the New York Stock Exchange, which
events may not be reflected in the computation of a Portfolio's net asset value.
If, during such periods, events occur which materially affect the value of the
securities of a Portfolio, and during such periods either shares are tendered
for redemption or a purchase or sale order is received by the Fund, such
securities will be valued at fair value as determined in good faith by the Board
of Directors of the Fund.
Short-term debt securities having remaining maturities of 60 days or less
are valued on an amortized cost basis unless the Board determines that such
method does not represent fair value. This procedure values a purchased
instrument at cost on the date of purchase plus assumes a constant rate of
amortization of any discount or premium, regardless of any intervening change in
general interest rates or the market value of the instrument.
Options and convertible preferred stocks listed on a national securities
exchange are valued as of their last sale price or, if there is no sale, at the
current bid price. Futures Contracts are valued as of their last sale price or,
if there is no sale, at the mean of the bid and asked price.
All other securities and assets are valued at their fair value as
determined in good faith by the Board of Directors of the Fund.
With the approval of the Board, the Fund may utilize a pricing service, a
bank, or a broker-dealer experienced in such matters to perform any of the
above-described valuation functions.
Further discussion of asset valuation methods is included in the Statement
of Additional Information under the heading "DETERMINATION OF NET ASSET VALUE."
YEAR 2000
The Company has no computers or data processing equipment of its own. Therefore,
it has contracted with a number of affiliated and unaffiliated service agents to
provide all its computer and data processing support.
These service agents have been using certain computer programs which were
originally written using two rather than four digits to define applicable years.
As a result they may be using computer programs that have no time sensitive
software which may recognize a date using "00" as the 1900 rather than the year
2000 (the "Year 2000 Matter"). This could result in a system failure which may
disrupt operations, including an inability to accurately process purchases and
sales or calculate asset values or complete other important data processing
functions.
The service agents will have to identify, replace or modify portions of their
software and hardware so that their systems will function properly with respect
to dates in the Year 2000 and thereafter. If these modifications are not made or
are not completed
50
<PAGE>
on a timely basis, the Year 2000 Matter could have a material adverse affect on
the Company and there is no guarantee that the Company or other companies on
which the Company relies will be in compliance on a timely basis.
Jefferson-Pilot Corporation, the parent of many of the Company's affiliated
service agents, has developed a centralized oversight and project management
process to facilitate the conversion of all information systems to be ready for
the year 2000 and has been converting critical data processing systems. The
Investment Manager is monitoring similar projects involving service agents which
are not affiliates of Jefferson Pilot. The Company does not currently expect the
Year 2000 Matter to have a significant effect on operations of the Company.
OTHER INFORMATION
Shares of the Portfolios are presently offered to separate accounts of
Jefferson Pilot Financial, ("JPF") Hamilton and Jefferson Pilot, affiliates of
Jefferson Pilot Financial, Hamilton and Jefferson Pilot and may be offered in
the future to other non-affiliated insurance companies in order to fund
additional variable life insurance policies, variable annuity contracts or other
investment products.
A potential for certain conflicts of interest exists between the interests
of variable life insurance policyowners and variable annuity contract owners. In
the event that shares of the Portfolios are offered to separate accounts funding
variable annuity contracts, the Board of Directors of the Fund intends to
monitor events for the existence of any material conflict between the interests
of variable life insurance policyowners and variable annuity contract owners and
to determine what action, if any, should be taken in response thereto.
51
<PAGE>
JEFFERSON PILOT VARIABLE FUND, INC.
FORMERLY CHUBB AMERICA FUND, INC
One Granite Place
Concord, New Hampshire 03301
(603) 226-5000
A Series Fund
with a
World Growth Stock Portfolio Investing Primarily in Stocks
International Equity Portfolio Invests In Securities Whose Primary Trading
Markets Are Outside The United States.
Money Market Portfolio Investing Primarily
in Money Market Instruments.
Global Hard Assets Portfolio Investing Primarily in Hard Asset Securities.
High Yield Bond Portfolio Investing Primarily In Corporate Obligations With
Emphasis On Higher Yielding, Higher Risk, Lower-Rated Or Unrated
Securities.
Domestic Growth Stock Portfolio Investing Primarily in Stocks.
Growth Portfolio Invests In Equity Securities That Have Above-Average
Growth Prospects.
Growth and Income Portfolio Investing Primarily in Stocks.
Capital Growth Portfolio Investing Primarily in Stocks.
Balanced Portfolio Investing Primarily in
Stocks and Fixed Income Securities.
Emerging Growth Portfolio Investing Primarily in Common Stocks
of Small and Medium-Sized Companies.
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the Fund.
It is incorporated by reference into the Prospectus. A copy of the Prospectus
may be obtained by writing or calling the Fund at the address or telephone
number above.
- --------------------------------------------------------------------------------
The date of the Prospectus to which this Statement of Additional Information
relates is May 1, 1998.
The date of this Statement of Additional Information is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
Business History.........................................................
Investment Restrictions..................................................
Description of Certain Investments.......................................
Bank Obligations......................................................
Repurchase Agreements.................................................
Commercial Paper......................................................
Loan Participation and other Direct Indebtedness......................
Corporate Asset Backed Securities.....................................
Lending of Securities.................................................
Forward Commitments...................................................
Warrants..............................................................
Forward Foreign Currency Exchange Contracts...........................
American Depository Receipts..........................................
Securities and Index Options..........................................
Futures Contracts and Related Options.................................
High Yield Bonds......................................................
Description of Investment Ratings.....................................
Risk Considerations......................................................
U.S. Dollar Obligations of Foreign....................................
Branches of U.S. Banks................................................
Repurchase Obligations................................................
Foreign Securities....................................................
Forward Foreign Currency Exchange Contracts...........................
Gold Mining Shares....................................................
Options...............................................................
Futures Contracts and Related Options.................................
Federal Tax Matters...................................................
Investment Advisory and Other Services...................................
Investment Management Agreements and Sub-Investment Management
Agreements..........................................................
Independent Auditors..................................................
Custodians............................................................
Payment of Expenses...................................................
Portfolio Transactions and Brokerage Allocations.........................
Management of the Fund...................................................
Capital Stock............................................................
Offering and Redemption of Shares........................................
Determination of Net Asset Value.........................................
Taxes....................................................................
Performance and Yield Information........................................
Additional Information...................................................
Reports...............................................................
Name and Service Mark.................................................
S-2
<PAGE>
BUSINESS HISTORY
Jefferson Pilot Variable Fund, Inc., formerly Chubb America Fund, Inc.,
(the "Fund") is an open-end diversified management investment company
established by Jefferson Pilot Financial Insurance Company ("JPF"), formerly
Chubb Life Insurance Company of America, to provide for the investment of assets
of separate accounts established by Jefferson Pilot Financial, Jefferson Pilot
Life ("Jefferson Pilot") and Alexander Hamilton Life ("Alexander Hamilton") or
their affiliated insurance companies. Jefferson Pilot Financial was purchased by
Jefferson-Pilot Corporation, a North Carolina corporation, as of April 30, 1997.
Such assets are acquired by the separate accounts pursuant to the sale of
flexible premium variable life insurance policies and variable annuities (the
"Policies"). The Fund has no business history prior to being incorporated in
Maryland on October 19, 1984. In the future, the Fund may sell its shares to
other separate accounts funding variable annuities and variable life insurance
policies established by Jefferson Pilot Financial, its successors or assigns,
and to other insurance companies with which Jefferson Pilot Financial is
affiliated or unaffiliated, and may add or delete Portfolios.
INVESTMENT RESTRICTIONS
Each of the following investment restrictions are fundamental policies of
the World Growth Stock, Money Market, Global Hard Assets and Domestic Growth
Stock Portfolios and may not be changed for any such Portfolio without approval
of a majority of the outstanding shares of each affected Portfolio. Investment
restrictions 2, 3, 5, 6, 8-10 are fundamental policies for the Growth Portfolio.
Investment restrictions 2, 3, 5, 6, 8-12 and 17 are fundamental policies for the
Growth and Income, Capital Growth, Emerging Growth and Balanced Portfolios and
investment restrictions 2, 3, 5 and 8, 10, 12 are fundamental restrictions of
the International Equity Portfolio and investment restrictions 2, 3, 5, 6, 8, 9,
10, 11 and 12 are fundamental restrictions of the High Yield Bond Portfolio and
may not be changed for any such Portfolio without approval of a majority of the
outstanding shares of the affected Portfolio. Each restriction, whether or not
fundamental, applies to each Portfolio of the Fund, unless otherwise indicated.
A change in policy affecting only one Portfolio may be effected with the
approval of a majority of the outstanding shares of that Portfolio only. (As
used in the Prospectus and this Statement of Additional Information, the term
"majority of the outstanding voting shares" means the lesser of (1) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (2) more than 50% of the outstanding shares.) A Portfolio
will not:
1. Invest more than 10%, or in the case of Emerging Growth Portfolio, High
Yield Bond Portfolio, Global Hard Assets Portfolio and the Growth Portfolio
15%, of the value of the total assets of the Portfolio in securities, or
5%, except with respect to Emerging Growth Portfolio, International Equity
Portfolio and the Growth Portfolio, of the value of the total assets of the
Portfolio in equity securities, which are not readily marketable, such as
repurchase agreements having a maturity of more than seven days, restricted
securities, and securities that are secured by interests in real estate.
2. Invest in real estate, although it may buy securities of companies which
deal in real estate and securities which are secured by interests in real
estate, including interests in real estate investment trusts.
3. Invest in commodities or commodity contracts, except that the Growth and
Income Portfolio, International Equity Portfolio, High Yield Bond
Portfolio, the Growth Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio, Global Hard Assets Portfolio and the Emerging Growth Portfolio
may each enter into financial futures contracts and options thereon that
are listed on a national securities or commodities exchange and Global Hard
Assets may enter into financial and commodity futures, forward and options
contract thereon, if, immediately thereafter for that Portfolio: (a) the
total of the initial margin deposits required with respect to all open
futures positions at the time such positions were established plus the sum
of the premiums paid for all unexpired options on futures contracts would
not exceed 5% of the value of a Portfolio's total assets and (b) a
segregated account consisting of cash or liquid high-grade debt securities
or liquid equity securities in an amount equal to the total market value of
any futures contracts purchased by a Portfolio, less the amount of any
initial margin, is established by that Portfolio. In the case of an option
that is "in-the-money" at the time of purchase, the "in-the-money" amount,
as defined under Commodity Futures Trading Commission regulations, may be
excluded in computing the 5% limit. Except the Growth Portfolio and Global
Hard Assets Portfolio may engage in futures or options transactions which
are permissible pursuant to Rule 4.5 under the Commodity Exchange Act,
provided, however, that the Portfolio may use futures and options on
futures (within the meaning of the Commodity Exchange Act), provided that
the initial margin and premiums required to establish such positions, less
the amount by which such options positions are in the money (within the
meaning of the Commodity Exchange Act), do not exceed 5% of the Portfolio's
net assets. In addition, (i) the aggregate value of securities underlying
call options on securities written by the Growth Portfolio or obligations
underlying put options on securities written by the Portfolio determined as
of the date the options are written will not exceed 50% of the Portfolio's
net assets; (ii) the aggregate premiums paid on all options purchased by
the Portfolio and which are being held will not exceed 20% of the
Portfolio's net assets; (iii) the Portfolio will not purchase put or call
options, other than hedging
S-3
<PAGE>
positions, if, as a result thereof, more than 5% of its total assets would
be so invested; and (iv) the aggregate margin deposits required on all
futures and options on futures transactions being held will not exceed 5%
of the Portfolio's total assets.
4. Invest in securities of other investment companies, except by purchases in
the open market involving only customary broker's commissions or as part of
a merger, consolidation, or acquisition, subject to limitations in the
Investment Company Act of 1940 (the "1940 Act") and rules thereunder.
5. Make loans, except by the purchase of bonds or other debt obligations
customarily distributed privately to institutional investors and except
that the Fund may buy repurchase agreements and provided that the Emerging
Growth Fund may lend its portfolio securities representing not in excess of
30% of its total assets (taken at market value and further provided the
International Equity Portfolio, Global Hard Assets Portfolio and the High
Yield Bond Portfolio may make loans if as a result less than 33 1/3% of the
Portfolio's assets would be lent to other persons).
6. Except with respect to the International Equity Portfolio, make an
investment unless, when considering all its other investments, 75% of the
value of the Portfolio's assets would consist of cash, cash items, U.S.
Government securities, securities of other investment companies, and other
securities. For this restriction, "other securities" are limited, for each
issuer, to not more than 5% of the value of the Portfolio's assets and to
not more than 10% of the issuer's outstanding voting securities.
As a matter of operating policy, the Fund, except the International Equity
Portfolio, considers bank obligations as "other securities" and will invest no
more than 5% of a Portfolio's total assets in the obligations of any one issuer
and will own no more than 10% of the outstanding voting securities of such
issuer. Pursuant to this operating policy, the Fund will not consider repurchase
agreements to be subject to this 5% limitation if the collateral underlying the
repurchase agreements are exclusively U.S. Government Obligations.
7. Except with respect to the International Equity Portfolio, Growth and
Income Portfolio; Capital Growth Portfolio; Balanced Portfolio; Emerging
Growth Portfolio, Global Hard Assets Portfolio and High Yield Bond
Portfolio invest more than 5% of the value of the total assets of the
Portfolio in securities of companies having a record of less than three
years' continuous operations, including predecessors and unconditional
guarantors.
8. Act as an underwriter of securities of other issuers, except to the extent
that it may be deemed to be an underwriter in reselling securities, such as
restricted securities, acquired in private transactions and subsequently
registered under the Securities Act of 1933.
9. Except with respect to the Emerging Growth Portfolio and Global Hard Assets
Portfolio, borrow money, except that, as a temporary measure for
extraordinary or emergency purposes and not for investment purposes, any
Portfolio may borrow from banks up to 5% of its assets taken at cost,
provided in each case that the total borrowings have an asset coverage, of
at least 300%. The Emerging Growth Portfolio, High Yield Bond Portfolio,
Global Hard Assets Portfolio and Growth Portfolio may not borrow money in
an amount in excess of 33 1/3% of its total assets, and then only as a
temporary measure for extraordinary or emergency purposes. This restriction
will not prevent the Growth Portfolio, International Equity Portfolio, High
Yield Bond Portfolio, Growth and Income Portfolio, the Capital Growth
Portfolio, Global Hard Assets Portfolio, the Balanced Portfolio or Emerging
Growth Portfolio from entering into futures contracts as set forth above in
restriction 3.
10. Issue securities senior to its common stock except to the extent set out in
paragraph 9 above. For purposes hereof, writing covered call options, and
as regards Emerging Growth Portfolio and Global Hard Assets Portfolio, put
options, and entering into futures contracts, to the extent permitted by
restrictions 3 and 13, and with respect to Global Hard Assets Portfolio
currency and commodity contracts and related options purchased on margin
and currency swaps shall not involve the issuance of senior securities.
11. Sell securities short, except the International Equity Portfolio, Growth
Portfolio, Growth and Income Portfolio, Capital Growth Portfolio, the
Balanced Portfolio and Emerging Growth Portfolio may make short sales
against the box and the Global Hard Assets Portfolio may make short sales
for any reason.
12. Buy securities on margin, except that (1) it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities, and (2) the Growth and Income Portfolio, the Capital Growth
Portfolio, the Balanced
S-4
<PAGE>
Portfolio, Growth Portfolio, Global Hard Assets Portfolio, and the Emerging
Growth Portfolio may make margin deposits in connection with futures
contracts and options transactions to the extent permitted by restrictions
3 and 13.
13. Except for the Growth Portfolio, Growth and Income Portfolio, High Yield
Bond Portfolio, International Equity Portfolio, Balanced Portfolio, Capital
Growth Portfolio, Global Hard Assets Portfolio, and Emerging Growth
Portfolio invest in or write puts, calls, straddles, or spreads. However,
this restriction shall not prohibit the Portfolios (other than the Money
Market Portfolio) from writing or selling covered call options or
purchasing call options in order to close transactions. Nor shall this
restriction prohibit the Emerging Growth, Global Hard Assets Portfolio or
Capital Growth Portfolio from writing or selling covered call and put
options or purchasing call or put options. (In addition, as a matter of
operating policy, no Portfolio may write covered call options if, as a
result, a Portfolio's securities covering all call options written or
subject to put or call options would exceed 25% of the value of the
Portfolio's total assets.) Provided that the International Equity Portfolio
and the High Yield Bond Portfolio may write covered calls or put options
with respect to 25% of their assets at any time and may invest more that
25% of the value of their net assets at any time in purchased puts, calls,
spreads or straddles, or any combination thereof other than protective put
options. The aggregate value or premiums paid on all options held by either
the International Equity Portfolio, Global Hard Assets Portfolio, or the
High Yield Bond Portfolio may not exceed 20% of the Portfolio's total net
assets.
14. Except for the Growth and Income Portfolio, the International Equity
Portfolio, the High Yield Bond Portfolio, Global Hard Assets Portfolio and
the Growth Portfolio enter into a repurchase agreement with Jefferson Pilot
Financial Insurance Company ("JPF"); The Chubb Corporation; or a subsidiary
of either of such corporations.
15. Except for the Emerging Growth Portfolio, the International Equity
Portfolio, the High Yield Bond Portfolio and the Growth Portfolio
participate on a joint or joint and several basis in any trading account in
securities. Transactions for the Portfolios and any other accounts under
common management may be combined or allocated between the Portfolios and
such other accounts.
16. Except for the Growth and Income Portfolio, the International Equity
Portfolio, the High Yield Bond Portfolio and the Growth Portfolio invest in
companies for the purpose of exercising control of management.
17. Invest more than 25% of the value of the total assets of the Portfolio
(other than the Global Hard Assets Portfolio) in securities of any one
industry. Banks are not considered a single industry for purposes of this
restriction. (As a matter of operating policy, only the Money Market
Portfolio may utilize this exception.) Nor shall this restriction apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
18. Invest in interests, other than debentures or equity stock interests, in
oil and gas or other mineral exploration or development programs.
19. Invest more than 5% of the total value of the assets of the Portfolio in
warrants, whether or not the warrants are listed on the New York or
American Stock Exchanges, or more than 2% of the value of the assets of the
Portfolio in warrants which are not listed on those exchanges. Warrants
acquired in units or attached to securities are not included in this
restriction.
20. Invest more than 15% of the value of the assets of the Portfolios (except
the Emerging Growth Portfolio, Global Hard Assets Portfolio and the
International Equity Portfolio, Growth Portfolio, and High Yield Bond
Portfolio) in securities of foreign issuers that are not listed on a
recognized U.S. or foreign securities exchange, or quoted on an inter-
dealer quotation system. Provided, however that the International Equity
Portfolio may not invest in foreign issuers unless, after such investment,
issuers in at least the following number of different countries are
represented in the Portfolio's holding: if up to 40% of the Portfolio's
total assets are invested in foreign issuers, two foreign countries; if
between 40% and 60% of the Portfolio's total assets are invested in foreign
issuers, three foreign countries; if between 60% and 80% of the Portfolio's
total assets are invested in foreign issuers, four foreign countries if
over 80% of the Portfolio's total assets are invested in foreign issuers,
five foreign countries.
DESCRIPTION OF CERTAIN INVESTMENTS
The following is a description of certain types of investments which may be
made by the Portfolios and which may involve certain specific risks, discussed
under "RISK CONSIDERATIONS" below:
S-5
<PAGE>
Bank Obligations
All of the Portfolios may acquire obligations of banks. These include
certificates of deposit, which are normally limited to $100,000 per issuing
bank, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term, interest-bearing negotiable certificates issued by
commercial banks or savings and loan associations against funds deposited in the
issuing institution. Bankers' acceptances are time drafts drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods). With
a bankers' acceptance, the borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most bankers' acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity. Time deposits are generally
short-term, interest-bearing negotiable obligations issued by commercial banks
against funds deposited in the issuing institution. None of the Portfolios will
invest in time deposits maturing in more than seven days.
The Money Market Portfolio will not invest in any security issued by a
commercial bank unless the bank is organized and operating in the U.S. and is a
member of the Federal Deposit Insurance Corporation. However, this limitation
shall not prohibit investments in foreign branches of U.S. banks which otherwise
meet the foregoing requirements.
Repurchase Agreements
All of the Portfolios, except the Domestic Growth Stock Portfolio, may
invest in repurchase agreements.
A repurchase agreement customarily obligates the seller, at the time it
sells securities to the Portfolio, to repurchase the securities at a mutually
agreed upon time and price. The total amount received on repurchase would be
calculated to exceed the price paid by the Portfolio, reflecting an agreed upon
market rate of interest for the period from the time of the repurchase agreement
to the settlement date, and would not necessarily be related to the interest
rate on the underlying securities. The differences between the total amount to
be received upon repurchase of the securities and the price which was paid by
the Portfolio upon their acquisition is accrued as interest and is included in
the Portfolio's net income declared as dividends. The underlying securities will
consist of high-quality securities. With respect to the Money Market Portfolio,
the underlying security must be either a U.S. Government Obligation or a
security rated in the highest rating category by the Requisite NRSROs (as
defined in the Prospectus) and must be determined to present minimal credit
risk. The Fund has the right to sell securities subject to repurchase agreements
but would be required to deliver identical securities upon maturity of the
repurchase agreements unless the seller fails to pay the repurchase price. It is
each Portfolio's intention not to sell securities subject to repurchase
agreements prior to the agreement's maturity.
Commercial Paper
All of the Portfolios may invest in commercial paper. Commercial paper
involves an unsecured promissory note issued by a corporation. It is usually
sold on a discount basis and has a maturity at the time of issuance of nine
months or less. In connection with the World Growth Stock Portfolio and the
Domestic Growth Stock Portfolio, on the date of investment, such paper must be
rated A-1 by Standard & Poor's Corporation ("Standard & Poor's") or Prime-1 by
Moody's Investor's Service, Inc. ("Moody's"), the highest commercial paper
ratings, or the highest commercial paper ratings by other Nationally Recognized
Securities Rating Organization (NRSROs), or, if not rated, must have been issued
by a corporation with an outstanding debt issue rated AAA or AA by Standard &
Poor's or AAA or Aa by Moody's as described below, and be of equivalent
investment quality in the judgment of the Portfolio's Investment Manager or
Sub-Investment Manager, as appropriate. On the date of investment, with respect
to the Money Market Portfolio, such paper or its issuer must be rated in one of
the two highest commercial paper rating categories by at least two NRSROs which
have issued a rating with respect to such commercial paper or its issuer or by
one NRSRO if that paper or its issuer has been rated by only one NRSRO or, if
not rated, must be of comparable quality. In connection with the Growth and
Income Portfolio, the Capital Growth Portfolio, Growth Portfolio and the
Balanced Portfolio, on the date of investment, such paper must be rated within
the three highest categories by Moody's, Standard & Poor's or other NRSROs or,
if not rated, must be of equivalent investment quality in the judgment of the
Portfolio's Investment Manager or Sub-Investment Manager, as appropriate.
Commercial Paper
The Global Hard Assets Portfolio may invest in commercial paper which is
indexed to certain specific foreign currency exchange rates. The terms of such
commercial paper provide that its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. The Portfolio
will purchase such commercial paper with the currency in which it is denominated
and, at maturity, will receive interest
S-6
<PAGE>
and principal payments thereon in that currency, but the amount or principal
payable by the issuer at maturity will change in proportion to the change (if
any) in the exchange rate between two specified currencies between the date the
instrument is issued and the date the instrument matures. While such commercial
paper entails the risk of loss of principal, the potential for realizing gains
as a result of changes in foreign currency exchange rate enables the Portfolio
to hedge or cross-hedge against a decline in the U.S. dollar value of
investments denominated in foreign currencies while providing an attractive
money market rate of return. The Portfolio will purchase such commercial paper
for hedging purposes only, not for speculation. The staff of the Securities and
Exchange Commission has been considering whether the purchase of this type of
commercial paper would result in the issuance of a "senior security" within the
meaning of the 1940 Act. The Portfolio believes that such investments do not
involve the creation of such a senior security, but nevertheless will establish
a segregated account with respect to its investments in this type of commercial
paper and maintain in such account cash not available for investment or U.S.
Government securities or other liquid high quality securities having a value
equal to the aggregate principal amount of outstanding commercial paper of this
type.
Loan Participations and Other Direct Indebtedness
As described in the Prospectus, the Portfolios may purchase loan
participations and other direct indebtedness. In purchasing a loan
participation, a Portfolio acquires some or all of the of the interest of a bank
or other lending institution in a loan to a corporate borrower. Many such loans
are secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans and other direct indebtedness that are fully secured
offer a Portfolio more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation collateral from a secured loan or other direct indebtedness
would satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans and other direct indebtedness loans
are typically made by a syndicate of lending institutions represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternatively, such loans and other
direct indebtedness may be structured as a novation, pursuant to which the
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan or other direct
indebtedness either directly from the lender or through an intermediary. A
Portfolio may also purchase trade or other claims against companies, which
generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default.
Certain of the loan participations and other direct indebtedness acquired
by a Portfolio may involve revolving credit facilities or other standby
financing commitments which obligates a Portfolio to pay additional cash on a
certain date or on demand. These commitments may have the effect of requiring a
Portfolio to increase its investment in a company at a time when the Emerging
Growth Portfolio might not otherwise decide to do so (including at a time when
the company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that a Portfolio is committed to advance additional
funds, it will at all times hold and maintain in a segregated account liquid
assets in an amount sufficient to meet such commitments.
The Portfolio's ability to receive payment of principal, interest and
other amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loan participations
and other direct indebtedness which the Portfolio will purchase, The
Sub-Investment Manager will rely upon its own (and not the original lending
institution's) credit analysis of the borrower. As the Portfolio may be required
to rely upon another lending institution to collect and pass on to the Portfolio
amounts payable with respect to the loan and to enforce the Portfolio's rights
under the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Portfolio
from receiving such amounts. In such cases, the Portfolio will evaluate as well
the creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for the
purposes of certain investment restrictions pertaining to the diversification of
the Portfolio's investments. The highly leveraged nature of many such loans and
other direct indebtedness may make such loans and other direct indebtedness
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans and other direct indebtedness may involve additional
risk to the Portfolio. For example, if a loan or other direct indebtedness is
foreclosed, the Portfolio could become part owner of any collateral, and would
bear the costs and liabilities associated with owning and disposing of
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Portfolio could be held liable as co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Portfolio relies on the Sub-Investment Manager's
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect the Portfolio. In addition, loan participations and other
direct investments may not
S-7
<PAGE>
be in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Portfolio may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value. To the extent that the Sub-
Investment Manager determines that any such investments are illiquid, the
Portfolio will include them in the investment limitations described below.
Corporate Asset-Backed Securities
As described in the Prospectus, the Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special purposes
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in
the case of credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors and underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letter of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
Lending of Securities
Subject to their investment limitations the Portfolios may seek to
increase their income by lending portfolio securities. Such loans will usually
be made to member banks of the Federal Reserve System and to its member firms
(and subsidiaries thereof) of the New York Stock Exchange and would be required
to be secured continuously by collateral in cash, cash equivalents, or U.S.
Government securities maintained on a current basis at an amount at least equal
to the market value of the securities loaned. The Portfolios would have the
right to call a loan and obtain the securities loaned at any time on customary
industry settlement notice (which will usually not exceed five days). During the
existence of a loan, the Portfolio would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities loaned and would
also receive compensation based on investment of the cash collateral or a fee.
The Emerging Growth Portfolio would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
fail financially. However, the loans would be made only to firms deemed by The
Sub-Investment Manager to be of good standing, and when, in the judgment of The
Sub-Investment Manager, the consideration which could be earned currently from
securities loans of this type justifies the attendant risk. If The
Sub-Investment Manager determines to make securities loans, it is not intended
that the value of the securities loaned would exceed 30% of the value of the
Emerging Growth Portfolio's total assets.
Forward Commitments
The Portfolios except the Money Market Portfolio may, from time to time,
purchase securities on a forward commitment, when issued, or delayed delivery
basis. The price of such forward commitment securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made.
Delivery and payment will take place at a later date. Normally, the
S-8
<PAGE>
settlement date may take up to three months. During the period between purchase
and settlement, no payments are made by the Portfolio to the issuer and no
interest accrues to the Portfolio. Forward commitments involve a risk of loss if
the value of the security to be purchased declines prior to the settlement date.
While forward commitment securities may be sold prior to the settlement date,
each Portfolio intends to purchase such securities with the purpose of actually
acquiring them, unless a sale appears desirable for investment reasons. At the
time a Portfolio makes the commitment to purchase a security on a forward
commitment basis, the Portfolio will record the transaction and reflect the
value of the security in determining its net asset value. The Investment
Managers do not believe that the net asset value or income of the Portfolios
will be adversely affected by the purchase of securities on a forward commitment
basis. Each Portfolio using forward commitments will maintain with it's
custodian in a segregated account liquid assets equal in value to its total
commitments for forward commitment securities.
Forward Foreign Currency Exchange Contracts
Certain of the Portfolios may use forward foreign currency exchange
contracts ("forward currency contracts") to hedge against the decline of a
currency in which the Portfolio's securities are denominated or exposed. A
forward 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 as agreed by the parties, at a price set at the time of the
contracts.
The Portfolios may enter into forward currency contracts or maintain a net
exposure on such contracts only if (i) the consummation of the contracts would
not obligate the Portfolio to deliver an amount of foreign currency in excess of
the value of the Portfolio's securities or other assets denominated in or
exposed to the currency and (ii) the Portfolios maintain with their custodian
liquid assets in a segregated account in an amount not less than the value of
the Portfolio's total assets committed to the consummation of the contracts or
otherwise cover the forward currency contract in accordance with the current
SEC's regulations.
Depository Receipts
Certain of the Portfolios may invest in American Depository Receipts
("ADR's"), Global Depository Receipts ("GDR's"), and European Depository
Receipts ("EDR's"). ADR's are certificates issued by a U.S. bank representing
the right to receive securities of a foreign issuer deposited in that bank or a
correspondent bank. There are no fees imposed on the purchase or sale of ADR's
when purchased from the issuing bank in the initial underwriting, although the
issuing bank may impose charges for the collection of dividends and the
conversion of ADR's into the underlying ordinary shares. Brokerage commissions
will be incurred if ADR's are purchased through brokers on U.S. stock exchanges.
Investments in ADR's often have advantages over direct investments in the
underlying foreign securities, including the following: they are more liquid
investments, they can be sold for U.S. dollars, they may be transferred easily,
market quotations are readily available in the U.S. and more uniform financial
information is available for the issuers of such securities. GDRs and EDRs are
similar to ADRs except that they are not necessarily issued by a US Bank in that
they represent evidence of ownership of underlying securities issued in the US
or foreign securities market. Generally, Depository Receipts in bearer form are
designed for care in securities market outside the United States. Depository
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depository Receipts may
be in sponsored or unsponsored programs. The issuer may not be involved and less
issuer information may be available. The Fund believes that the risk associated
with ownership of depository receipts are no greater than the risks associated
with the direct ownership of foreign shares.
Restricted and Illiquid Securities
All of the Portfolios may to some extent purchase certain restricted
securities (those that are not registered under the Securities Act of 1933 ("33
Act") but can be offered and sold to "qualified institutional buyers" under Rule
144A of the 33 Act) and limited amounts of illiquid investments, including
illiquid restricted securities. Limitations on illiquid securities and other
illiquid investments for each Portfolio are described in the Portfolio's
investment restriction above.
Illiquid investments include many restricted securities, repurchase
agreements that mature in more than seven days, currency and interest rate
swaps, time deposits that mature in more than seven days or that have a notice
or demand period more than seven days, certain over-the-counter option
contracts, participation interests in loans, securities not readily marketable
and certain restricted securities.
Certain repurchase agreements which provide for settlement in more than
seven days, however, can be liquidated before the nominal fixed term on seven
days or less notice. The Portfolios will consider such repurchase agreements as
liquid. Likewise, restricted securities (including commercial paper issued
pursuant to 4(2) of the 33 Act) that the Board of Directors or the sub-advisers
have determined to be liquid will be treated as such.
S-9
<PAGE>
Securities and Index Options
All of the Portfolios, except the Money Market Portfolio Portfolio may
write (sell) covered call options and purchase call options in order to close
transactions. In addition, the Growth and Income Portfolio, the Capital Growth
Portfolio, the Balanced Portfolio, the International Equity Portfolio; the
Growth Portfolio, the High Yield Bond Portfolio, the Global Hard Assets
Portfolio and the Emerging Growth Portfolio may purchase put and call options to
enhance investment performance or for hedging purposes. The options activities
of a Portfolio may increase its portfolio turnover rate and the amount of
brokerage commissions paid. These commissions may be higher than those which
would apply to purchases and sales of securities directly.
Writing Covered Call Options. A call option is a contract that gives the
holder (buyer) of the option the right to buy (in return for a premium paid),
and the writer of the option (in return for a premium received) the obligation
to sell, the underlying security at a specified price (the exercise price) at
any time before the option expires. A covered call option is a call in which the
writer of the option, for example, owns the underlying security throughout the
option period. In such cases, the security covering the call will be maintained
in a segregated account with the Fund's custodian. The exercise price of a call
option written by a Portfolio may be below, equal to or above the current market
value of the underlying security at the time the option is written. A Portfolio
will write covered call options to reduce the risks associated with certain of
its investments or to increase total investment return through the receipt of
premiums.
A Portfolio may attempt to protect itself from loss due to a decline in
value of the underlying security or from the loss of appreciation due to its
rise in value by buying an identical option, in which case the purchase cost of
such option may offset the premium received for the option previously written.
In order to do this, the Portfolio makes a "closing purchase transaction" by the
purchase of a call option on the same security with the same exercise price and
expiration date as the covered call option which it has previously written. The
Portfolio will realize a gain or loss from a closing purchase transaction if the
amount paid to purchase a call option is less or more than the amount received
from the sale of the corresponding call option. Also, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the exercise or
closing out of a call option is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Portfolio.
Purchasing Put and Call Options. A Portfolio may purchase put options on
securities to protect its holdings in an underlying or related security against
an anticipated decline in market value. Such hedge protection is provided only
during the life of the option. Securities are considered related if their price
movements generally correlate with one another. The purchase of put options on
securities held by a Portfolio or related to such securities will enable a
Portfolio to preserve, at least partially, unrealized gains in an appreciated
security in its portfolio without actually selling the security. In addition, a
Portfolio will continue to receive interest or dividend income on the security.
A Portfolio may purchase call options on individual securities or stock
indices in order to take advantage of anticipated increases in the price of
those securities by purchasing the right to acquire the securities underlying
the option or, with respect to options on indices, to receive income equal to
the value of such index over the strike price. As the holder of a call option
with respect to individual securities, a Portfolio obtains the right to purchase
the underlying securities at the exercise price at any time during the option
period. As the holder of a call option on a stock index, a Portfolio obtains the
right to receive, upon exercise of the option, a cash payment equal to the
multiple of any excess of the value of the index on the exercise date over the
strike price specified in the option.
Options on Indexes. A Portfolio may write covered call options and
purchase put and call options on appropriate securities indexes for the purpose
of hedging against the risk of unfavorable price movements adversely affecting
the value of a Portfolio's securities or to enhance income. Unlike a stock
option which gives the holder the right to purchase or sell a specified stock at
a specified price, an option on a securities index gives the holder the right to
receive a cash settlement amount based upon price movements in the stock market
generally (or in a particular industry or segment of the market represented by
the index) rather than the price movements in individual stocks.
A securities index fluctuates with changes in the market values of the
securities so included. For example, some securities index options are based on
a broad market index such as the S&P 500 or the NYSE Composite Index, or a
narrower market index such as the S&P 100. Indexes may also be based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options on stock indexes are currently traded on
the following exchanges, among others: The Chicago Board Options Exchange, New
York Stock Exchange and American Stock Exchange. Options on other types
S-10
<PAGE>
of securities indexes, which do not currently exist, including indexes on
certain debt securities, may be introduced and traded on exchanges in the
future.
Futures Contracts and Related Options
The Growth and Income Portfolio, Growth Portfolio, High Yield Bond
Portfolio, International Equity Portfolio, the Capital Growth Portfolio, the
Balanced Portfolio, the Global Hard Assets Portfolio, and the Emerging Growth
Portfolio may purchase or sell futures contracts and related options.
Futures Transactions. A futures contract is an agreement to buy or sell a
security (or deliver a final cash settlement price in the case of a contract
relating to an index or otherwise not calling for physical delivery at the end
of trading in the contracts) for a set price in the future. Futures exchanges
and trading in futures is regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC"). Futures contracts trade on
certain regulated contracts markets.
Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying securities whenever it
appears economically advantageous to the Portfolio to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that, as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Upon entering into a futures contract, a Portfolio will be required to
deposit with a futures commission merchant a certain percentage (usually 1% to
5%) of the futures contracts market value as initial margin. A Portfolio may not
commit in the aggregate more than 5% of the market value of its total assets to
initial margin deposits on the Portfolio's existing futures contracts and
premium paid for options on unexpired futures contracts used for non hedging
purposes. Initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned upon termination of the futures
contract if all contractual obligations have been satisfied. The initial margin
in most cases will consist of cash or U.S. Government securities. Subsequent
payments, called variation margin, may be made with the futures commission
merchant as a result of marking the contracts to market on a daily basis as the
contract value fluctuates.
Futures on Debt Securities. A futures contract on a debt security is a
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities [assuming a "long" position] a Portfolio will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed price. By selling futures on debt securities [assuming a "short"
position] it will legally obligate itself to make the future delivery of the
security against payment of the agreed price. Open future positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Sub-Investment Manager to reflect the fair value of the
contract, in which case the positions will be valued by, or under the direction
of, the Board of Directors.
The Portfolios by hedging through the use of futures on debt securities
seek to establish more certainty with respect to the effective rate of return on
their portfolio securities. A Portfolio may, for example, take a "short"
position in the futures market by selling contracts for the future delivery of
debt securities held by the Portfolio (or securities having characteristics
similar to those held by the Portfolio) in order to hedge against an anticipated
rise in interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position.
On other occasions, a Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
intends to purchase particular debt securities, but expects the rate of return
available in the bond market at that time to be less favorable than rates
currently available in the futures markets. If the anticipated rise in the price
of the debt securities should occur (with its concomitant reduction in yield),
the increased cost to the Portfolio of purchasing the debt securities will be
offset, at least to some extent, by the rise in the value of the futures
position in debt securities taken in anticipation of the subsequent purchase of
such debt securities.
The Portfolio could accomplish similar results by selling debt securities
with long maturities and investing in debt securities with short maturities when
interest rates are expected to increase or by buying debt securities with long
maturities and selling debt securities with short maturities when interest rates
are expected to decline. However, by using futures contracts as a risk
S-11
<PAGE>
management technique (to reduce a Portfolio's exposure to interest rate
fluctuations), given the greater liquidity in the futures market than in the
bond market, it might be possible to accomplish the same result more effectively
and perhaps at a lower cost. See Limitations on Purchase and Sale of Futures
Contracts and Options on Futures Contracts below.
Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date, a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based.
Stock index futures may be used to hedge the equity portion of a
Portfolio's securities portfolio with regard to market risk (involving the
market's assessment of over-all economic prospects), as distinguished from
stock-specific risk (involving the market's evaluation of the merits of the
issuer of a particular security). By establishing an appropriate "short"
position in stock index futures, a Portfolio may seek to protect the value of
its portfolio against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, a Portfolio can
seek to avoid losing the benefit of apparently low current prices by
establishing a "long" position in stock index futures and later liquidating that
position as particular equity securities are in fact acquired. To the extent
that these hedging strategies are successful, a Portfolio will be affected to a
lesser degree by adverse overall market price movements, unrelated to the merits
of specific portfolio equity securities, than would otherwise be the case. See
Limitations on Purchase and Sale of Futures Contracts and Options on Futures
Contracts below.
Options on Futures. The Growth Portfolio, International Equity Portfolio,
High Yield Bond Portfolio, Growth and Income Portfolio, the Capital Growth
Portfolio, the Global Hard Assets Portfolio, the Emerging Growth Portfolio and
the Balanced Portfolio may purchase put and call options and write call options
on futures contracts. These options are traded on exchanges that are licensed
and regulated by the CFTC for the purpose of options trading. A call option on a
futures contract gives the purchaser the right, in return for the premium paid,
to purchase a futures contract (assume a "long" position) at a specified
exercise price at any time before the option expires. A put option gives the
purchaser the right, in return for the premium paid, to sell a futures contract
(assume a "short" position) at a specified exercise price at any time before the
option expires. Upon the exercise of a call, the writer of the option is
obligated to sell the futures contract (to deliver a "long" position to the
option holder) at the option exercise price, which presumably will be lower than
the current market price of the contract in the futures market. Upon exercise of
a put, the writer of the option is obligated to purchase the futures contract
(to deliver a "short" position to the option holder) at the option exercise
price which presumably will be higher than the current market price of the
contract in the futures market. When a Portfolio, as a purchaser of an option on
a futures contract, exercises such option and assumes a long futures position,
in the case of a call, or a short futures position, in the case of a put, its
gain will be credited to its futures variation margin account. Any loss suffered
by the writer of the option of a futures contract will be debited to its futures
variation margin account. However, as with the trading of futures, most
participants in the options markets do not seek to realize their gains or losses
by exercise of their option rights. Instead, the holder of an option usually
will realize a gain or loss by buying or selling an offsetting option at a
market price that will reflect an increase or a decrease from the premium
originally paid as purchaser or required as a writer.
Options on futures contracts can be used by a Portfolio to hedge the same
risks as might be addressed by the direct purchase or sale of the underlying
futures contracts themselves. Depending on the pricing of the option, compared
to either the futures contract upon which it is based or upon the price of the
underlying securities themselves, it may or may not be less risky than direct
ownership of the futures contract or the underlying securities.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received by a Portfolio as a purchaser in an option
transaction will be reduced by the amount of the premium paid as well as by
transaction costs. In the event of an adverse market movement, however, a
Portfolio which purchased an option will not be subject to a risk of loss on the
option transaction beyond the price of the premium it paid plus its transaction
costs, and may consequently benefit from a favorable movement in the value of
its portfolio securities that would have been more completely offset if the
hedge had been effected through the use of futures.
If a Portfolio writes call options on futures contracts, the Portfolio
will receive a premium but will assume a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Portfolio will realize a
gain in the amount of the premium, which may partially offset unfavorable
changes in the value of securities held by, or to be acquired for, the
Portfolio. If the option is exercised, the Portfolio will incur a loss in the
option transaction, which will be reduced by the amount of the premium it has
received, but which may be partially offset by favorable changes in the value of
its portfolio securities.
S-12
<PAGE>
While the purchaser or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, a Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the existence of a
liquid market. The Portfolios will not purchase or write options on futures
contracts unless, in the Sub-Investment Manager's opinion, the market for such
options has sufficient liquidity that the risks associated with such options
transactions are not at unacceptable levels.
Options on Foreign Currencies
As noted in the Prospectus, the Capital Growth, Global Hard Assets and
Emerging Growth Portfolios may purchase and write options on foreign currencies
for hedging purposes in a manner similar to that in which Forward Contracts will
be utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant.
In order to protect against such diminutions in the value of portfolio
securities, the Portfolios may purchase put options on the foreign currency. If
the value of the currency does decline, the Portfolios will have the right to
sell such currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on its investments which otherwise would
have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Capital Growth, Global Hard Assets Portfolio and
the Emerging Growth Portfolios may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to Portfolios deriving from purchases of foreign options will be
reduced by the amount of the premium and related transactions costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, Portfolios could sustain losses on transactions in foreign
currency options which would require it to forgo a portion or all of the
benefits of advantageous changes in such rates.
The Capital Growth, Growth, International Equity, High Yield Bond, Global
Hard Assets, and Emerging Growth Portfolios may write options on foreign
currencies for the same types of hedging purposes. For example, where the
Capital Growth, Global Hard Assets, or Emerging Growth Portfolios anticipate a
decline in the dollar value of foreign-dominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of premium received.
Similarly, instead of purchasing a call option to hedge against
anticipated increase in the dollar cost of securities to be acquired, a
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow a Portfolio to hedge
such increased costs up to the amount of the premium. Foreign currency options
written by a Portfolio will generally be covered in a manner similar to the
covering of other types of options. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Portfolio
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, a Portfolio also may be required to forgo all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Limitations on Purchase and Sale of Futures Contracts and Options on Futures
Contracts
The Portfolios except the Growth Portfolio and Global Hard Assets
Portfolio will engage in transactions in futures contracts and related options
for bona fide hedging purposes and not for speculation. These Portfolios may not
purchase or sell futures contracts or related options for purposes other than
bona fide hedging if immediately thereafter the sum of the amounts of initial
margin deposits on a Portfolio's existing futures contracts and premiums paid
for unexpired options on futures contracts would exceed 5% of the value of the
Portfolio's total assets; provided, however, that in the case of an option that
is "in-the-money" at the time of purchase, the "in-the-money" amount may be
excluded in calculating the 5% limitation. In instances involving the purchase
or sale of futures contracts or the writing of covered call options thereon by a
Portfolio, such positions will always be "covered", as appropriate, by either
(i) an amount of cash and cash equivalents, equal to the market value of the
futures contracts purchased or sold and options written thereon (less any
related margin deposits), deposited in a segregated account with its custodian
or (ii) by owning the instruments underlying the futures contract sold (i.e.,
short futures positions) or option written
S-13
<PAGE>
thereon or by holding a separate option permitting the Portfolio to purchase or
sell the same futures contract or option at the same strike price or better.
High Yield Bonds
The medium and lower quality debt securities in which the Growth, Capital
Growth, High Yield Bond, Global Hard Assets and Emerging Growth Portfolios may
invest are regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Medium and lower
quality bonds may be more susceptible to real or perceived adverse economic and
individual corporate developments than would investment grade bonds. For
example, a projected economic downturn or the possibility of an increase in
interest rates could cause a decline in high yield bond prices because such an
event might lessen the ability of highly leveraged high yield issuers to meet
their principal and interest payment obligations, meet projected business goals
or obtain additional financing. In addition, the secondary trading market for
medium and lower quality bonds may be less liquid than the market for investment
grade bonds. This potential lack of liquidity may make it more difficult for the
Sub-Investment Manager to accurately value certain portfolio securities.
Further, there is the risk that certain high yield bonds containing redemption
or call provisions may be called by the issuers of such bonds in a declining
interest rate market and the Portfolio might then have to replace such called
bonds with lower yielding bonds, thereby decreasing the net investment income to
the Portfolio.
Description of Investment Ratings
Moody's - Bond Ratings
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
S-14
<PAGE>
Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Standard & Poor's - Bond Ratings
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as 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.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an 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.
BB, B, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree. While such bonds
will likely have some equality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C-Bonds rated C are typically subordinated to senior debt which is
assigned an actual or implied CCC rating.
D-Bonds rated D are in payment default or may be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A-Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
A-1-This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2-Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1".
S-15
<PAGE>
A-3-Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
SP-1-A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2-A satisfactory capacity to pay principal and interest.
SP-3-A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed for
municipal bond ratings.
RISK CONSIDERATIONS
U.S. Dollar Obligations of Foreign Branches of U.S. Banks
The Money Market Portfolio and the Balanced Portfolio may regularly invest
in U.S. dollar denominated obligations of foreign branches of FDIC-member U.S.
banks. These instruments represent the loan of funds actually on deposit in the
U.S. The Fund believes that the U.S. bank would be liable in the event that the
foreign branch failed to pay on its U.S. dollar obligations. Nevertheless, the
assets supporting the liability could be expropriated or otherwise restricted if
located outside the U.S. Exchange controls, taxes, or political and economic
developments could affect liquidity or repayment. Because of possibly
conflicting laws or regulations, the issuing bank could maintain and prevail
that the liability is solely that of the branch, thus exposing the Portfolio to
a possible loss. Such U.S. dollar obligations of foreign branches of FDIC-member
U.S. banks are not covered by the usual $100,000 of FDIC insurance if they are
payable only at an office of such a bank located outside the U.S., the District
of Columbia, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Repurchase Agreements
During the holding period of a repurchase agreement, the seller marks to
market the collateral on a daily basis and must provide additional collateral if
the market value of the obligation falls below the repurchase price. If a
Portfolio acquires a repurchase agreement and then the seller defaults at a time
when the value of the underlying securities is less than the obligation of the
seller, the Fund could incur a loss. If the seller defaults or becomes
insolvent, a Portfolio could realize delays, costs or a loss in asserting its
rights to the collateral in satisfaction of the seller's repurchase agreement.
The Portfolios will enter into repurchase agreements only with sellers who are
believed to present minimal credit risks and whose creditworthiness has been
evaluated by the Board of Directors of the Fund. As a general matter, if the
seller of the repurchase agreement is a bank it must have assets of at least
$1,000,000,000; if the seller is a broker-dealer it must have a net worth of at
least $25,000,000.
Foreign Securities
The investment in securities of foreign issuers by certain of the
Portfolios may involve special considerations associated with fluctuating
exchange rates, the fact that foreign securities and the markets therefore are
not as liquid as their domestic counterparts, the imposition of exchange control
restrictions, and economic or political instability. In addition, issuers of
foreign securities are subject to different, and in some cases less
comprehensive, accounting, reporting and disclosure requirements than domestic
issuers. As a result, the selection of investments in foreign issuers may be
more difficult and subject to greater risks than investments in domestic
issuers.
These Portfolios make investments in businesses located in foreign
nations. Thus, there is the possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments which could
affect investments in those nations. Further, foreign brokerage commissions and
custodian fees are generally higher than in the U.S. In addition, government
restrictions in certain countries and other limitations or investment may affect
the maximum percentage of equity ownership in any one company by the Portfolios.
Moreover, in some countries, only special classes of securities may be purchased
by external investors and the price, liquidity, and rights with respect to such
securities may differ from those relating to shares owned by
S-16
<PAGE>
nationals. In addition, there may also be the absence of developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property. As a result, the selection of securities
of non-U.S. issuers may be more difficult and subject to greater risks than
investment in domestic issuers.
A Portfolio may be affected, either unfavorably or favorably, by
fluctuations in the relative rates of exchange between the currencies of
different nations and the exchange control regulations and by their indigenous
economic and political developments. The Sub-Investment Managers for these
Portfolios will consider these and other factors before investing in particular
foreign securities, and will not make such investments unless, in its opinion,
such investments will meet the policies and objectives of its respective
Portfolio. In addition, the Board of Directors will monitor all foreign custody
arrangements to ensure compliance with the 1940 Act and the rules thereunder,
and will review and approve, at least annually, the continuance of such
arrangements as consistent with the best interests of the Fund and the
stockholders.
Forward Foreign Currency Exchange Contracts
The Portfolios' use of forward foreign currency exchange contracts
involves the special risks described below. The precise matching of the amounts
of foreign currency contracts and the value of the portfolio securities being
hedged will not generally be possible, because the future value of such
securities in foreign currencies will change as a consequence of movements in
the market value of those securities between the dates the forward currency
contracts are entered into and the dates they mature.
In addition, since it is impossible to forecast with precision the market
value of portfolio securities at the expiration or maturity of a forward
currency contract, it may be necessary for the Portfolio to purchase additional
foreign currency on the spot (i.e., cash) market (and bear the expense of such
purchase) if the market value of the securities being hedged is less than the
amount of foreign currency the Portfolio would be obligated to deliver upon the
sale of such securities. Conversely, it may be necessary for the Portfolio to
sell some of the foreign currency received upon the sale of portfolio securities
on the spot market if the market value of such securities exceeds the amount of
foreign currency the Portfolio is obligated to deliver.
Further, the Portfolios may not always be able to enter into a forward
currency contract when the Sub-Investment Manager deems it advantageous to do
so, for instance, if the Portfolio is unable to find a counterparty to the
transaction at an attractive price. Moreover, the Portfolio may not be able to
purchase forward currency contracts with respect to all of the foreign
currencies in which its portfolio securities may be denominated. In those
circumstances, and in other circumstances in which the Portfolio enters into a
cross-hedging forward currency contract, the correlation between the movements
in the exchange rates of the subject currency and the currency in which the
portfolio security is denominated may not be precise. Finally, the cost of
purchasing forward currency contracts in a particular currency will reflect, in
part, the rate of return available on instruments denominated in that currency.
The cost of purchasing forward contracts to hedge portfolio securities that are
denominated in currencies that, in general, yield high rates of return may,
therefore, tend to reduce the rate of return.
Gold Mining Shares
The four largest producers of gold currently are the Republic of South
Africa, the U.S., Australia and Canada. Economic and political conditions and
objectives prevailing in these countries may have direct effects on the
production and marketing of newly produced gold and sales of central bank gold
holdings. Political and social conditions in South Africa, due to the history of
apartheid and the volatility of the political conditions in the new South
African government and unsettled political conditions which could recur in South
Africa as well as in neighboring countries, may pose certain risks to
investments in South Africa if aggravated by local or international
developments, such risks could have an adverse effect on investments in South
Africa including the Fund's investments and, under certain conditions, on the
liquidity of the Funds portfolio and its ability to meet shareholder redemption
requests. The ability of the Fund to invest or hold investments in South African
companies may be further affected by changes in the United States or South
African laws or regulations. In the past legislation has been proposed in
Congress which would require U.S. investors, including the Fund, to sell their
investment in South Africa. If such legislation were to be enacted it could have
a materially adverse effect on the value of the Fund's investments in South
Africa. Notwithstanding these considerations, the recent liberalization of South
Africa's political system could reduce the risks described above in the future.
Options
During the option period, the writer of a call option has, in return for
the premium received on the option, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. The writer has no control over the time when it may
S-17
<PAGE>
be required to fulfill its obligation as a writer of the option. The premium is
intended to offset that loss in whole or in part. Unlike the situation in which
the Portfolio owns securities not subject to a call option, the Portfolio in
writing call options must assume that the call may be exercised at any time
prior to the expiration of its obligation as a seller, and that in such
circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing market
price, although it must be at the previously agreed to exercise price.
The risk of purchasing a call option or a put option is that the Portfolio
may lose the premium it paid plus transaction costs. If a Portfolio does not
exercise the option and is unable to close out the position prior to expiration
of the option, it will lose its entire investment. An option position may be
closed out only on an exchange that provides a secondary market for an option of
the same series. Although a Portfolio will write and purchase options only when
the Sub-Investment Manager believes that a liquid secondary market will exist
for options of the same series, there can be no assurance that a liquid
secondary market will exist for a particular option at a particular time and
that a Portfolio, if it so desires, can close out its position by effecting a
closing transaction. If the writer of a covered call option is unable to effect
a closing purchase transaction, it cannot sell the underlying security until the
option expires or the option is exercised. Accordingly, a covered call writer
may not be able to sell the underlying security at a time when it might
otherwise be advantageous to do so.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Portfolio will not exactly match the
composition of the securities indexes on which options are written. The
principal risk in purchasing securities index options is that the premium and
transaction costs paid by a Portfolio will be lost as a result of unanticipated
movements in the price of the securities comprising the securities index for
which the option has been purchased. In writing securities index options, the
principal risks are the inability to effect closing transactions at favorable
prices and the inability to participate in the appreciation of the underlying
securities.
Futures Contracts and Related Options
Positions in futures contracts and related options may be closed out only
on an exchange that provides a secondary market for such contracts or options. A
Portfolio will enter into an option or futures contract only if there appears to
be a liquid secondary market. However, there can be no assurance that a liquid
secondary market will exist for any particular option or futures contract at any
specific time. Thus, it may not be possible to close out a futures contract or
related option position. In the case of a futures contract, in the event of
adverse price movements a Portfolio would continue to be required to make daily
margin payments. In this situation, if a Portfolio has insufficient cash to meet
daily margin requirements it may have to sell portfolio securities at a time
when it may be disadvantageous to do so. In addition, a Portfolio may be
required to take or make delivery of the securities underlying the futures
contracts it holds. The inability to close out futures contracts also could have
an adverse impact on a Portfolio's ability to hedge its portfolio effectively.
There are several risks in connection with the use of futures contracts as
a hedging device. While hedging can provide protection against an adverse
movement in market prices, it can also preclude a hedger's opportunity to
benefit from a favorable market movement. In addition, investing in futures
contracts and options on futures contracts will cause a Portfolio to incur
additional brokerage commissions and may cause an increase in a Portfolio's
turnover rate.
The successful use of futures contracts and related options also depends
on the ability of the Sub-Investment Manager to forecast correctly the direction
and extent of market movements within a given time frame. To the extent market
prices remain stable during the period a futures contract or option is held by a
Portfolio or such prices move in a direction opposite to that anticipated, a
Portfolio may realize a loss on the hedging transaction that will not be offset
by an increase in the value of its portfolio securities. As a result, a
Portfolio's return for the period may be less than if it had not engaged in the
hedging transaction.
Utilization of futures contracts by a Portfolio involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the securities which are being hedged. If the price of
the futures contract moves more or less than the price of the securities being
hedged, a Portfolio will experience a gain or loss which will not be completely
offset by movements in the price of the securities.
Compared to the purchase or sale of futures contracts, the purchase of put
or call options on futures contracts involves less potential risk for a
Portfolio because the maximum amount at risk is the premium paid for the options
plus transaction costs. However, there may be circumstances when the purchase of
an option on a futures contract would result in a loss to a Portfolio
S-18
<PAGE>
while the purchase or sale of the futures contract would not have resulted in a
loss, such as when there is no movement in the price of the underlying
securities.
Federal Tax Matters
A policyowner's interest in earnings on assets held in a separate account
and invested in the Fund are not includible in the policyowner's gross income
because the Policies presently qualify as life insurance contracts for Federal
income tax purposes.
The Fund intends that each Portfolio will comply with Section 817(h) of
the Code and the regulations thereunder. Pursuant to that Section, the only
shareholders of the Fund and its Portfolios will be separate accounts funding
variable annuities and variable life insurance policies established by Chubb
Life, its successors and assigns or by other insurance companies with which
Chubb Life is affiliated and Chubb Life's general account which provided the
initial capital for the Portfolios.
In addition, Section 817(h) of the Code and the regulations thereunder
impose diversification requirements on the separate accounts and on the
Portfolios. These diversification requirements are in addition to the
diversification requirements imposed by the Code for the Portfolios to be
treated as regulated investment companies. Failure to meet the requirements of
Section 817(h) could result in taxation to Chubb Life or its affiliated
insurance companies and immediate taxation of the owners of the policies funded
by the Fund.
The Secretary of the Treasury may in the future issue regulations or one
or more revenue rulings which would prescribe the circumstances in which a
policyowner's control of the investments of a segregated asset account may cause
the policyowner, rather than an insurance company, to be treated as the owner of
the assets of the account. The regulations could impose requirements that are
not reflected in the Policy, relating, for example, to such elements of
policyowner control as premium allocation, transfer privileges and investment in
a division focusing on a particular investment sector such as the Global Hard
Assets Portfolio. Failure to comply with any such regulations presumably would
cause earnings on a policyowner's interest in the separate account to be
includible in the policyowner's gross income in the year earned.
The Fund may, therefore, find it necessary to take action to assure that
the Policy continues to qualify as a life insurance policy under Federal tax
laws. The Fund, for example, may be required to alter the investment objectives
of any Portfolios or substitute the shares of one Portfolio for those of
another. No such change of investment objectives or substitution of securities
will take place without notice to affected policyholders and the approval of a
majority of such policyholders or without prior approval of the Securities and
Exchange Commission, to the extent legally required. See "TAXES" below.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Management Agreements and Sub-Investment Management Agreements
The Fund has entered into Investment Management Agreements with Jefferson
Pilot Investment Advisory Corporation ("Jefferson Pilot Investment Advisory"),
formerly Chubb Investment Advisory Corporation, with respect to all Portfolios.
The Fund and Jefferson Pilot Investment Advisory have also executed
Sub-Investment Management Agreements with Templeton Global Advisors, Inc.
("Templeton"), Van Eck Associates Corporation ("Van Eck Associates"), Pioneering
Management Corporation ("Pioneer"), Janus Capital Corporation ("Janus"), J.P.
Morgan Investment Management Inc. ("Morgan"), Warburg, Pincus Asset Management,
Inc. ("Warburg") Strong Capital Management, Inc. ("Strong"), Lombard Odier
International Portfolio Management Limited ("Lombard Odier") Massachusetts
Financial Services Company ("MFS") (collectively the "Sub-Investment Managers")
with regard to the World Growth Stock; Global Hard Assets; Domestic Growth
Stock; Capital Growth; Balanced, Growth and Income, Growth; International
Equity; Money Market High Yield Bond and Emerging Growth Portfolios,
respectively.
The Investment Management Agreement provides that Jefferson Pilot
Investment Advisory, subject to control and review by the Fund's Board of
Directors, is responsible for the overall management and supervision of each
Portfolio and for providing certain administrative services to the Fund. See
"MANAGEMENT OF THE FUND" in the Prospectus. The Sub-Investment Management
Agreements provide that the Sub-Investment Managers, subject to review by the
Fund's Board of Directors and by Jefferson Pilot Investment Advisory, have the
day-to-day responsibility for making decisions to buy, sell or hold any
particular security for the Portfolio which they advise.
Jefferson Pilot Investment Advisory, each Sub-Investment Manager and their
affiliates may provide investment advice to other clients, including, but not
limited to, mutual funds, individuals, pension funds and institutional
investors. Some of the
S-19
<PAGE>
advisory accounts of Jefferson Pilot Investment Advisory, each Sub-Investment
Manager, and their affiliates may have investment objectives and investment
programs similar to those of the Portfolios. Accordingly, occasions may arise
when securities that are held by other advisory accounts, or that are currently
being purchased or sold for other advisory accounts, are also being selected for
purchase or sale for a Portfolio. It is the practice of Jefferson Pilot
Investment Advisory, each Sub-Investment Manager and their affiliates to
allocate such purchases or sales insofar as feasible among their several clients
in a manner they deem equitable, to all accounts involved. Under normal
circumstances such transactions will be (1) done on a pro-rata basis
substantially in proportion to the amounts ordered by each account, (2) entered
into only if the trade is likely to produce a benefit for the Portfolios, and
(3) at the same average price for each client. While it is conceivable that in
certain instances this procedure could adversely affect the price or number of
shares involved in the Fund's transaction, it is believed that the procedure
generally contributes to better overall execution of the Fund's portfolio
transactions. It is also the policy of Jefferson Pilot Investment Advisory, each
Sub-Investment Manager, and each of their affiliates not to favor any one
account over the other.
For providing investment advisory and management services to the Fund,
Jefferson Pilot Investment Advisory receives monthly compensation from the Fund
and has sole responsibility to provide each Sub-Investment Manager, with monthly
compensation, at annual rates computed as described under "MANAGEMENT OF THE
FUND" in the Prospectus. For the year ended December 31, 1995, the Fund paid
$511,260, $40,941, $59,640, $50,107, $317,840, $65,332, $387,176 and $106,430
and $33,463 to Chubb Investment Advisory for the World Growth Stock Portfolio,
the Money Market Portfolio, the Gold Stock Portfolio, the Bond Portfolio, the
Domestic Growth Stock Portfolio, the Growth and Income Portfolio, the Capital
Growth Portfolio, the Balanced Portfolio, and the Emerging Growth Portfolio,
respectively. For the year ended December 31, 1996 the Fund paid $656,061,
$42,558, $62,705, $53,464 $480,015, $135,739, $703,701, $134,709, and $173,563
to Chubb Investment Advisory for the World Growth Stock Portfolio, the Money
Market Portfolio, the Gold Stock Portfolio, the Bond Portfolio, the Domestic
Growth Stock Portfolio, the Growth and Income Portfolio, the Capital Growth
Portfolio, the Balanced Portfolio and the Emerging Growth Portfolio. All such
fees were paid pursuant to the terms of the Investment Management Agreements and
the Sub-Investment Management Agreements. For the year ended December 31, 1997
the Fund paid $281,312, $16,816, $16,911, $201,449, $83,877, $264,808, $59,682,
$132,766 to Jefferson Pilot Investment Advisory for the World Growth Stock
Portfolio, the Money Market Portfolio, the Global Hard Assets Portfolio
(formerly the Gold Stock Portfolio), the Domestic Growth Stock Portfolio, the
Growth and Income Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio and the Emerging Growth Portfolio.
For providing sub-investment advisory services to the Portfolios, as
described under "MANAGEMENT OF THE FUND" Jefferson Pilot Investment Advisory for
the years 1997, 1996, and 1995 respectively paid: $562,624, $437,374, and
$340,840 to Templeton for the World Growth Portfolio; $23,351, $29,791 and
$28,659 to Chubb Asset Managers, Inc. and in 1997 $10,214 to MFS for the Money
Market Portfolio for the years 1997, 1996 and 1995 respectively; $33,822,
$41,803 and $37,760, to Van Eck Associates for the Global Hard Assets Portfolio;
$402,898, $320,010 and $211,893 to Pioneering Management for the Domestic Growth
Portfolio; $97,789, $90,493 and $43,555 to Chubb Asset Managers, Inc. and for
1997 $69,964 to Warburg for the Growth and Income Portfolio; $799,863, $527,776
and $290,382 to Janus for the Capital Growth Portfolio; and $69,137, $89,806 and
$70,953 to Phoenix and for 1997 $37,219 to Morgan for the Balanced Portfolio;
and Jefferson Pilot Investment Advisory paid $176,797 for 1997 $108,477 for
1996, and $20,914 for 1995 to MFS for the Emerging Growth Portfolio.
The Investment Management Agreements also obligate Jefferson Pilot
Investment Advisory to perform certain administrative services which are
described more completely in the Prospectus. Certain of these functions have
been delegated to the Sub-Investment Managers.
The continuance of the Investment Management Agreements and the
Sub-Investment Management Agreements were approved by the Fund's Board of
Directors on January 30, 1997. As a result of the sale by the Chubb Corporation
of Jefferson Pilot Financial to Jefferson-Pilot on April 30, 1997 (the
"Transaction") and the resulting change in control of Jefferson Pilot Investment
Advisory, the Investment Management Agreements and each of the Sub-Investment
Management Agreements terminated by operation of law on that date. On April 3,
1997 the new Investment Management Agreements and the new Sub-Investment
Management Agreements were approved by Directors to become effective on the
change of control of Jefferson Pilot Financial. On April 30, 1997 the Fund and
Jefferson Pilot Investment Advisory received an exemptive order from the
Securities and Exchange Commission that permitted Jefferson Pilot Investment
Advisory to continue to provide investment management services to the Fund and
each of its series during an interim period of not more than 120 days from the
date of the Transaction and continuing through the date a new investment
management agreement and new sub-investment management agreements were approved
by Shareholders. On July 31, 1997 additional new Sub-Investment Advisory
Agreements were approved by the Fund's Board of Directors for the Money Market
Portfolio, Balanced Portfolio and Growth and Income Portfolio. On August 15,
1997 the Investment Management Agreement with Jefferson Pilot Investment
Advisory Corporation and each of the existing Sub-
S-20
<PAGE>
Investment Advisory Agreements with the Sub-Investment Advisors were approved at
a Special Meeting of Shareholders. See "CAPITAL STOCK" in this Statement of
Additional Information. In addition, on December 10, 1997 the Investment
Management and Sub-Investment Management Agreements relating to the Growth, High
Yield Bond and International Equity Portfolios were approved by the Fund's Board
of Directors and on December 23, 1997 were approved by the Portfolio's sole
shareholder.
Independent Auditors
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116 has
been selected as the independent auditors of the Fund.
The financial statements of the Fund to be incorporated by reference in
this Statement of Additional Information and the related financial highlights
included in the Prospectus for the periods indicated therein have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
Custodians
Citibank, N.A., 111 Wall Street, New York, New York 10043, acts as
custodian of the Fund's assets. The Fund has also appointed, with the approval
of the Fund's Board of Directors, from time to time, sub-custodians, qualified
under Rule 17f-5 of the 1940 Act, with respect to certain foreign securities.
The Fund may authorize Citibank to enter into an agreement with any U.S. banking
institution or trust company to act as a sub-custodian pursuant to a resolution
of the Fund's Board of Directors. Securities owned by the Fund subject to
repurchase agreements may be held in the custody of other U.S. banks.
Payment of Expenses
Jefferson Pilot Investment Advisory is obligated to assume the cost of
certain administrative expenses for the Fund, as described in the Prospectus
under the heading "MANAGEMENT OF THE FUND." The Fund pays the following
expenses: brokerage commissions and transfer taxes; other state, federal and
local taxes and filing fees; fees and expenses of qualification of the Fund and
its shares under federal and state securities laws subsequent to the effective
date of this Prospectus; compensation of directors who are not interested
persons of the Fund ("disinterested directors"); travel expenses of
disinterested directors; interest and other borrowing costs; extraordinary or
nonrecurring expenses such as litigation; costs of printing and distributing
communications to current policyowners; insurance premiums; charges and expenses
of the custodian, independent auditors, and counsel; industry association dues;
and other expenses not expressly assumed by Jefferson Pilot Investment Advisory.
Certain other expenses are assumed by Jefferson Pilot Variable Corporation ("JP
Variable Corp") pursuant to a distribution agreement with the Fund. See
"OFFERING AND REDEMPTION OF SHARES" below.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
Under the Investment Management Agreements, Jefferson Pilot Investment
Advisory has ultimate authority to select broker-dealers through which
securities are to be purchased and sold, subject to the general control of the
Board of Directors. Under the Sub-Investment Management Agreements, the
Sub-Investment Managers have day-to-day responsibility for selecting
broker-dealers through which securities are to be purchased and sold, subject to
Jefferson Pilot Investment Advisory's overall monitoring and supervision. The
Sub-Investment Managers each provide the trading desk for their respective
Portfolio transactions. Jefferson Pilot Investment Advisory will perform daily
valuation of the assets of each Portfolio.
The Money Market Portfolio's investments usually will be purchased on a
principal basis directly from issuers, underwriters or dealers. Accordingly,
minimal brokerage charges are expected to be paid on such transactions.
Purchases from an underwriter generally include a commission or concession paid
by the issuer, and transactions with a dealer usually include the dealer's
mark-up.
The amount of brokerage commissions paid by the Fund for all Portfolios,
for the year 1997 were $694,293, and for all portfolios for 1996 were $532,729
and Portfolios for 1995 was $402,052.
Insofar as known to management, no director or officer of the Fund,
Jefferson Pilot Investment Advisory, any Sub-Investment Manager or any person
affiliated with any of them has any material direct or indirect interest in any
broker-dealer employed by or on behalf of the Fund.
S-21
<PAGE>
In selecting broker-dealers to execute transactions for the Fund, the
Sub-Investment Managers are obligated to use their best efforts to obtain for
each Portfolio the most favorable overall price and execution available,
considering all the circumstances. Such circumstances include the price of the
security, the size of the broker-dealer's "spread" or commission, the
willingness of the broker-dealer to position the trade, the reliability,
financial strength and stability and operational capabilities of the
broker-dealer, the ability to effect the transaction at all where a large block
is involved, the availability of the broker-dealer to stand ready to execute
possibly difficult transactions in the future, and past experience as to
qualified broker-dealers, including broker-dealers who specialize in any
Canadian or foreign securities held by the Portfolios. Such considerations are
judgmental and are weighed by the Sub-Investment Managers in seeking the most
favorable overall economic result for the Fund.
Notwithstanding the foregoing, however, and subject to appropriate
policies and procedures as then approved by the Board of Directors of the Fund,
Jefferson Pilot Investment Advisory and the Sub-Investment Managers are
authorized to allocate portfolio transactions to broker-dealers who have
provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities and Exchange Act of 1934, for the Portfolios or
other advisory accounts as to which Jefferson Pilot Investment Advisory or any
Sub-Investment Manager has investment discretion. In addition, Jefferson Pilot
Investment Advisory and the Sub-Investment Managers may cause the Portfolios to
pay a broker-dealer a commission for effecting a securities transaction in
excess of the amount another broker-dealer would have charged for effecting the
same transaction, if Jefferson Pilot Investment Advisory or the Sub-Investment
Manager determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services, as defined above,
provided by such broker-dealer viewed in terms of either that particular
transaction or the overall responsibilities of Jefferson Pilot Investment
Advisory or the Sub-Investment Managers with respect to the Portfolios or their
other advisory accounts. Such brokerage and research services may include, among
other things, analyses and reports concerning issuers, industries, securities,
economic factors and trends, and, portfolio strategy. Such brokerage and
research services may be used by Jefferson Pilot Investment Advisory or a
Sub-Investment Manager in connection with any other advisory accounts managed by
it. Conversely, research services for any other advisory accounts may be used by
the Sub-Investment Manager or Jefferson Pilot Investment Advisory in managing
the investments of a Portfolio. Jefferson Pilot Investment Advisory or a
Sub-Investment Manager may also receive from such broker-dealers quotations for
Portfolio valuation purposes, provided that this results in no additional cost
to the Fund.
Research services may be provided to Templeton, at no additional cost to
the Fund, by various wholly owned subsidiaries, including Templeton Investment
Counsel, Inc., a corporation registered under the Investment Advisers Act of
1940, Templeton Investment Management (Hong Kong) Ltd., and Templeton Management
Limited, a Canadian company. The research services include information,
analytical reports, computer screening studies, statistical data, and factual
resumes pertaining to securities in the U.S. and in various foreign nations
which Templeton considers as having relatively stable and friendly governments.
Such supplemental research, when utilized, is subjected to analysis by Templeton
before being incorporated into the investment advisory process. Templeton pays
these subsidiaries compensation and reimbursement of expenses as mutually agreed
on, without cost to the Fund. These subsidiaries and Templeton are independent
contractors and in no sense is any of them an agent for the other. Any of them
is free to discontinue such research services at any time on 30 days' notice
without cost or penalty.
In 1997, no commissions were paid to brokers because of research services
provided to either Jefferson Pilot Investment Advisory or the Sub-Investment
Managers.
The Sub-Investment Managers will use their best efforts to recapture all
available tender offer solicitation fees and similar payments in connection with
tenders of the securities of the Fund and to advise the Fund of any fees or
payments of whatever type which it may be possible to obtain for the Fund's
benefit in connection with the purchase or sale of Fund securities.
Any of the Sub-Investment Managers and Jefferson Pilot Investment Advisory
may combine transactions for the Fund with transactions for other accounts
managed by them or their affiliates, including other investment companies
registered under the 1940 Act, as previously described above. Transactions will
be combined only when the transaction meets the Fund's requirements as to
selection of brokers or dealers and negotiation of prices and commissions which
the Sub-Investment Managers would otherwise apply.
S-22
<PAGE>
MANAGEMENT OF THE FUND
The directors and officers of the Fund, their addresses, their positions
with the Fund, and their principal occupations for the past five years are set
forth below:
<TABLE>
<CAPTION>
Positions
with Principal Occupations for
Name and Address the Fund the Past Five Years
- ---------------- -------- -------------------
<S> <C> <C>
Ronald Angarella* President Senior Vice President, Jefferson Pilot Financial,
One Granite Place and Director President and Director, Jefferson Pilot Investment
Concord, N.H. 03301 Advisory, Jefferson Pilot Securities and Hampshire
Funding, Inc.; Senior Vice President and Director,
Chubb Investment Funds, Inc.
Charles C. Cornelio Vice President Executive Vice President, Jefferson Pilot Financial
One Granite Place and General Counsel and Jefferson Pilot Corporation, Vice President, and
Concord, N.H. 03301 Secretary, Jefferson Pilot Securities Corporation.
Shari J. Lease Secretary Assistant Vice President and Associate Counsel,
One Granite Place Jefferson Pilot Financial; Assistant Secretary, Chubb
Concord, N.H. 03301 Investment Advisory, previously Secretary, Chubb Investment
Funds, Inc.; Assistant Counsel and Assistant Vice President,
State Bond and Mortgage Company and affiliated companies.
John A. Weston Treasurer Assistant Vice President of Jefferson Pilot Financial,
One Granite Place Treasurer of Jefferson Pilot Securities Corporation,
Concord, N.H. 03301 Jefferson Pilot Investment Advisory and Hampshire
Funding, Inc.; formerly, Mutual Fund Accounting Officer
for the Fund, Chubb Investment Funds, Inc. and Jefferson
Pilot Investment Advisory Corporation and Assistant
Treasurer for Chubb Securities Corporation and
Hampshire Funding, Inc.
Mark D. Landry Assistant Treasurer Mutual Fund Accounting and Operations Officer for
One Granite Place Jefferson Pilot Financial, Concord, N.H. 03301 and
Concord, N.H. 03301 Jefferson Pilot Investment Advisory; formerly Mutual
Fund Accounting and Operations Manager for the Fund,
Chubb Investment Funds, Inc., Assistant Treasurer of
Chubb Investment Funds, Inc.; and Chubb Investment
Advisory.
Michael D. Coughlin Director President of Concord Litho Company, Inc. (printing
106 School Street company)
Concord, N.H. 03301
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
Positions
with Principal Occupations for
Name and Address the Fund the Past Five Years
- ---------------- -------- -------------------
<S> <C> <C>
Elizabeth S. Hager Director State Representative, New Hampshire, Executive Director,
5 Auburn Street United Way, Consultant, Fund Development, previously,
Concord, N.H. 03301 City Councilor, City of Concord, N.H. and Mayor, City of
Concord, N.H.
Thomas D. Rath Director Partner, Rath, Young, Pignatelli, P.A.; President, PlayBall
N.H.; formerly Vice Chairman, Primary Bank; Chairman,
Horizon Bank
</TABLE>
Asterisks indicate those directors who are "interested persons" within the
meaning of Section 2(a)(19) of the 1940 Act. Mr. Coughlin and Ms. Hager are
members of the audit committee and Mr. Angarella and Ms. Hager are members of
the valuation committee.
CAPITAL STOCK
The authorized capital stock of the Fund consists of 12,000,000,000 shares
of common stock which are divided into twelve series: World Growth Stock
Portfolio common stock, International Equity Portfolio common stock, Money
Market Portfolio common stock, Global Hard Assets Portfolio common stock, Bond
Portfolio common stock, High Yield Bond Portfolio common stock, Domestic Growth
Stock Portfolio common stock, Growth and Income Portfolio common stock, Capital
Growth Portfolio common stock, Growth Portfolio common stock, Balanced Portfolio
common stock and Emerging Growth Portfolio common stock. Each series currently
consists of 1,000,000,000 shares. The Fund has the right to issue additional
shares without the consent of stockholders and may reallocate shares to new
series or to one or more of the existing series.
The assets received by the Fund for the issuance or sale of shares of each
Portfolio and all income, earnings, profits and proceeds thereof are
specifically allocated to each Portfolio. They constitute the underlying assets
of each Portfolio, are required to be segregated on the books of account and are
to be charged with the expenses of such Portfolio. Any assets which are not
clearly allocable to a particular Portfolio or Portfolios are allocated in a
manner determined by the Board of Directors. Accrued liabilities which are not
clearly allocable to one or more Portfolios would generally be allocated among
the Portfolios in proportion to their relative net assets before adjustment for
such unallocated liabilities. Each issued and outstanding share in a Portfolio
is entitled to participate equally in dividends and distributions declared with
respect to such Portfolio and in the net assets of such Portfolio upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
The shares of each Portfolio, are fully paid and non-assessable, have no
preference, preemptive, conversion, exchange or similar rights, and are freely
transferable. Shares do not have cumulative voting rights.
Jefferson Pilot Financial provided the initial capital for the Fund by
purchasing $1,000,000 worth of shares of the World Growth Stock Portfolio, the
Money Market Portfolio and the Global Hard Assets Portfolio for its general
account. Subsequently, upon formation of the Bond Portfolio and Domestic Growth
Stock Portfolio, Jefferson Pilot Financial purchased $1,000,000 worth of shares
of the two additional Portfolios for its general account. Most recently,
Jefferson Pilot Financial purchased $1,000,000 worth of shares of the Growth and
Income Portfolio and the Capital Growth Portfolio,$5,000,000 worth of shares of
the Balanced Portfolio and $3,000,000 worth of shares of Emerging Growth
Portfolio for its general account. Jefferson Pilot Financial intends to withdraw
such investment from time to time.
The shares held by Jefferson Pilot Financial or its affiliated insurance
companies, including shares for which no voting instructions have been received,
shares held in a separate account representing charges imposed by Jefferson
Pilot Financial or its affiliates and shares held by Jefferson Pilot Financial
that are not otherwise attributable to Policies, will be voted by Jefferson
Pilot Financial or its affiliated insurance companies in proportion to
instructions received from the owners of
S-24
<PAGE>
Policies. Jefferson Pilot Financial and its affiliated insurance companies
reserve the right to vote any or all such shares at their discretion to the
extent consistent with then current interpretations of the 1940 Act and rules
thereunder.
The officers and directors of the Fund cannot directly own shares of the
Fund without purchasing a Policy. As a result, the amount of shares owned by the
directors and officers of the Fund as a group is less than 1% of each Portfolio.
OFFERING AND REDEMPTION OF SHARES
The Fund offers shares of each Portfolio only for purchase by the
corresponding division of separate accounts established by Jefferson Pilot
Financial or its affiliated insurance companies. It thus will serve as an
investment medium for the Policies offered by Jefferson Pilot Financial and its
affiliated insurance companies. The offering is without a sales charge and is
made at each Portfolio's net asset value per share, which is determined in the
manner set forth below under "DETERMINATION OF NET ASSET VALUE." In the future,
the shares of the Fund may be offered to additional separate accounts of
Jefferson Pilot Financial, its successor or assigns, or of its affiliated
insurance companies.
Jefferson Pilot Variable Corporation ("JP Variable Corporation") is the
principal underwriter and distributor of the Fund's shares. It is also the
principal underwriter and distributor of the Policies.
Under the terms of the Fund Distribution Agreement entered into by JP
Variable Corporation and the Fund, JP Variable Corporation is not obligated to
sell any specific number of shares of the Fund. JP Variable Corporation also
pays any distribution expenses and costs (that is, those arising from any
activity which is primarily intended to result in the sale of shares issued by
the Fund) including expenses and costs attributable to the Fund which are
related to the printing and distributing of prospectuses and periodic reports to
new or prospective owners of Policies. Such expenses are reimbursed by Jefferson
Pilot Financial or its affiliated insurance companies, their successors or
assigns, pursuant to the terms of separate agreements with Jefferson Pilot
Securities relating to the sale of Policies.
The Fund redeems all full and fractional shares of the Fund at the net
asset value per share applicable to each Portfolio. See "DETERMINATION OF NET
ASSET VALUE" below.
Redemptions are normally made in cash, but the Fund has authority, at its
discretion, to make full or partial payment by assignment to the separate
account of portfolio securities at their value used in determining the
redemption price. The Fund, nevertheless, pursuant to Rule 18f-1 under the 1940
Act, has filed a notification of election on Form N-18f-1, by which the Fund has
committed itself to pay to the separate account in cash, all such separate
account's requests for redemption made during any 90-day period, up to the
lesser of $250,000 or 1% of the applicable Portfolio's net asset value at the
beginning of such period. The securities, if any, to be paid in-kind to the
separate account will be selected in such manner as the Board of Directors deems
fair and equitable. In such cases, the separate account would incur brokerage
costs should it wish to liquidate these portfolio securities.
The right to redeem shares or to receive payment with respect to any
redemption of shares of any Portfolio may only be suspended (1) for any period
during which trading on the New York Stock Exchange is restricted or such
Exchange is closed, other than customary weekend and holiday closings, (2) for
any period during which an emergency exists as a result of which disposal of
securities or determination of the net asset value of that Portfolio is not
reasonably practicable, or (3) for such other periods as the Securities and
Exchange Commission may by order permit for the protection of stockholders of
the Portfolio.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio of the Fund is
determined immediately after the declaration by the Fund of dividends, if any,
as of the close of regular trading on the New York Stock Exchange (presently
4:00 P.M. New York Time), on each day during which the New York Stock Exchange
is open for trading except on days where both (i) the degree of trading in the
Portfolio's securities would not materially affect the net asset value of the
Portfolio's shares and (ii) no shares of the Portfolio were tendered for
redemption or no purchase order was received. The New York Stock Exchange is
open from Monday through Friday except on the following national holidays: New
Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. In the event that any of the above
holidays falls on a Sunday, it is regularly observed on the following Monday.
The net asset value per share of each Portfolio is computed by dividing
the sum of the value of the securities held by that Portfolio, plus any cash or
other assets and minus all liabilities, by the total number of outstanding
shares of that Portfolio at such
S-25
<PAGE>
time. Any expenses borne by the Fund, including the investment management fee
payable to Jefferson Pilot Investment Advisory, are accrued daily except for
extraordinary or non-recurring expenses. See "INVESTMENT ADVISORY AND OTHER
SERVICES-Payment of Expenses" above.
Portfolio securities which are traded on national stock exchanges are
valued at the last sale price as of the close of business of the New York Stock
Exchange on the day the securities are being valued, or, lacking any sales, at
the mean between the closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the closing
sales price as reported on a readily available market quotation system, or, if
no sale took place, the mean between the bid and asked prices. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Board of Directors of the Fund.
Quotations of foreign securities in foreign currencies are converted to
U.S. dollar equivalents using appropriately translated foreign market closing
prices.
Long-Term U.S. Treasury securities and other obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities are valued
at representative quoted prices from bond pricing services.
Long-term publicly traded corporate bonds are valued at prices obtained
from a bond pricing service when such prices are available or, when appropriate,
from broker-dealers who make a market in that security.
Debt instruments with a remaining maturity of 60 days or less are valued
on an amortized cost basis. Under this method of valuation, the security is
valued at cost on the date of purchase plus a constant rate of amortization of
any discount or premium until maturity, regardless of any intervening change in
general interest rates or the market value of the instrument. The amortized cost
value of the security may be either more or less than the market value at any
given time. If for any reason the fair value of any security is not fairly
reflected through the amortized cost method of valuation, such security will be
valued by market quotations, if available, otherwise as determined in good faith
by the Board of Directors.
TAXES
In order for each Portfolio of the Fund to qualify for Federal income tax
treatment as a regulated investment company, two of the tests they must meet are
(i) that at least 90% of its gross income for a taxable year must be derived
from qualifying income, i.e., dividends, interest, income derived from loans of
securities, and gains from the sale of securities. It is the Fund's policy to
comply with the provisions of the Internal Revenue Code of 1986 regarding
distribution of investment income and capital gains so that each Portfolio will
not be subject to Federal income tax on amounts distributed and undistributed or
an excise tax on certain undistributed income or capital gains. For these
purposes, if a regulated investment company declares a dividend in December to
stockholders of record in December and pays such dividends before the end of
January they will be treated as paid in the preceding calendar year and to have
been received by such stockholder in December.
PERFORMANCE AND YIELD INFORMATION
Money Market Portfolio
For the seven days ended December 31, 1997, the yield of the Money Market
Portfolio expressed as a simple annualized yield was 5.05%; the yield of the
Money Market Portfolio expressed as a compounded effective yield was 5.18%.
The Money Market Portfolio's yield is its investment income, less
expenses, expressed as a percentage of assets on an annualized basis for a
seven-day period. The yield is expressed as a simple annualized yield and as a
compounded effective yield. The yield does not reflect the fees and charges
imposed on the assets of Separate Account A.
The simple annualized yield is computed by determining the net change
(exclusive of realized gains and losses from the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
seven-day period, dividing the net change in account value by the value of the
account at the beginning of the period, and annualizing the resulting quotient
(base period return) on a 365-day basis. The net change in account
S-26
<PAGE>
value reflects the value of additional shares purchased with dividends from the
original shares in the account during the seven-day period, dividends declared
on such additional shares during the period, and expenses accrued during the
period.
The compounded effective yield is computed by determining the unannualized
base period return, adding one to the base period return, raising the sum to a
power equal to 365 divided by seven, and subtracting one from the result.
Non-Money Market Portfolios
Yield represents the net annualized yield based on a specified 30-day (or
one month) period assuming a reinvestment semiannual compounding of income.
Yield is calculated by dividing the average daily net investment income per
share earned during the specified period by the maximum offering price, which is
net asset value per share on the last day of the period, and annualizing the
result according to the following formula:
Yield = 2(((A-B + 1) 6) -1)
---
CD
Where A equals dividends and interest earned during the period, B equals
expenses accrued for the period (net of reimbursements), C equals the average
daily number of shares outstanding during the period that were entitled to
receive dividends, and D equals the maximum offering price per share on the last
day of the period.
The average annual total return quotations for the World Growth Stock
Portfolio, the Money Market Portfolio, the Global Hard Assets Portfolio
(formerly the Gold Stock Portfolio), the Domestic Growth Stock Portfolio, the
Growth and Income Portfolio, the Capital Growth Portfolio, the Balanced
Portfolio and Emerging Growth Portfolio for the one year ended December 31, 1997
are 15.33%, 4.86%, (44.63%), 23.60%, 28.92%, 29.41%, 16.33%, and 20.47%,
respectively. The average annual total return quotations for these Portfolios,
other than the Emerging Growth Portfolio, for the 5 years ended December 31,
1997 are 15.71%, 4.03%, (3.73%), 18.43% 18.42%, 21.42% and 11.15%, respectively.
The average annual total return quotations for World Growth Stock Portfolio, the
Money Market Portfolio, the Global Hard Assets Portfolio and the Domestic Growth
Stock Portfolio for the 10 years ended December 31, 1997 are 13.39%, (6.02%),
4.92%, and 17.03% respectively. The average annual total return quotations for
World Growth Stock Portfolio, the Money Market Portfolio, the Global Hard Assets
Portfolio, the Domestic Growth Stock Portfolio, the Growth and Income Portfolio,
the Capital Growth Portfolio, the Balanced Portfolio and the Emerging Growth
Portfolio since each Portfolio's inception through December 31, 1997 are 12.58%,
5.00%, (0.12%), 14.75%, 17.70%, 23.81%, 11.35%, and 27.01%, respectively.
The average annual total return figures represent the average annual
compounded rate of return of the stated period. Average annual total return
quotations reflect the percentage change between the beginning value of a static
account in the Portfolio and the ending value of that account measured by the
then current net asset value of that Portfolio assuming that all dividends and
capital gains distributions during the stated period were reinvested in shares
of the Portfolio when paid. Total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment that would
compare the initial amount to the ending redeemable value of such investment
according to the following formula:
T = (ERV/P)/1/n/-1
Where T equals average annual total return, where ERV, the ending
redeemable value, is the value, at the end of the applicable period, of a
hypothetical $10,000 payment made at the beginning of the applicable period,
where P equals a hypothetical initial payment of $1,000, and where N equals the
number of years. From time to time, in reports and sales literature: (1) each
Portfolio's performance or P/E ratio may be compared to: (i) the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index") and Dow Jones
Industrial Average so that you may compare that Portfolio's results with those
of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of mutual
funds traced by: (A) Lipper Analytical Services, a widely-used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and asset size; (B) Forbes Magazine's Annual Mutual Funds Survey and
Mutual Fund Honor Roll; or (C) other financial or business publications, such as
the Wall Street Journal, Business Week, Money Magazine, and Barron's, which
provide similar information; (iii) indices of stocks comparable to those in
which the particular Portfolio invests; (2) the Consumer Price Index (measure of
inflation) may be used to assess the real rate of return from an investment
in
S-27
<PAGE>
each Portfolio; (3) other U.S. government statistics such as GNP, and net import
and export figures derived from governmental publications, e.g., The Survey of
Current Business, may be used to illustrate investment attributes of each
Portfolio or the general economic, business, investment, or financial
environment in which each Portfolio operates; and (4) the effect of tax-deferred
compounding on the particular Portfolio's investment returns, or on returns in
general, may be illustrated by graphs, charts, etc. where such graphs or charts
would compare, at various points in time, the return from an investment in the
particular Portfolio (or returns in general) on a tax-deferred basis (assuming
reinvestment of capital gains and dividends and assuming one or more tax rates)
with the return on a taxable basis. Each Portfolio's performance may also be
compared to the performance of other mutual funds by Morningstar, Inc. which
ranks mutual funds on the basis of historical risk and total return. Morningstar
rankings are calculated using the mutual fund's performance relative to
three-month Treasury bill monthly returns. Morningstar's rankings range from
five stars (highest) to one star (lowest) and represent Morningstar's assessment
of the historical risk level and total return of a mutual fund as a weighted
average for 3, 5, and 10-year periods. In each category, Morningstar limits its
five star rankings to 10% of the funds it follows and its four star rankings to
22.5% of the funds it follows. Rankings are not absolute or necessarily
predictive of future performance.
The performance of the Portfolios may be compared, for example, to the
record of the S&P 500 Index, NASDAQ Composite Index, and the Europe, Australia,
Far Eastern ("EAFE") Index. The S&P 500 Index is a well known measure of the
price performance of 500 leading larger domestic stocks which represent
approximately 80% of the market capitalization of the U.S. equity market. The
NASDAQ Composite Index is comprised of all stocks on NASDAQ's National Market
Systems, as well as other NASDAQ domestic equity securities. The NASDAQ
Composite Index has typically included smaller, less mature companies
representing 10% to 15% of the capitalization of the entire domestic equity
market. The EAFE Index is comprised of more than 900 companies in Europe,
Australia and the Far East. All of these indices are unmanaged and
capitalization weighted. In general, the securities comprising the NASDAQ
Composite Index are more growth oriented and have a somewhat higher beta and P/E
ratio than those in the S&P 500 Index.
The total returns of all of these indices will show the changes in prices
for the stocks in each index. However, only the performance data for the S&P 500
Index assumes reinvestment of all capital gains distributions and dividends paid
by the stocks in each data base. Tax consequences will not be included in such
illustration, nor will brokerage or other fees or expenses of investing be
reflected in the NASDAQ Composite, S&P 500, EAFE Index.
ADDITIONAL INFORMATION
Reports
Annual and semi-annual reports containing financial statements of the
Fund, as well as voting instruction soliciting material for the Fund, have been
sent to Policyowners.
Name and Service Mark
The Chubb Corporation, in conjunction with its sale of Jefferson Pilot
Financial to Jefferson-Pilot Corporation, has granted a limited right to use the
"Chubb" name and service mark. Jefferson Pilot Corporation has also granted a
limited license to the Fund to use the Jefferson Pilot name and service mark.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's December 31, 1997 Annual
Report are incorporated herein by reference.
S-28
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The financial statements contained in the Fund's December 31, 1997
Annual Report to shareholders filed on March 3, 1998 are
incorporated by reference in the Fund's Statement of Additional
Information.
(b) Exhibits
1. a. Amended and Restated Articles of Incorporation, incorporated by
reference to earlier filing on September 5, 1997 SEC file
No. 2-94479 Exhibit l.a of Form N-lA Registration
Statement.
b. Articles of Amendment to the Articles of Incorporation are
incorporated by reference to earlier filing on March 2, 1998
SEC File No. 2-94479 Exhibit 1.b of Form N-1A Registration
Statement.
2. By-Laws, incorporated by reference to earlier filing on March 2, 1998
SEC File No. 2-94479 Exhibit 2 of Form N-1A Registration Statement.
3. Not applicable.
4. Not applicable.
C-1
<PAGE>
5. a. Investment Management Agreement between Chubb America Fund, Inc.
and Chubb Investment Advisory Corporation incorporated by reference
to earlier filing on March 2, 1998 SEC File No. 2-94479 Exhibit
99.5a.
b. Investment Subadvisory Agreement among Chubb America Fund, Inc.,
Chubb Investment Advisory Corporation and Templeton Global Advisers
Limited. Incorporated by reference to earlier filing on September 5,
1997 SEC file No. 2-94479 Exhibit 99.5B.
c. Investment Subadvisory Agreement among Chubb America Fund, Inc.,
Chubb Investment Advisory Corporation and Van Eck Associates
Corporation. Incorporated by reference to earlier filing on September
5, 1997 SEC file No. 2-94479 Exhibit 99.5C.
d. Sub-Investment Subadvisory Agreement among Chubb America Fund,
Inc., Chubb Investment Advisory Corporation and Pioneering Management
Corporation. Incorporated by reference to earlier filing on September
5, 1997 SEC file No. 2-94479 Exhibit 99.5D.
C-2
<PAGE>
e. Investment Sub Advisory Agreement between Chubb America Fund,
Inc., Chubb Investment Advisory Corporation and Warburg, Pincus
Counselors, Inc. for the Growth and Income Portfolio. Incorporated
by reference to earlier filing on September 5, 1997 SEC file No.
2-94479 Exhibit 99.5E.
f. Investment Sub Advisory Agreement between Chubb America Fund,
Inc., Chubb Investment Advisory Corporation and Janus Capital
Corporation for the Capital Growth Portfolio. Incorporated by
reference to earlier filing on September 5, 1997 SEC file No.
2-94479 Exhibit 99.5F.
g. Investment Sub Advisory Agreement between Chubb America Fund,
Inc., Chubb Investment Advisory Corporation and J.P. Morgan
Investment Management Inc. for the Balanced Portfolio. Incorporated
by reference to earlier filing on September 5, 1997 SEC file No.
2-94479 Exhibit 99.5G.
C-3
<PAGE>
h. Investment Sub-Advisory Agreement among Chubb America Fund,
Inc., Chubb Investment Advisory Corporation, and Massachusetts
Financial Services Company with respect to the Emerging Growth
Portfolio and Money Market Portfolios. Incorporated by reference to
earlier filing on September 5, 1997 SEC file No. 2-94479 Exhibit 99.
5H.
i. Investment Sub-Advisory Agreement among Chubb America Fund,
Inc., Chubb Investment Advisory Corporation and Chubb Asset
Managers, Inc. for the Bond Portfolio. Incorporated by reference to
earlier filing on September 5, 1997 SEC file No. 2-94479 Exhibit
99.5I.
j. Investment Sub-Advisory Agreement between Jefferson Pilot
Variable Fund, Inc., Jefferson Pilot Investment Advisory Corporation
and Lombard International Portfolio Management Limited for the
International Equity Portfolio incorporated by reference to earlier
filing on March 2, 1998 SEC File No. 2-94479 Exhibit 99.5j.
k. Investment Sub-Advisory Agreement between Jefferson Pilot
Variable Fund, Inc., Jefferson Pilot Investment Advisory Corporation
and Strong Capital Management, Inc. for the Growth Portfolio
incorporated by reference to earlier filing on March 2, 1998 SEC
File No. 2-94479 Exhibit 99.5k.
l. Investment Sub Advisory Agreement between Jefferson Pilot
Variable Fund, Inc., Jefferson Pilot Variable Corporation and
Massachusetts Financial Service Company for the High Yield Bond
Portfolio incorporated by reference to earlier filing on March 2,
1998 SEC File No. 2-94479 Exhibit 99.5e.
6. Fund Distribution Agreement between Jefferson Pilot Variable
Fund, Inc. and Jefferson Pilot Variable Corporation incorporated by
reference to earlier filing on March 2, 1998 SEC File No. 2-94479
Exhibit 99.6.
C-4
<PAGE>
7. Not applicable.
8. a. Custodian Agreement between Chubb America Fund, Inc. and
Citibank, N.A.
b. Amendment to the Custodial Services Agreement between Chubb
America Fund, Inc. and Citibank, N.A.
c. Amendment No. 2 to Custodial Services Agreement between Chubb
America Fund, Inc. and Citibank, N.A.
9. Not applicable.
10. a. Opinion and Consent of Counsel as to the legality of the
securities being registered. Incorporated by reference to earlier
filing on September 5, 1997 SEC file No. 2-94479 Exhibit 99.10A of
N-lA Registration Statement.
11. Not applicable.
12. Not applicable.
C-5
<PAGE>
13. a. Stock Subscription Agreement between Chubb America Fund, Inc. and
The Volunteer State Life Insurance Company, incorporated by reference
to earlier filing on April 11, 1990, SEC File No. 2-94479, Exhibit
13(a) of N-lA Registration Statement.
b. Stock Subscription Agreement between Chubb America Fund, Inc. and
The Volunteer State Life Insurance Company, incorporated by reference
to earlier filing on April 11, 1990, SEC File No. 2-94479, Exhibit
13(b) of N-lA Registration Statement.
c. Stock Subscription Agreement between Chubb America Fund, Inc. and
Chubb Life Insurance Company of America, incorporated by reference to
earlier filing on February 28, 1992, SEC File No. 2-94479, Exhibit
13(c) of N-lA Registration Statement.
14. Not applicable.
27.1 FINANCIAL DATA SCHEDULES No. 2-94479
99.1 Consent of Ernst & Young L.L.P.
99.2 Schedule of Computation of Performance Quotation Incorporated by
reference to earlier filing on April 7, 1997 SEC File 2-94479 EXHIBIT
99.2 of NIA Registration Statement SEC File No. 2-94479
99.3 Diagram of Subsidiaries of the Jefferson-Pilot Corporation
99.4 Price Make-up Sheet Incorporated by reference to earlier filing on
April 7, 1997 SEC. File No. 2-94479 Exhibit 99.4 of NIA Registration
Statement SEC File No. 2-94479
C-6
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
Initially, shares of the Registrant were offered and sold only to The Volunteer
State Life Insurance Company ("Volunteer"), a stock life insurance company
organized under the laws of Tennessee. Effective July 1, 1991, Volunteer changed
its name to Chubb Life Insurance Company of America ("Chubb Life") and
re-domesticated to New Hampshire. Chubb Life will change its name to Jefferson
Pilot Financial Insurance Company ("J.P. Financial") on or before May 1, 1998.
The purchasers of variable life insurance contracts issued in connection with
separate accounts established by J.P. Financial or its affiliated insurance
companies will have the right to instruct J.P. Financial or its affiliated
insurance companies with respect to the voting of the Registrant's shares held
by such separate accounts on behalf of policyowners. The shares held by J.P.
Financial or its affiliated insurance companies, including shares for which no
voting instructions have been received, shares held in the separate accounts
representing charges imposed by J.P. Financial or its affiliated insurance
companies against the separate account and shares held by J.P. Financial or its
affiliated insurance companies that are not otherwise attributable to Policies,
will also be voted by J.P. Financial or its affiliated insurance companies in
proportion to instructions received from owners of Policies. J.P. Financial or
its affiliated insurance companies reserve the right to vote any or all such
shares at their discretion to the extent consistent with then current
interpretations of the Investment Company Act of 1940 and rules thereunder.
Subject to such voting instruction rights, J.P. Financial or its affiliated
insurance companies will directly control the Registrant.
Subsequently, shares of the Registrant may be offered and sold to other separate
accounts formed by J.P. Financial, its successors or assigns, and by other
insurance companies which, along with J.P. Financial, are subsidiaries of The
Jefferson Pilot Corporation, a North Carolina corporation, or subsidiaries of
such subsidiaries. In addition, shares of the Fund may be also offered and sold
to other separate accounts of non-affiliated insurance companies. A diagram of
the subsidiaries of The Jefferson Pilot Corporation is included in this filing.
C-7
<PAGE>
Item 26. Number of Holders of Securities
As of the effective date of this Registration Statement:
<TABLE>
<CAPTION>
(2)
(1) Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
World Growth Stock Portfolio Capital Stock; $.01 par value........ 2
International Equity Portfolio Capital Stock; $.01 par value...... 3
Money Market Portfolio Capital Stock; $.01 par value.............. 2
Global Hard Assets Portfolio Capital Stock; $.01 par value........ 1
High Yield Bond Portfolio Capital Stock; $.01 par value........... 3
Growth Portfolio Capital Stock; $.01 par value.................... 3
Domestic Growth Stock Portfolio Capital Stock; $.01 par value..... 2
Growth and Income Portfolio Capital Stock; $.01 par value......... 3
Capital Growth Portfolio Capital Stock; $.01 par value............ 3
Balanced Portfolio Capital Stock; $.01 par value.................. 2
Emerging Growth Portfolio Capital Stock; $.01 par value........... 3
</TABLE>
J.P. Financial has purchased 300,000 shares of capital stock of the Emerging
Growth Portfolio. J.P. Financial Separate Account A has purchased shares of each
Portfolio in the amounts allocated to each Portfolio by purchasers of Policies.
Item 27. Indemnification
Reference is made to Article VIII, Section 10 of the Registrant's Amended and
Restated Articles of Incorporation filed on April 11, 1990 as Exhibit 1 to the
Form N-lA Registration Statement and to Article V of the Registrant's By-Laws
filed herein as Exhibit 2 to this Registration Statement. The Amended and
Restated Articles of Incorporation provide that neither an officer nor director
of the Registrant will be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as an officer or director, except
to the extent such limitation of liability is not otherwise permitted by law.
The By-Laws provide that the Registrant will indemnify its directors and
officers to the extent permitted or required by Maryland law. A resolution of
the Board of Directors specifically approving payment or advancement of expenses
to an officer is required by the By-Laws. Indemnification may not be made if the
director or officer has incurred liability by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties in the conduct of
his/her office ("Disabling Conduct"). The means of determining whether
indemnification shall be made are (1) a final decision by a court or other body
before whom the proceeding is brought that the director or officer was not
liable by reason of Disabling Conduct, or (2) in the absence of such a decision,
a reasonable determination, based on a review of the facts, that the director or
officer was not
C-8
<PAGE>
liable by reason of Disabling Conduct. Such latter determination may be made
either by (a) vote of a majority of directors who are neither interested persons
(as defined in the Investment Company Act of 1940) nor parties to the proceeding
or (b) independent legal counsel in a written opinion. The advancement of legal
expenses may not occur unless the director or officer agrees to repay the
advance (if it is determined that the director or officer is not entitled to the
indemnification) and one of three other conditions is satisfied: (1) the
director or officer provides security for his/her agreement to repay, (2) the
Registrant is insured against loss by reason of lawful advances, or (3) the
directors who are not interested persons and are not parties to the proceedings,
or independent counsel in a written opinion, determine that there is reason to
believe that the director or officer will be found entitled to indemnification.
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Jefferson Pilot Investment Advisory was formed in 1984 and had not been
previously engaged in any other business. The other businesses, professions,
vocations and employment of a substantial nature of its directors and officers
during the past two years are as follows:
C-9
<PAGE>
<TABLE>
<CAPTION>
Name of Director Other Business,
or Officer of Jefferson Positions with Chubb Profession, Vocation or
Pilot Investment Employment During
Investment Advisory Advisory Past Two Years
- ------------------- -------- --------------
<S> <C> <C>
Ronald Angarella President and Director Senior Vice President,
Jefferson Pilot Financial;
President and
Director, Jefferson Pilot
Securities, and Hampshire
Funding, Inc.; formerly
Senior Vice President and
Director, Chubb
Investment Funds, Inc.
Ronald H. Emery Senior Vice President Senior Vice President and
and Director Controller, Jefferson
Pilot Financial
Shari J. Lease Secretary Vice President and Counsel,
Jefferson Pilot Financial;
formerly Secretary Chubb
Investment Funds, Inc.
and Chubb Series Trust
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
Other Business,
Name of Director Positions with Chubb Profession, Vocation or
or Officer of Chubb Investment Employment During
Investment Advisory Advisory Past Two Years
- ------------------- -------- --------------
<S> <C> <C>
John A. Weston Treasurer Assistant Vice President,
Mutual Fund Accounting
Officer, Jefferson Pilot
Financial; Treasurer,
Jefferson Pilot
Securities Corporation,
and Hampshire Funding,
Inc.; previously Financial
Reporting Officer, Chubb
Life, Treasurer Chubb
Investment Funds Inc. and
Chubb Series Trust.
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
Name of Director Positions with Chubb Other Business,
or Officer of Chubb Investment Profession, Vocation or
Investment Advisory Advisory Employment During
- ------------------- -------- Past Two Years
--------------
<S> <C> <C>
Carol R. Hardiman Assistant Vice Vice President of
President Jefferson Pilot Securities
and Hampshire Funding Inc.
</TABLE>
The directors, officers, employees and partners of the Sub-Investment Managers
have rendered investment advice and management during the past two years and
have not engaged in any other business of a substantial nature.
Item 29. Principal Underwriters
Jefferson Pilot Variable Corporation also distributes Chubb Separate Account A,
Colonial Separate Account B, Chubb Separate Account C, Colonial Separate Account
D, Alexander Hamilton Variable Annuity Separate Account and Jefferson Pilot
Separate Account A.
The names, principal business addresses, positions and offices with Jefferson
Pilot Variable Corporation, and positions with the Fund, of each director or
officer of Jefferson Pilot are:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ---------------- ---------------- ---------------
<S> <C> <C>
Ronald A. Angarella President and President and Director
One Granite Place Chairman
Concord NH 03301
David Booth Vice President, None
One Granite Place Marketing
Concord NH 03301
John A. Weston Treasurer Treasurer
One Granite Place
Concord NH 03301
Shari J. Lease Secretary Secretary
One Granite Place
Concord NH 03301
W. Thomas Boulter Assistant Vice President None
One Granite Place Compliance
Concord NH 03301
</TABLE>
Item 30. Location of Accounts and Records
The following entities prepare, maintain and preserve the records required by
Section 31(a) of the 1940 Act for the Registrant. These services are provided to
the Registrant through written agreements between the parties to the effect that
such services will be provided to the Registrant
C-12
<PAGE>
for such periods prescribed by the Rules and Regulations of the Securities and
Exchange Commission under the 1940 Act and such records will be surrendered
promptly on request:
Citibank, N.A., 111 Wall Street, New York, New York 10043; Chubb Asset Managers,
Inc., 15 Mountain View Road, Warren, New Jersey 07061; Van Eck Associates
Corporation, 99 Park Avenue, New York, New York 10016; Jefferson Pilot
Investment Advisory, One Granite Place, Concord, New Hampshire 03301; Pioneering
Management Corporation, 60 State Street, Boston, Massachusetts; Templeton,
Global Advisors, Inc., Lyford Cay, Nassau, Bahamas; Janus Capital Corporation,
100 Fillmore Street, Suite 300, Denver, Colorado 80206; Phoenix Investment
Counsel, Inc., One American Row, Hartford Connecticut 06115; Massachusetts
Financial Services Company, 500 Boylston Street, Boston, Massachusetts 02116;
and Jefferson Pilot Securities Corporation and Jefferson Pilot Variable
Corporation, One Granite Place, Concord, New Hampshire 03301.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Not applicable.
C-13
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Concord, and the State of New Hampshire on the
20th day of April, 1998 and the registrant certifies that this amendment meets
all the requirement for effectiveness under paragraph (b) of Rule 485.
By: /s/ Ronald Angarella
----------------------------------
Ronald Angarella
President
Each of the undersigned Officers and Directors of Jefferson Pilot Variable Fund,
Inc. (the "Fund") whose signatures appear below hereby makes, constitutes and
appoints Ronald Angarella, Shari Lease and Thomas H. Elwood and each of them
acting individually, his/her true and lawful attorneys with power to act without
any other and with full power of substitution, to execute, deliver and file in
each of the undersigned Officers and Directors capacity or capacities as shown
below, this Registration Statement and any and all documents in support of this
Registration Statement or supplement thereto, and any and all amendments,
including any and all post-effective amendments to the foregoing; and said
Officers and Directors hereby grant to said attorneys, and to any one or more of
them, full power and authority to do and perform each and every act and thing
whatsoever as said attorney or attorneys may deem necessary or advisable to
carry out fully the intent of this Power of Attorney to the same extent and with
the same effect as each of said Officers and Directors might or could do
personally in his/her capacity or capacities as aforesaid, and each of said
Officers and Directors ratifies, confirms and approves all acts and things which
said attorney or attorneys might do or cause to be done by virtue of this Power
of Attorney and his/her signature as the same as may be signed by said attorney
or attorneys, or any one or more of them to this Registration Statement and any
and all amendments thereto, including any and all post-effective amendments to
the foregoing.
C-14
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Ronald Angarella President, April 20, 1998
- ---------------------------- Principal
Ronald Angarella Executive
Officer, and
Director
/s/ John A. Weston Treasurer, Principal April 20, 1998
- ---------------------------- Financial Officer, and
John A. Weston, Principal Accounting
Officer
Director April 20, 1998
- ----------------------------
Michael D. Coughlin
* Director April 20, 1998
- ----------------------------
Elizabeth S. Hager
* Director April 20, 1998
- ----------------------------
Thomas D. Rath
Ronald Angarella
- ---------------------------
Ronald Angarella
Attorney In Fact
</TABLE>
C-15
<PAGE>
Exhibit Index
-------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedules -
<PAGE>
99.1 Consent of Ernst & Young L.L.P.
99.2 Schedule of Computation of Performance Quotation Incorporated by
reference to earlier filing on April 7, 1997 SEC File 2-94479
EXHIBIT 99.2 of NIA Registration Statement SEC File No. 2-94479
99.3 Diagram of Subsidiaries of the Jefferson-Pilot Corporation
Incorporated
99.4 Price Make-up Sheet Incorporated by reference to earlier filing on
April 7, 1997 SEC File No. 2-94479 Exhibit 99.4 of N1A Registration
Statement SEC File No. 2-94479.
99.8 Custodian Agreement between Chubb America Fund N/K/A Jefferson Pilot
Variable Fund Inc.
<PAGE>
Exhibit 1
---------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference of our report dated
February 13, 1998 in Post-Effective Amendment Number 23 to the Registration
Statement (Form N-1A No. 2-94479) of Chubb America Fund, Inc.
ERNST & YOUNG LLP
Boston, Massachusetts
April 17, 1998
<PAGE>
Exhibit 99.3
JEFFERSON-PILOT CORPORATION
CORPORATE ORGANIZATION CHART
A. Affiliates actually controlled
------------------------------
Jefferson-Pilot Corporation (North Carolina corp.)
Alexander Hamilton Life Insurance Company of America (Michigan
corp.)
AH (Michigan) Life Insurance Company (Michigan corp.)
Alexander Hamilton Capital Management, Inc. (Michigan
corp.)
Alexander Hamilton Variable Insurance Trust (Massachusetts
business trust)
First Alexander Hamilton Life Insurance Company (New York
corp.)
Chubb Life Insurance Company of America (New Hampshire corp.)
(name being changed effective May 1, 1998 to Jefferson Pilot
Financial Insurance Company) Chubb Colonial Life Insurance
Company (New Jersey corp.) (name being changed effective
May 1, 1998 to Jefferson Pilot LifeAmerica Insurance
Company) Chubb Life Insurance Agency of Massachusetts, Inc.
(Massachusetts corp.) Chubb Sovereign Life Insurance
Company (New Hampshire corp.) (to be sold or merged into
Chubb Life by June 30, 1998) Chubb America Service
Corporation (New Hampshire corp.)
GARCO Capital Corp. (Delaware corp.)
HARCO Capital Corp. (Delaware corp.)
Omega Jefferson Pilot Seguros de Vida S.A. (Argentina
corp.) (See note 2)
Jefferson Pilot Omega Seguros de Vida S.A.
(Uruguay corp.)
Hampshire Fund Inc. (New Hampshire corp.)
JP Investment Management Company (North Carolina corp.)
Jefferson-Pilot Capital Trust A (Delaware business trust)
Jefferson-Pilot Capital Trust B (Delaware business trust)
Jefferson-Pilot Communications Company (North Carolina corp.)
Jefferson-Pilot Communications Company of California (North
Carolina corp.)
San Diego Broadcasting Corporation (California corp.)
Jefferson-Pilot Communications Company of Virginia
(Virginia corp.)
Jefferson-Pilot Sports, Inc. (North Carolina corp.)
WCSC, Inc. (South Carolina corp.)
Tall Tower, Inc. (South Carolina corp.)
Jefferson-Pilot Health Care Delivery Systems, Inc. (North
Carolina corp.)
Community Choice of North Carolina, Inc. (North Carolina
corp.)
Medselect, Inc. (North Carolina corp.)
Jefferson Pilot Investment Advisory Corporation (Tennessee
corp.)
(formerly Chubb Investment Advisory Corporation)
Jefferson-Pilot Investments, Inc. (North Carolina corp.)
Hampshire Syndications, Inc. (New Hampshire corp.)
Jefferson Pilot Variable Corporation (North Carolina corp.)
(formerly Jefferson-Pilot Investor Services, Inc.)
Jefferson-Pilot Investor Services of Nevada, Inc. (Nevada
corp.)
Jefferson-Pilot Life Insurance Company (North Carolina corp.)
Jefferson Standard Life Insurance Company (North Carolina
corp.)
Jefferson-Pilot Property Insurance Company (North Carolina
corp.)
Jefferson Pilot Securities Corporation (New Hampshire corp.)
(formerly Chubb Securities Corporation)
Notes: (1) Each indentation reflects another tier of ownership. All entities
more than 50% owned are listed.
(2) The immediate parent owns 100% of the voting securities of each
entity except that HARCO owns 70% of Omega.
B. Affiliates not controlled but state Insurance Holding Company
-------------------------------------------------------------
Act definitions presume control starting at 10% ownership
---------------------------------------------------------
Jefferson-Pilot Life Insurance Company
Athens Newspapers, Inc., Class A Common, Georgia corp.,
40.0% owned
Tomco2 Equipment Company, Class A Common, Georgia corp.,
29.20% owned
<PAGE>
GARCO Capital Corp.
International Home Furnishing Center, Inc., Common, North
Carolina corp., 25.06% owned
Recent changes other than noted above:
Volunteer Garage Company, Inc. (Tennessee corp.) - liquidated 12/31/98; to be
dissolved
ChubbHealth Holdings, Inc. (New Hampshire corp.) - liquidated 12/31/98; to be
dissolved
<PAGE>
EXHIBIT 3
---------
U.S. INVESTMENT COMPANY
CUSTODIAL SERVICES AGREEMENT
AMONG
CITIBANK, N.A.,
CITICORP
AND
CHUBB AMERICA FUNDS
<PAGE>
________________________________________________________________________________
U.S. INVESTMENT COMPANY
CUSTODIAL SERVICES AGREEMENT
________________________________________________________________________________
CUSTODIAL SERVICES AGREEMENT dated as of December 1, 1997 among CITIBANK,
N.A., a national banking association having an office at 111 Wall Street, New
York, New York 10005 and acting through such office in New York (the "Bank"),
CITICORP, a corporation organized under the laws of the State of Delaware,
having an office at Citicorp Center, 153 East 53rd Street, New York, New York
10043 and CHUBB AMERICA FUNDS,*a Corporation organized under the laws of the
State of Maryland, having an office at One Granite Place, Concord, New Hampshire
(the "Fund").
WITNESSETH:
THAT WHEREAS, the Fund represents that it is a management investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act");
WHEREAS, the Fund further represents that it is duly incorporated, organized
or associated and in good standing under the laws of its state of incorporation,
organization or association and the consummation of transactions contemplated
hereby or directed by it hereunder will not violate any applicable laws,
regulations or orders;
WHEREAS, the Fund represents that it is authorized to (a) open and maintain
a custody account (the "Custody Account") with the Bank to hold certain property
("Property"), including but not limited to stocks, bonds or other securities
("Securities"), cash and other property owned or held by the Fund, (b) to enter
into this Agreement and (c) direct all actions and transactions contemplated
hereunder; and
WHEREAS, the Securities and Exchange Commission issued on June 19, 1995, and
may in the future issue, an order or orders (the "Exemptive Orders") which,
among other things, exempt certain indirect subsidiaries of Citicorp (the
"Exempt Subsidiaries") from the shareholders' equity requirements of Rule 17f-5
promulgated under the Investment Company Act;
NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the parties hereby agree as follows:
1. APPOINTMENT AND ACCEPTANCE
The Fund hereby appoints the Bank as custodian of the Property and as its
agent hereunder, and the Bank agrees to act as such upon the terms and
conditions hereinafter provided.
1
<PAGE>
2. DELIVERY; SAFEKEEPING
The Fund has heretofore delivered, or will deliver or cause to be delivered,
Property to the Bank, which Property the Bank agrees to keep safely' as
custodian for the Fund. The Bank shall not surrender possession of Property
except upon properly authorized Instructions (as hereinafter defined) of the
Fund or as may be required by due process of applicable law.
3. IDENTIFICATION AND SEGREGATION OF ASSETS
With respect to Property in the Custody Account:
(A) Except as otherwise provided in this Agreement, the Bank will separately
identify on its books as belonging to the Fund and, to the extent
practicable, segregate all Property held pursuant to this Agreement by the
Bank or any other entity authorized to hold Property in accordance with
Section 6 or 7 hereof.
(B) The Bank shall supply to the Fund from time to time as mutually agreed
upon a written statement with respect to all of the Property in the Custody
Account. In the event that the Fund does not inform the Bank in writing of
any exceptions or objections within thirty (30) day's after receipt of such
statement, the Fund shall be deemed to have approved such statement.
4. STANDARD OF CARE
(A) The Bank shall exercise the same standard of care that it exercises over
its own assets in the safekeeping, handling, servicing, and disposition of
the Property in accordance with this Agreement. The Bank will exercise the
due care expected of a professional custodian for hire with respect to the
Property in its possession or control.
(B) The Bank shall be responsible for the acts or omissions of any Exempt
Subsidiary acting as a foreign subcustodian pursuant to an Exemptive Order
to the same extent as if the act or omission of such Exempt Subsidiary were
that of the Bank.
(C) Except as otherwise provided above, the Bank shall use reasonable care
in selecting, and shall be responsible only for the proper selection of, any
foreign subcustodian or foreign depository.
(D) The Bank's delegation of duties to an Exempt Subsidiary shall not
relieve the Bank of any responsibility to the Fund for any loss due to such
delegation, except such losses or damages which may result from (i)
political risk, including, but not limited to losses resulting from exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities and (ii) other risk of loss
for which neither the Bank nor any foreign subcustodian would be liable
under Rule 17f-5 promulgated under the Investment Company Act.
2
<PAGE>
(E) In the event the Fund enters into triparty repurchase agreements
pursuant to which collateral therefor is to be held by a custodian other
than the Bank and the Fund instructs the Bank to deliver Property to such
custodian, the Bank shall be under no duty to determine whether such
custodian satisfies the requirements of Section 17(f) of the Investment
Company Act or the Rules promulgated thereunder. Citibank shall have no
further duties or obligations under this Agreement with respect to such
Property.
(F) The Bank is not under any duty to supervise the investments of the Fund,
or to advise or make any recommendation to the Fund with respect to the
purchase or sale of any of the Securities or the investment of any cash. The
Fund shall have the sole and exclusive responsibility for investment of
Property held hereunder.
5. PERFORMANCE BY THE BANK
(A) General
-------
The Bank's performance of its duties hereunder and the day-to-day operations
of the Custody Account shall be in accordance with written service standards
furnished to the Fund by the Bank from time to time. Such service standards,
as amended from time to time, are incorporated herein by reference.
(B) Receipt, Delivery and Disposal of Securities
--------------------------------------------
The Bank shall, or shall instruct any other entity authorized to hold
Property in accordance with Section 6 or 7 hereof to, receive or deliver
Securities and credit or debit the Fund's account, in accordance with
properly authorized Instructions from the Fund. The Bank or such entity
shall also receive in custody all stock dividends, rights and similar
securities issued in connection with Securities held hereunder, shall
surrender for payment, in a timely manner, all items maturing or called for
redemption and shall take such other action as the Fund may direct in
properly authorized Instructions.
(C) Registration
------------
Securities held hereunder may be registered in the name of the Bank, any
entity authorized to hold Property in accordance with Section 6 or 7 hereof,
or a nominee of the Bank or any such authorized entity, and the Fund shall
be informed upon request of all such registrations. Securities in registered
form will be transferred upon request of the Fund into such names or
registrations as it may specify in properly authorized Instructions.
(D) Cash Accounts
-------------
(i) All cash received or held by the Bank or by any entity authorized
to hold Property in accordance with Section 7 hereof as interest, dividends,
proceeds from transfer, and other payments for or with respect to the
Securities shall be (x) held in a cash account in accordance with properly'
authorized Instructions received by the Bank or such entity, or (y) if
specified in the Fund's Instructions, converted to or from U.S. dollars and
remitted to the Fund. The Fund shall bear any foreign exchange risk in
connection with any such conversion. In effecting any currency conversions
hereunder, the Bank or such entity may use any methods or agencies as it may
see fit including the Bank's or such entity's facilities at customary rates.
3
<PAGE>
(ii) The Fund agrees, with respect to all payments for purchases of
Securities to be deposited in the Custody Account, that funds for settlement
will be on deposit by the settlement date at the location of settlement, in
good available funds and in the currency of settlement. The Fund acknowledges
that nothing in this Agreement shall obligate the Bank to extend credit,
grant financial accommodation or otherwise advance moneys to the Fund for the
purpose of making any payments for purchases or part thereof or otherwise
carrying out any Instructions.
(iii) The Fund authorizes the Bank from time to time to cause the branch
of the Bank located in London, England ("Citibank London") to establish a
multicurrency cash account reflecting cash received by any Eligible Foreign
Custodian on the Fund's behalf. Citibank London will maintain such cash
account in accordance with the requirements of Section 7 hereof applicable to
an entity authorized to hold Property hereunder.
(E) Reports
-------
(i) If the Bank has in place a system for providing telecommunication
access or other means of electronic access by customers to the Bank's
reporting system for Property in the Custody Account, then, at the Fund's
election, the Bank shall provide the Fund with such instructions and
passwords as may be necessary in order for the Fund to have such electronic
access through the Fund's terminal device. Such electronic access shall be
restricted to information relating to the Custody Account. If electronic
access to such reporting system is requested by the Fund, the Fund agrees to
assume full responsibility for the consequences of such use, including any
misuse or unauthorized use of the terminal device, instructions or passwords
referred to above, and agrees to defend and indemnify the Bank and hold the
Bank harmless from and against any and all liabilities, losses, damages,
costs, counsel fees, and other expenses of every nature suffered or incurred
by the Bank by reason of or in connection with such use by the Fund or others
of such terminal device, unless such liabilities, losses, damages, costs,
counsel fees and other expenses can be shown to be the result of negligent or
wrongful acts of the Bank, the Bank's employees or the Bank's agents.
Further, in the event the Fund elects to have electronic access, the Bank
shall provide the Fund on each business day a report of the preceding
business day's transactions relating to the Custody Account and of the
closing or net balances of each business day. If the Fund does not choose to
have electronic access, the Bank shall provide the Fund with such reports of
transactions in the Custody' Account by such means as may' be mutually agreed
upon.
(ii) The Bank agrees to use reasonable efforts to furnish the Fund with
such information regarding Property held hereunder as the Fund may reasonably
request in connection with its complying with requests of any regulatory
authorities having jurisdiction over the Fund.
(iii) The Bank shall also, subject to restrictions under applicable law,
seek to obtain from any entity with which the Bank maintains the physical
possession of any of the Property in the Custody Account records of such
entity relating to the Property in the Custody Account as may be required by'
the Fund or its agents in connection with an internal examination by the Fund
of its own affairs. Upon a reasonable request from the Fund, the Bank shall
use its best efforts to furnish to the Fund reports (or portions thereof) of
the external auditors of each such entity relating directly to such entity's
system of internal accounting controls applicable to its duties under its
agreement with the Bank.
4
<PAGE>
(F) Access
------
During the Bank's regular banking hours and upon receipt of reasonable notice
from the Fund, any officer or employee of the Fund, any independent
accountant(s) selected by the Fund and any person designated by' any
regulatory authority having jurisdiction over the Fund shall be entitled to
examine on the Bank's premises, Property held by the Bank on its premises and
the Bank's records regarding Property held hereunder deposited with entities
authorized to hold Property in accordance with Section 6 or 7 hereof, but
only upon the Fund's furnishing the Bank with properly authorized
Instructions to that effect, provided, that such examination shall be
--------
consistent with the Bank's obligations of confidentiality to other parties.
The Bank's costs and expenses in facilitating such examinations shall be
borne by the Fund, provided that such costs and expenses shall not be deemed
--------
to include the Bank's costs in providing to the Fund: (i) the "single audit
report" of the independent certified public accountants engaged by the Bank
and (ii) such reports and documents as this Agreement contemplates that the
Bank shall furnish routinely to the Fund.
(G) Voting and other Action
-----------------------
(i) The Bank will transmit to the Fund upon receipt, and will instruct
any entities authorized to hold Property in accordance with Section 6 of 7
hereof to transmit to the Fund upon receipt, all financial reports,
stockholder communications, notices, proxies and proxy soliciting materials
received from issuers of the Securities, and all information relating to
exchange or tender offers received from offers with respect to the
Securities. Such proxies will be executed by the registered holder if other
than the Fund, but the manner in which Securities are to be voted will not be
indicated. Neither the Bank nor any' other entity holding Property hereunder
shall vote any of the Securities or authorize the voting of any Securities or
give any consent or take any other action with respect thereto, except as
otherwise provided herein.
(ii) In the event of tender offers, the Fund will hand deliver or
telecopy Instructions to the Bank as to the action to be taken with respect
thereto, designating such Instructions as being related to a tender offer.
The Fund shall hold the Bank harmless from any adverse consequences of the
Fund's use of any other method of transmitting Instructions relating to a
tender offer.
(iii) The Fund agrees that if it gives an Instruction for the
performance of an act on the last permissible date of a period established by
a tender offer or on the last permissible date for the performance of such
act, the Fund shall hold the Bank harmless from any adverse consequences in
connection with acting upon or failing to act upon such Instructions.
(iv) The Bank is authorized to accept and open on the Fund's behalf all
mail or communications relating to the Property received by the Bank or
directed in its care.
6. AUTHORIZED USE OF U.S. DEPOSITORIES
The Fund authorizes the Bank, for any Securities held hereunder, to use the
services of any United States securities depository permitted to perform
such services for registered investment companies and their custodians under
Rule 17f-4 promulgated under the Investment Company Act, including but not
limited to, The Depository Trust Company, the Federal Reserve Book Entry
System and Participants Trust Company ("U.S. Depositories"). The Bank will
deposit Securities held hereunder with a U.S. Depository only in an account
which holds assets of customers of the Bank.
5
<PAGE>
7. USE OF FOREIGN CUSTODIANS
(A) Authorization
-------------
(i) The Bank may cause Securities which are foreign securities within
the meaning of Rule 17f-5(c)(1) promulgated under the Investment Company Act
("Foreign Securities") and amounts of cash and cash equivalents reasonably
required to effect the Fund's Foreign Securities transactions ("Cash") in
the Custody Account to be held in such country or other jurisdiction as the
Fund shall direct in properly authorized Instructions.
(ii) Subject to prior approval by the Fund, the Bank may hold such
Foreign Securities and Cash in subcustody accounts, which shall be deemed
part of the Custody Account and which have been established by the Bank with
(x) branches of "Qualified U.S. Banks", as defined in Rule 17f-5(c)(3)
promulgated under the Investment Company Act ("Branches"), or (y) foreign
custodians which satisfy the provisions of Rule 17f-5(c)(2)(i) or (ii)
promulgated under the Investment Company Act, or Exempt Subsidiaries or
other foreign custodians ("Exempt Foreign Custodians") which are exempt from
such provisions under an Exemptive Order or any other order or release
issued by the Securities and Exchange Commission, respectively (such
Branches, Exempt Foreign Custodians and Exempt Subsidiaries, collectively,
the "Eligible Foreign Custodians").
(iii) Subject to prior approval by the Fund, the Bank or an Eligible
Foreign Custodian is authorized to hold Foreign Securities or the Fund in an
account with any foreign securities depository or foreign clearing agency
which in the Bank's judgment satisfies the provisions of Rule 17f-5(c)(iii)
or (iv) promulgated under the Investment Company Act, or which is exempt
from such provisions under an order, no-action letter or release issued by
the Securities and Exchange Commission ("Eligible Foreign Securities
Depository").
(iv) Any Foreign Securities or Cash held by an Eligible Foreign
Custodian or an Eligible Foreign Securities Depository, shall be subject to
applicable laws, regulations, restrictions, customs, procedures, and market
practices (i) to which such Eligible Foreign Custodian or Eligible Foreign
Securities Depository is subject, (ii) as exist in the country in which such
Foreign Securities and Cash is held, and (iii) of the country of the
currency in which the Property is denominated. In the event that local laws
or regulations to which an Eligible Foreign Custodian or Eligible Foreign
Securities Depository is subject change in a way that would prevent or limit
the performance of duties and obligations by the Eligible Foreign Custodian
or Foreign Securities Depository, such duties and obligations shall be
superseded and neither the Bank nor any other member of the Citicorp
organization shall be liable therefor or for any damages in any way
resulting from such prevented or limited performance. The Fund acknowledges
that, as is normally the case with respect to the deposits outside the
United States, deposits with Citibank London and any other entity authorized
to hold Property pursuant to the Agreement are not insured by the Federal
Deposit Insurance Corporation.
(B) Provision of Information Regarding Foreign Custodians and Securities
--------------------------------------------------------------------
Depositories
------------
(i) The Bank shall use its best efforts to assist the Fund in obtaining
the following:
(a) As to each country in which Property is held, information concerning
whether, and to what extent, applicable foreign law would restrict the
access afforded the Fund's independent public accountants to books and
records kept by a foreign custodian or foreign securities depository
used in that country;
6
<PAGE>
(b) As to each country in which Property is held, information concerning
whether, and to what extent, applicable foreign law would restrict the
Fund's ability to recover its assets in the event of the bankruptcy' of a
foreign custodian or foreign securities depository used in that country;
(c) As to each country in which Property is held, information concerning
whether, and to what extent, applicable foreign law would restrict the
Fund's ability to recover assets that are lost while under the control of
a foreign custodian or foreign securities depository used in that
country;
(d) As to each country in which Property is held, information concerning
whether under applicable foreign currency exchange regulations the Fund's
cash and cash equivalents held in that country are readily convertible to
U.S. dollars;
(e) Information relating to whether each foreign custodian or foreign
securities depository used would provide a level of safeguards for
maintaining the Fund's Securities not materially different from that
provided by the Bank in maintaining the Securities in the United States;
(f) Information concerning whether each foreign custodian or foreign
securities depository used has offices in the United States in order to
facilitate the assertion of jurisdiction over and enforcement of
judgments against such custodian or depository; and
(g) As to each foreign securities depository used, information concerning
the number of participants in, and operating history of, such depository.
(ii) During the term of this Agreement, the Bank shall use its best
efforts to provide the Fund with prompt notice of any material changes in
the facts or circumstances upon which any' of the foregoing information or
statements were based.
(iii) Notwithstanding any of the foregoing provisions of this subsection
(b) of this Section 7, the Bank's undertaking to assist the Fund in
obtaining the information referred to in this subsection (b) of the this
Section 7 shall neither increase the Bank's duty of care nor reduce the
Fund's responsibility to determine for itself the prudence of entrusting
its assets to any particular foreign custodian or foreign securities
depository.
(C) Segregation and Identification of Assets
----------------------------------------
The Bank will deposit Property of the Fund with an Eligible Foreign Custodian
only in an account which holds exclusively assets of customers of the Bank. In
the event that an Eligible Foreign Custodian is authorized to hold any of the
Foreign Securities placed in its care in an Eligible Foreign Securities
Depository pursuant to the provisions of subsection (A) of this Section 7, the
Bank will direct such Eligible Foreign Custodian to identify such Foreign
Securities on its books as being held for the account of the Bank as custodian
for its customers.
(D) Instructions to Eligible Foreign Custodians; Instructions to Eligible
---------------------------------------------------------------------
Foreign Securities Depositories
-------------------------------
Any Property in the Custody Account held by an Eligible Foreign Custodian will
be subject only to the instructions of the Bank or its agents; and any'
Foreign Securities held in an Eligible Foreign Securities
7
<PAGE>
Depository for the account of an Eligible Foreign Custodian will be subject
only to the instructions of such Eligible Foreign Custodian, as subcustodian
for the Bank.
(E) Contracts between the Bank and Exempt Subsidiaries.
--------------------------------------------------
The Bank's contract with each Exempt Subsidiary provides:
(i) an acknowledgment by such Exempt Subsidiary that it is acting as a
foreign custodian for U.S. Investment Companies or their custodians
pursuant to the terms of the applicable Exemptive Order; and
(ii) that the Fund is entitled to enforce the terms of the subcustodian
agreement between the Bank and the Exempt Subsidiary and is entitled to
seek relief directly against the Exempt Subsidiary.
(F) Contracts between the Bank and Exempt Foreign Custodians.
--------------------------------------------------------
The Bank's contract with each Exempt Foreign Custodian provides:
(i) an acknowledgment by such Exemptive Foreign Custodian that it is
acting as a foreign custodian for U.S. Investment Companies or their
custodians pursuant to the terms of the applicable order or release issued
by the Securities and Exchange Commission; and
(ii) a representation by such Exempt Foreign Custodian that it is, and
during the term of the contract will continue to be, in compliance with
the terms of the applicable order or release issued by the Securities and
Exchange Commission.
8. CITICORP GUARANTEE
Citicorp agrees that it shall be liable, in accordance with the terms of a
guarantee issued by it in compliance with the conditions of the Exemptive
Orders, for losses of Foreign Securities and cash incurred by the Fund
resulting from bankruptcy or insolvency of Exempt Subsidiaries operating
pursuant to the terms of the Exemptive Orders. Citicorp's obligations
hereunder, and under the guarantee shall terminate automatically with
respect to an Exempt Subsidiary at such time as such obligations are no
longer required by the conditions of the Exemptive Order. Obligations
arising prior to the date of such termination shall survive the termination.
8
<PAGE>
9. USE OF AGENTS
The Bank may, subject to applicable laws, rules and regulations, appoint
agents, whether in its own name or that of the Fund, to perform any of the
duties of the Bank hereunder, and the Bank may delegate to any such agent so
appointed any of its functions under this Agreement.
10. INSTRUCTIONS
(A) The Bank is authorized to rely and act upon instructions
("Instructions") in writing which are signed by persons ("Authorized
Persons") named in a list provided to the Bank from time to time, which list
must be certified by the Fund's Secretary or Assistant Secretary and include
authenticated specimen signatures of all Authorized Persons. Such list shall
separately designate those Authorized Persons who may authorize the
withdrawal of the Securities free of payment, those Authorized Persons who
may authorize the unconditional transfer of funds, and those Authorized
Persons who may give Instructions by electronic access.
(B) The Fund agrees that the Bank is authorized to rely and act upon such
Instructions in accordance with this Section 10 and the Funds Transfer
Procedures attached hereto and incorporated herein by reference (including
each Schedule A) to this Agreement and to debit or credit the applicable
account(s) of the Fund accordingly and that such Funds Transfer Procedures
and method(s) of transmission are commercially' reasonable.
(C) The Bank shall be entitled to rely upon the continued authority of any
Authorized Person to give Instructions until the Bank receives notice from
the Fund to the contrary; and the Bank shall be entitled to rely upon any
Instructions it believes in good faith to have been given by an Authorized
Person.
(D) The Bank is further authorized to rely upon any Instructions received
by' any other means and identified as having been given or authorized by'
any' Authorized Person, regardless of whether such Instructions shall in
fact have been authorized or given by any of such Authorized Persons,
provided that the Bank and the Fund shall have agreed upon the means of
--------
transmission and the method of identification for such Instructions.
Instructions received by any other means shall include but not be limited to
verbal Instructions only in connection with delivery against payment or
receipt against payment transactions and transfer from one account with the
Bank to another with the Bank and provided that such verbal Instructions are
promptly confirmed in writing by the Fund. Notwithstanding the foregoing, in
the event any such verbal Instructions are not subsequently confirmed in
writing, as provided above, the Fund agrees to hold the Bank harmless and
without liability for any claims or losses in connection with such verbal
Instructions.
(E) The Fund agrees to be bound by any Instruction, whether or not
authorized, given to the Bank in its name and accepted by the Bank in
accordance with the provisions hereof (including but not limited to the
Funds Transfer Procedures and Schedule A thereto) and further agrees to
indemnify and hold the Bank harmless from and against any loss, liability,
claim or expense (including legal fees and expenses) associated with the
Bank's acting upon such Instructions as provided herein, except such as may
arise from the Bank's own negligence, bad faith or willful misconduct.
(F) The Fund may appoint one or more investment managers ("Investment
Managers") with respect to the Custody Account. The Bank is authorized to
act upon Instructions received from any Investment Manager to
9
<PAGE>
the same extent that the Bank would act upon the Instructions of an
Authorized Person, provided that the Bank has received written evidence of
--------
the Investment Manager's appointment and written confirmation from the
Investment Manager evidencing acceptance of such appointment. The Investment
Manager shall provide to the Bank from time to time a list of persons
authorized to give Instructions on behalf of the Investment Manager. The
list must be certified by the Investment Manager's Secretary or Assistant
Secretary and include authenticated specimen signatures of such persons.
(G) If the Fund should choose to have telecommunication or other means of
electronic access to the Bank's reporting system for Property in the Custody
Account, pursuant to paragraph (E) of Section 5, the Bank is also authorized
to rely and act upon any Instructions received by it through a terminal
device, provided that such Instructions are accompanied by code words which
--------
the Bank has furnished to the Fund, or an Authorized Person, by any method
mutually agreed to by the Bank and the Fund, provided that the Bank has not
been notified by the Fund, or any such Authorized Person to cease to
recognize such code words, regardless of whether such Instructions shall in
fact have been given or authorized by the Fund or any such Authorized
Person..
11. THE FUND
(A) The Fund agrees that no printed material or other matter in any language
(including without limitation, prospectuses, statements of additional
information, notices to shareholders, annual reports and promotional
material) which mention the Bank's or Citicorp's name or the rights, powers
or duties of the custodian of the Fund shall be issued by the Fund or of
Citicorp or on the Fund's behalf unless the Bank shall first have given its
specific written consent thereto; provided, however, that no prior consent
shall be required if the only reference to the Bank's or Citicorp's name is
in identifying the Bank as the Fund's custodian.
(B) The Fund shall give prior notice to the Bank of any change in its place
of incorporation or organization, mailing address, or sponsors, or any
significant change in management, investment objectives, fees or redemption
rights.
(C) The Fund confirms that it is, and agrees that in the future it will be,
audited at least annually by an independent accounting firm and that it
mails, and in the future will mail, an audited financial report of the Fund
to its shareholders at least annually.
12. FEES AND EXPENSES
Fees and expenses for the services rendered under this Agreement shall be
mutually agreed upon by the parties in writing. The Bank shall be entitled
to debit the Custody Account for such fees and expenses.
10
<PAGE>
13. LIENS
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this Agreement.
If the Bank advances cash or securities to the Fund for any purpose or in
the event that the Bank or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with the
performance of its duties hereunder, except such as may arise from its or
its nominee s negligent action, negligent failure to act or willful
misconduct, any Property at any time held for the Custody Account shall be
security therefor and the Fund hereby grants a security interest therein to
the Bank. The Fund shall promptly reimburse the Bank for any such advance of
cash or securities or any such taxes, charges, expenses, assessments, claims
or liabilities upon request for payment, but should the Fund fail to so
reimburse the Bank, the Bank shall be entitled to dispose of such Property
to the extent necessary to obtain reimbursement. The Bank shall be entitled
to debit any account of the Fund with the Bank including, without
limitation, the Custody Account, in connection with any such advance and any
interest on such advance as the Bank deems reasonable.
14. TAX STATUS/WITHOLDING TAXES.
(A) The Fund's U.S. Tax Identification Number is: see attached. If the Fund
------------
does not have a U.S. Tax Identification Number, it will provide the Bank
with information as to its tax status as reasonably requested by the Bank
from time to time.
(B) The Fund may be required from time to time to file such proof of
taxpayer status or residence, to execute such certificates and to make such
representations and warranties, or to provide any other information or
documents, as the Bank and/or Eligible Foreign Custodian may deem necessary
or proper to fulfill the Bank's and/or Eligible Foreign Custodian's
obligations under applicable law. The Fund shall provide the Bank and/or
Eligible Foreign Custodian in a timely manner, with copies of originals if
necessary and appropriate, or any such proofs of residence, taxpayer status,
beneficial ownership and any other information or documents which the Bank
and/or a Eligible Foreign Custodian may reasonably request.
(C) If any tax or other governmental charge or assessment shall become
payable with respect to any payment due to the Fund ("Taxes"), such Taxes
shall be withheld from such payment in accordance with applicable law. The
Bank and/or the Eligible Foreign Custodian may withhold any interest, any
dividends or other distributions or securities receivable in respect of
Securities, proceeds from the sale or distributions of Securities
("Payments"), or may sell for the account of the Fund any part thereof or
all of the Securities, and may apply such Payment in satisfaction of such
Taxes, the Fund remaining liable for any deficiency. If any Taxes shall
become payable with respect to any payment made to the Fund by the Bank or a
Eligible Foreign Custodian in a prior year, the Bank and the Eligible
Foreign Custodian may withhold Payments in satisfaction of such prior year's
Taxes. The Fund shall indemnify and hold harmless the Bank and the Eligible
Foreign Custodian, its officers, employees, agents and affiliated companies
against any Taxes, penalties, additions to tax, and interest, and costs and
expenses related thereto, arising out of claims against the Bank and/or the
Eligible Foreign Custodian by any governmental authority for failure to
withhold Taxes or arising out of any reclaim or refund of taxes or other tax
benefit obtained by the Bank or the Eligible Foreign Custodian for the Fund.
(D) This section 14 shall survive the termination of this Agreement and
continue in force until the time for assessment of all Taxes expires.
11
<PAGE>
15. AMENDMENT
This Agreement may not be amended except by a written agreement among the
parties hereto.
16. TERMINATION
Either the Bank or the Fund may terminate this Agreement upon sixty (60)
days' written notice to the other parties.
17. CONFIDENTIALITY
Subject to the foregoing provisions of this Agreement and subject to any
applicable law, the Fund and the Bank shall each use best efforts to
maintain the confidentiality of matters concerning Property in the Custody
Account.
18. NOTICES
All notices and other communications hereunder, except for Instructions and
reports relating to the Property which are transmitted through the Bank's
electronic reporting system for Property in the Custody Account, shall be in
writing, telex or telecopy or, if verbal, shall be promptly confirmed in
writing, and shall be hand-delivered, telexed, telecopied or mailed by
prepaid first class mail (except that notice of termination, if mailed,
shall be by prepaid registered or certified mail) to each party at its
address set forth above, if to the Fund, marked "Attention see attached" and
------------
if to the Bank, marked "Citibank as Custodian for see attached", and if to
------------
Citicorp, marked "Attention of Office of Corporate Finance, Gregory C.
Ehlke, Vice President", or at such other address as either party may give
notice of to the other.
19. ASSIGNMENT
No party may assign, transfer or charge all or any of its rights and
benefits hereunder without the written consent of the other parties. Any
purported assignments made in contravention of this Section shall be null
and void and of no effect whatsoever.
20. GOVERNING LAW
This Agreement shall be governed by and construed according to the laws of
the State of New York and the parties agree that the courts of the State of
New York shall have jurisdiction to hear and determine any suit, action or
proceeding and to settle any disputes which may arise out to or in
connection with this Agreement, and, for such purposes, each irrevocably
submits to the non-exclusive jurisdiction of such courts.
21. MISCELLANEOUS
(A) This Agreement may be executed in several counterparts, each of which
shall be an original, but all of which shall constitute one and the same
instrument.
12
<PAGE>
(B) This Agreement contains the entire agreement among the parties relating
to custody of Property and supersedes all prior agreements on this subject.
(C) The captions of the various sections and subsections of this Agreement
have been inserted only for the purposes of convenience and shall not be
deemed in any manner to modify, explain, enlarge or restrict any of the
provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
CITIBANK, N.A. CITICORP
BY: _____________________________________ BY:__________________________________
NAME: ___________________________________ TITLE:_______________________________
TITLE: __________________________________ TITLE:_______________________________
CHUBB AMERICA FUNDS
BY: _____________________________________
NAME: ___________________________________
TITLE: __________________________________
13
<PAGE>
Chubb America Fund, Inc.
ATTACHMENT
----------
NAME TAX ID# (EIN)
---- -------------
Chubb America Fund, Inc. - High Yield Portfolio 02-0495075
Chubb America Fund, Inc. - Growth Portfolio 02-0495074
Chubb America Fund, Inc. - International Portfolio 02-0495076
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> WORLD GROWTH STOCK PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 97,443,710
<INVESTMENTS-AT-VALUE> 117,002,484
<RECEIVABLES> 423,151
<ASSETS-OTHER> 2,359,338
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,784,973
<PAYABLE-FOR-SECURITIES> 207,681
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,009,789
<TOTAL-LIABILITIES> 14,217,470
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85,542,397
<SHARES-COMMON-STOCK> 4,534,236
<SHARES-COMMON-PRIOR> 3,947,054
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (458,232)
<ACCUMULATED-NET-GAINS> 931,406
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,551,932
<NET-ASSETS> 105,567,503
<DIVIDEND-INCOME> 3,460,488
<INTEREST-INCOME> 440,374
<OTHER-INCOME> (271,945)
<EXPENSES-NET> 1,021,723
<NET-INVESTMENT-INCOME> 2,607,194
<REALIZED-GAINS-CURRENT> 12,217,581
<APPREC-INCREASE-CURRENT> 179,772
<NET-CHANGE-FROM-OPS> 15,004,547
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,503,403)
<DISTRIBUTIONS-OF-GAINS> (12,496,321)
<DISTRIBUTIONS-OTHER> (930,784)
<NUMBER-OF-SHARES-SOLD> 506,207
<NUMBER-OF-SHARES-REDEEMED> (310,198)
<SHARES-REINVESTED> 391,173
<NET-CHANGE-IN-ASSETS> 13,571,869
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,046,667
<OVERDISTRIB-NII-PRIOR> (490,907)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 843,936
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,021,723
<AVERAGE-NET-ASSETS> 111,876,388
<PER-SHARE-NAV-BEGIN> 23.31
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 2.97
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> (2.97)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 23.28
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 9,600,265
<INVESTMENTS-AT-VALUE> 9,600,265
<RECEIVABLES> 575,535
<ASSETS-OTHER> 241,630
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,417,430
<PAYABLE-FOR-SECURITIES> 498,778
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 483,198
<TOTAL-LIABILITIES> 981,976
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,436,362
<SHARES-COMMON-STOCK> 922,650
<SHARES-COMMON-PRIOR> 770,648
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (908)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9,435,454
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 538,304
<OTHER-INCOME> 0
<EXPENSES-NET> 60,871
<NET-INVESTMENT-INCOME> 477,433
<REALIZED-GAINS-CURRENT> 200
<APPREC-INCREASE-CURRENT> 1,235
<NET-CHANGE-FROM-OPS> 478,868
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (477,433)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,949,895
<NUMBER-OF-SHARES-REDEEMED> (1,835,753)
<SHARES-REINVESTED> 37,860
<NET-CHANGE-IN-ASSETS> 1,539,197
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (1,108)
<GROSS-ADVISORY-FEES> 50,381
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 60,871
<AVERAGE-NET-ASSETS> 10,076,208
<PER-SHARE-NAV-BEGIN> 10.25
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> GLOBAL HARD ASSETS PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,441,714
<INVESTMENTS-AT-VALUE> 5,082,507
<RECEIVABLES> 451,416
<ASSETS-OTHER> 246,484
<OTHER-ITEMS-ASSETS> 4,995
<TOTAL-ASSETS> 5,785,402
<PAYABLE-FOR-SECURITIES> 519,825
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 60,923
<TOTAL-LIABILITIES> 580,748
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,871,169
<SHARES-COMMON-STOCK> 583,765
<SHARES-COMMON-PRIOR> 454,995
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (17,094)
<ACCUMULATED-NET-GAINS> (290,214)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,359,207)
<NET-ASSETS> 5,204,654
<DIVIDEND-INCOME> 87,367
<INTEREST-INCOME> 31,785
<OTHER-INCOME> (4,466)
<EXPENSES-NET> 72,315
<NET-INVESTMENT-INCOME> 42,371
<REALIZED-GAINS-CURRENT> (83,859)
<APPREC-INCREASE-CURRENT> (3,627,821)
<NET-CHANGE-FROM-OPS> (3,669,309)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (52,180)
<DISTRIBUTIONS-OF-GAINS> (154,999)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 364,373
<NUMBER-OF-SHARES-REDEEMED> (257,709)
<SHARES-REINVESTED> 22,106
<NET-CHANGE-IN-ASSETS> (2,349,773)
<ACCUMULATED-NII-PRIOR> 105,318
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (135,784)
<GROSS-ADVISORY-FEES> 50,733
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 72,315
<AVERAGE-NET-ASSETS> 6,764,303
<PER-SHARE-NAV-BEGIN> 16.60
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (7.30)
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (0.31)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.92
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> DOMESTIC GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 69,552,238
<INVESTMENTS-AT-VALUE> 86,605,973
<RECEIVABLES> 97,205
<ASSETS-OTHER> 2,803,383
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,506,561
<PAYABLE-FOR-SECURITIES> 230,414
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,771,040
<TOTAL-LIABILITIES> 8,001,454
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 63,450,493
<SHARES-COMMON-STOCK> 3,989,371
<SHARES-COMMON-PRIOR> 3,418,546
<ACCUMULATED-NII-CURRENT> 23,265
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 977,614
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,053,735
<NET-ASSETS> 81,505,107
<DIVIDEND-INCOME> 884,475
<INTEREST-INCOME> 165,285
<OTHER-INCOME> 0
<EXPENSES-NET> 672,199
<NET-INVESTMENT-INCOME> 377,561
<REALIZED-GAINS-CURRENT> 8,322,941
<APPREC-INCREASE-CURRENT> 7,988,122
<NET-CHANGE-FROM-OPS> 16,668,624
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (377,561)
<DISTRIBUTIONS-OF-GAINS> (7,681,445)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 490,812
<NUMBER-OF-SHARES-REDEEMED> (360,301)
<SHARES-REINVESTED> 440,314
<NET-CHANGE-IN-ASSETS> 19,338,741
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 359,383
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 604,347
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 672,199
<AVERAGE-NET-ASSETS> 80,579,541
<PER-SHARE-NAV-BEGIN> 18.19
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 4.17
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (1.93)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.43
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> GROWTH AND INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 43,019,663
<INVESTMENTS-AT-VALUE> 45,333,613
<RECEIVABLES> 964,151
<ASSETS-OTHER> 4,788,020
<OTHER-ITEMS-ASSETS> 42
<TOTAL-ASSETS> 51,085,826
<PAYABLE-FOR-SECURITIES> 1,296,222
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,111,528
<TOTAL-LIABILITIES> 11,407,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,538,206
<SHARES-COMMON-STOCK> 2,319,530
<SHARES-COMMON-PRIOR> 1,402,464
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (174,080)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,313,950
<NET-ASSETS> 39,678,076
<DIVIDEND-INCOME> 539,554
<INTEREST-INCOME> 96,778
<OTHER-INCOME> (2,676)
<EXPENSES-NET> 287,121
<NET-INVESTMENT-INCOME> 346,535
<REALIZED-GAINS-CURRENT> 9,552,050
<APPREC-INCREASE-CURRENT> (1,869,319)
<NET-CHANGE-FROM-OPS> 8,029,266
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (346,535)
<DISTRIBUTIONS-OF-GAINS> (9,552,050)
<DISTRIBUTIONS-OTHER> (598,314)
<NUMBER-OF-SHARES-SOLD> 1,041,889
<NUMBER-OF-SHARES-REDEEMED> (216,351)
<SHARES-REINVESTED> 91,528
<NET-CHANGE-IN-ASSETS> 15,966,380
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 424,234
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 251,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 287,121
<AVERAGE-NET-ASSETS> 33,789,010
<PER-SHARE-NAV-BEGIN> 16.91
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 4.67
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (4.47)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.11
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> CAPITAL GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 98,828,249
<INVESTMENTS-AT-VALUE> 126,920,923
<RECEIVABLES> 626,953
<ASSETS-OTHER> 1,077,271
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 128,625,147
<PAYABLE-FOR-SECURITIES> 172,052
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,329,100
<TOTAL-LIABILITIES> 4,510,152
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 95,682,366
<SHARES-COMMON-STOCK> 5,846,944
<SHARES-COMMON-PRIOR> 4,103,167
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (147)
<ACCUMULATED-NET-GAINS> 349,140
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 28,092,636
<NET-ASSETS> 124,123,995
<DIVIDEND-INCOME> 973,129
<INTEREST-INCOME> 219,129
<OTHER-INCOME> (10,672)
<EXPENSES-NET> 1,157,744
<NET-INVESTMENT-INCOME> 23,842
<REALIZED-GAINS-CURRENT> 4,525,489
<APPREC-INCREASE-CURRENT> 21,641,483
<NET-CHANGE-FROM-OPS> 26,190,814
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21,994
<DISTRIBUTIONS-OF-GAINS> 4,529,357
<DISTRIBUTIONS-OTHER> 1,177,521
<NUMBER-OF-SHARES-SOLD> 1,194,055
<NUMBER-OF-SHARES-REDEEMED> (237,318)
<SHARES-REINVESTED> 787,041
<NET-CHANGE-IN-ASSETS> 53,291,833
<ACCUMULATED-NII-PRIOR> 1,873
<ACCUMULATED-GAINS-PRIOR> 1,526,661
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,064,671
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,157,744
<AVERAGE-NET-ASSETS> 106,467,108
<PER-SHARE-NAV-BEGIN> 17.26
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 4.99
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.23
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 24,859,420
<INVESTMENTS-AT-VALUE> 25,479,808
<RECEIVABLES> 351,953
<ASSETS-OTHER> 941,852
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,773,613
<PAYABLE-FOR-SECURITIES> 575,267
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,560,769
<TOTAL-LIABILITIES> 4,136,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,060,793
<SHARES-COMMON-STOCK> 1,926,775
<SHARES-COMMON-PRIOR> 1,513,162
<ACCUMULATED-NII-CURRENT> 778
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (44,382)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 620,388
<NET-ASSETS> 22,637,577
<DIVIDEND-INCOME> 158,227
<INTEREST-INCOME> 635,546
<OTHER-INCOME> (307)
<EXPENSES-NET> 216,260
<NET-INVESTMENT-INCOME> 577,206
<REALIZED-GAINS-CURRENT> 3,064,434
<APPREC-INCREASE-CURRENT> (330,942)
<NET-CHANGE-FROM-OPS> 3,310,698
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (577,375)
<DISTRIBUTIONS-OF-GAINS> (3,064,434)
<DISTRIBUTIONS-OTHER> (527,439)
<NUMBER-OF-SHARES-SOLD> 388,779
<NUMBER-OF-SHARES-REDEEMED> (152,011)
<SHARES-REINVESTED> 176,844
<NET-CHANGE-IN-ASSETS> 4,381,147
<ACCUMULATED-NII-PRIOR> 169
<ACCUMULATED-GAINS-PRIOR> 629,848
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 166,038
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 216,260
<AVERAGE-NET-ASSETS> 22,222,435
<PER-SHARE-NAV-BEGIN> 12.07
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> (0.30)
<PER-SHARE-DISTRIBUTIONS> (1.92)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.75
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> EMERGING GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 51,868,318
<INVESTMENTS-AT-VALUE> 59,156,233
<RECEIVABLES> 3,141,626
<ASSETS-OTHER> 91,714
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,389,573
<PAYABLE-FOR-SECURITIES> 3,300,421
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,859,977
<TOTAL-LIABILITIES> 6,160,398
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49,138,392
<SHARES-COMMON-STOCK> 3,218,595
<SHARES-COMMON-PRIOR> 2,021,917
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (197,132)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,287,915
<NET-ASSETS> 56,229,175
<DIVIDEND-INCOME> 62,528
<INTEREST-INCOME> 88,301
<OTHER-INCOME> (1,333)
<EXPENSES-NET> 383,069
<NET-INVESTMENT-INCOME> (233,573)
<REALIZED-GAINS-CURRENT> 3,355,964
<APPREC-INCREASE-CURRENT> 3,520,953
<NET-CHANGE-FROM-OPS> 6,643,344
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,816,095
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,772,417
<NUMBER-OF-SHARES-REDEEMED> (637,221)
<SHARES-REINVESTED> 61,482
<NET-CHANGE-IN-ASSETS> 25,435,145
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (166,640)
<GROSS-ADVISORY-FEES> 309,563
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 383,069
<AVERAGE-NET-ASSETS> 38,440,603
<PER-SHARE-NAV-BEGIN> 15.23
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 3.19
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.88)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.47
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
