As filed with the Securities and Exchange Commission on April 19, 1996
Registration No. 33-507
1940 Act File No.811-4419
- -------------------------------------------------------------------------------
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]
(Check appropriate box or boxes.)
WRL SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
201 HIGHLAND AVENUE, LARGO, FLORIDA 34640
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (813) 585-6565
THOMAS E. PIERPAN BOX 5068
CLEARWATER, FLORIDA 34618-5068
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective (check appropriate
box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485.
[X] on MAY 1, 1996 , pursuant to paragraph (b) of Rule 485.
___ 60 days after filing pursuant to paragraph (a) of Rule 485.
___ on___________________, pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2(a) under the Investment Company
Act of 1940 and filed a Rule 24f-2 Notice on February 28, 1996, for the fiscal
year ended December 31, 1995.
<PAGE>
WRL SERIES FUND, INC.
Growth Portfolio
Bond Portfolio
Global Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
<S> <C>
PART A.
Item 1. Cover Page ................................. Cover Page
Item 2. Synopsis ................................... Not Applicable
Item 3. Condensed Financial Information ............ Financial Highlights
Item 4. General Description of Registrant .......... The Growth Portfolio,
Bond Portfolio and
Global Portfolio and the
Fund; The Fund and its
Shares
Item 5. Management of the Fund ..................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance Not Applicable
Item 6. Capital Stock and other Securities ......... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ....... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................. Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................. Cover Page
Item 11. Table of Contents .......................... Table of Contents
Item 12. General Information and History ............ Not Applicable
</TABLE>
(i)
<PAGE>
WRL SERIES FUND, INC.
Growth Portfolio
Bond Portfolio
Global Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 13. Investment Objective and Policies .......... Investment Objectives
and Policies
Item 14. Management of the Registrant ............... Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities ...................... Purchase and
Redemption of
Shares
Item 16. Investment Advisory and Other
Services ................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ............................ and Brokerage
Item 18. Capital Stock and Other Securities ......... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................... Purchase and
Redemption of Shares
Item 20. Tax Status ................................. Taxes
Item 21. Underwriter ................................ Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ........................... Performance Related
Information
Item 23. Financial Statements ....................... Not Applicable (incorporated
by reference)
</TABLE>
(ii)
<PAGE>
WRL SERIES
Money Market Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
<S> <C>
PART A.
Item 1. Cover Page .................................... Cover Page
Item 2. Synopsis ...................................... Not Applicable
Item 3. Condensed Financial Information ............... Financial Highlights
Item 4. General Description of Registrant ............. The Money Market
Portfolio and the
Fund; The Fund and
its Shares
Item 5. Management of the Fund ........................ Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance ... Not Applicable
Item 6. Capital Stock and other Securities ............ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered .......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ...................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ..................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................... Cover Page
Item 11. Table of Contents ............................. Table of Contents
Item 12. General Information and History ............... Not Applicable
Item 13. Investment Objective and Policies ............. Investment Objective
and Policies
</TABLE>
(iii)
<PAGE>
WRL SERIES FUND, INC.
Money Market Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................. Management of the
Fund
Item 15. Control Persons and Principal
Holders of Securities......................... Purchase and
Redemption of Shares
Item 16. Investment Advisory and Other
Services ..................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices .............................. and Brokerage
Item 18. Capital Stock and Other Securities ........... Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ..................... of Shares
Item 20. Tax Status ................................... Taxes
Item 21. Underwriter .................................. Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ............................. Performance Related
Information
Item 23. Financial Statements ......................... Not Applicable
(incorporated
by reference)
</TABLE>
(iv)
<PAGE>
WRL SERIES FUND, INC.
Short-to-Intermediate Government Portfolio
Balanced Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
<S> <C>
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ....................................... Not Applicable
Item 3. Condensed Financial Information ................ Financial Highlights
Item 4. General Description of Registrant .............. The Short-to-Intermediate
Government Portfolio and
Balanced Portfolio and
the Fund; The Fund and its Shares
Item 5. Management of the Fund ......................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance .... Not Applicable
Item 6. Capital Stock and other Securities ............. The Fund and its Shares
Item 7. Purchase of Securities Being Offered ........... Purchase and Redemption
of Shares; Valuation of Shares
Item 8. Redemption or Repurchase ....................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ...................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ..................................... Cover Page
Item 11. Table of Contents .............................. Table of Contents
Item 12. General Information and History ................ Not Applicable
Item 13. Investment Objective and Policies .............. Investment Objective
and Policies
</TABLE>
(v)
<PAGE>
Cross Reference Sheet
WRL SERIES FUND, INC.
Short-to-Intermediate Government Portfolio
Balanced Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant .................... Management of the
Fund
Purchase and
Item 15. Control Persons and Principal Redemption
Holders of Securities ........................... of Shares
Item 16. Investment Advisory and Other Management of the
Services ........................................ Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices.................................. and Brokerage
Item 18. Capital Stock and Other Securities .............. Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ........................ of Shares
Item 20. Tax Status ...................................... Taxes
Item 21. Underwriter ..................................... Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ................................ Performance Related
Information
Item 23. Financial Statements ............................ Not Applicable
(incorporated by
reference)
</TABLE>
(vi)
<PAGE>
WRL SERIES FUND, INC.
Emerging Growth Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ................................... Cover Page
Item 2. Synopsis ..................................... Not Applicable
Item 3. Condensed Financial Information .............. Financial Highlights
Item 4. General Description of Registrant ............ The Emerging Growth
Portfolio and the
Fund; The Fund and
its Shares
Item 5. Management of the Fund ....................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance .. Not Applicable
Item 6. Capital Stock and other Securities ........... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ..................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------ OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................... Cover Page
Item 11. Table of Contents ............................ Table of Contents
Item 12. General Information and History .............. Not Applicable
Item 13. Investment Objective and Policies ............ Investment Objective
and Policies
</TABLE>
(vii)
<PAGE>
WRL SERIES FUND, INC.
Emerging Growth Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant .................. Management of the
Fund
Purchase and
Item 15. Control Persons and Principal Redemption
Holders of Securities ......................... of Shares
Item 16. Investment Advisory and Other Management of the
Services ...................................... Fund
Item 17. Brokerage Allocation and Portfolio Transaction
Other Practices ............................... and Brokerage
Item 18. Capital Stock and Other Securities ............ Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ...................... of Shares
Item 20. Tax Status .................................... Taxes
Item 21. Underwriter ................................... Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data............................... Performance Related
Information
Item 23. Financial Statements .......................... Not Applicable
(incorporated by
reference)
</TABLE>
(viii)
<PAGE>
WRL SERIES FUND, INC.
Equity-Income Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ................................... Cover Page
Item 2. Synopsis ..................................... Not Applicable
Item 3. Condensed Financial Information .............. Financial Highlights
Item 4. General Description of Registrant ............ The Equity-Income
Portfolio and the
Fund; The Fund and
its Shares
Item 5. Management of the Fund ....................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance .. Not Applicable
Item 6. Capital Stock and other Securities ........... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ..................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................... Cover Page
Item 11. Table of Contents ............................ Table of Contents
Item 12. General Information and History .............. Not Applicable
Item 13. Investment Objective and Policies ............ Investment Objective
and Policies
</TABLE>
(ix)
<PAGE>
WRL SERIES FUND, INC.
Equity-Income Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................. Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities ........................ Redemption of Shares
Item 16. Investment Advisory and Other
Services ..................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices............................... and Brokerage
Item 18. Capital Stock and Other Securities ........... Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ..................... of Shares
Item 20. Tax Status ................................... Taxes
Item 21. Underwriter .................................. Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ............................. Performance Related
Information
Item 23. Financial Statements ......................... Not Applicable
(incorporated by
reference)
</TABLE>
(x)
<PAGE>
WRL SERIES FUND, INC.
Aggressive Growth Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ................................... Cover Page
Item 2. Synopsis ..................................... Not Applicable
Item 3. Condensed Financial Information .............. Financial Highlights
Item 4. General Description of Registrant ............ The Aggressive Growth
Portfolio and the
Fund; The Fund and
its Shares
Item 5. Management of the Fund ....................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance .. Not Applicable
Item 6. Capital Stock and other Securities ........... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ..................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................... Cover Page
Item 11. Table of Contents ............................ Table of Contents
Item 12. General Information and History .............. Not Applicable
Item 13. Investment Objective and Policies ............ Investment Objective
and Policies
</TABLE>
(xi)
<PAGE>
WRL SERIES FUND, INC.
Aggressive Growth Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................. Management of the
Fund
Purchase and
Item 15. Control Persons and Principal Redemption
Holders of Securities ........................ of Shares
Item 16. Investment Advisory and Other
Services ..................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices .............................. and Brokerage
Item 18. Capital Stock and Other Securities ........... Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ..................... of Shares
Item 20. Tax Status ................................... Taxes
Item 21. Underwriter .................................. Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ............................. Performance Related
Information
Item 23. Financial Statements ......................... Not Applicable
(incorporated
by reference)
</TABLE>
(xii)
<PAGE>
WRL SERIES FUND, INC.
Tactical Asset Allocation Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................. Cover Page
Item 2. Synopsis .................................... Not Applicable
Item 3. Condensed Financial Information ............. Financial Highlights
Item 4. General Description of Registrant ........... The Tactical Asset Allocation
Portfolio and the Fund; The Fund and
its Shares
Item 5. Management of the Fund ...................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance . Not Applicable
Item 6. Capital Stock and other Securities .......... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ........ Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase .................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................. Cover Page
Item 11. Table of Contents ........................... Table of Contents
Item 12. General Information and History ............. Not Applicable
Item 13. Investment Objective and Policies ........... Investment Objective
and Policies
</TABLE>
(xiii)
<PAGE>
WRL SERIES FUND, INC.
Tactical Asset Allocation Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant .............. Management of the
Fund
Purchase and
Item 15. Control Persons and Principal Redemption
Holders of Securities ..................... of Shares
Item 16. Investment Advisory and Other
Services .................................. Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices............................ and Brokerage
Item 18. Capital Stock and Other Securities ........ Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered .................. of Shares
Item 20. Tax Status ................................ Taxes
Item 21. Underwriter ............................... Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data.... ...................... Performance Related
Information
Item 23. Financial Statements ...................... Not Applicable
(incorporated
by reference)
</TABLE>
(xiv)
<PAGE>
WRL SERIES FUND, INC.
Utility Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................... Cover Page
Item 2. Synopsis ...................................... Not Applicable
Item 3. Condensed Financial Information ............... Financial Highlights
Item 4. General Description of Registrant ............. The Utility Portfolio and
the Fund; The Fund and
its Shares
Item 5. Management of the Fund ........................ Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance ... Not Applicable
Item 6. Capital Stock and other Securities ............ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered .......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ...................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ..................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................... Cover Page
Item 11. Table of Contents ............................. Table of Contents
Item 12. General Information and History ............... Not Applicable
Item 13. Investment Objective and Policies ............. Investment Objective
and Policies
</TABLE>
(xv)
<PAGE>
WRL SERIES FUND, INC.
Utility Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant .............. Management of the
Fund
Purchase and
Item 15. Control Persons and Principal Redemption
Holders of Securities...................... of Shares
Item 16. Investment Advisory and Other Management
Services . ................................ Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ........................... and Brokerage
Item 18. Capital Stock and Other Securities ........ Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered .................. of Shares
Item 20. Tax Status ................................ Taxes
Item 21. Underwriter ............................... Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data .......................... Performance Related
Information
Item 23. Financial Statements ...................... Not Applicable
(incorporated by
reference)
</TABLE>
(xvi)
<PAGE>
WRL SERIES FUND, INC.
Value Equity Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ................................ Cover Page
Item 2. Synopsis .................................. Not Applicable
Item 3. Financial Highlights ...................... Not Applicable
Item 4. General Description of Registrant ......... The Value Equity Portfolio and the
Fund; The Fund and its Shares
Item 5. Management of the Fund .................... Management of the
Fund
Item 5A. Management's Discussion of
Fund Performance .......................... Not Applicable
Item 6. Capital Stock and other Securities ........ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ...... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase .................. Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ................. Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................ Cover Page
Item 11. Table of Contents ......................... Table of Contents
Item 12. General Information and History ........... Not Applicable
Item 13. Investment Objective and Policies ......... Investment Objective
and Policies
</TABLE>
(xvii)
<PAGE>
WRL SERIES FUND, INC.
Value Equity Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant .............. Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Redemption
Holders of Securities ..................... of Shares
Item 16. Investment Advisory and Other
Services .................................. Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ........................... and Brokerage
Item 18. Capital Stock and Other Securities ........ Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Redemption
Securities Being Offered .................. of Shares
Item 20. Tax Status ................................ Taxes
Item 21. Underwriter ............................... Not Applicable
Item 22. Calculations of Performance Data .......... Calculation of
Performance
Related Information
Item 23. Financial Statements ...................... Not Applicable
</TABLE>
(xviii)
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. Growth Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................. Cover Page
Item 2. Synopsis .................................... Not Applicable
Item 3. Condensed Financial Information ............. Financial Highlights
Item 4. General Description of Registrant ........... The C.A.S.E. Growth Portfolio and
the Fund; The Fund and its Shares
Item 5. Management of the Fund ...................... Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance . Not Applicable
Item 6. Capital Stock and other Securities .......... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ........ Purchase and Redemption of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase .................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................. Cover Page
Item 11. Table of Contents ........................... Table of Contents
</TABLE>
(xix)
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. Growth Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 12. General Information and History ............ Not Applicable
Item 13. Investment Objective and Policies .......... Investment Objective and Policies
Item 14. Management of the Registrant ............... Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities ...................... Redemption
of Shares
Item 16. Investment Advisory and Other
Services ................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ............................ and Brokerage
Item 18. Capital Stock and Other Securities ......... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered ................... Redemption of Shares
Item 20. Tax Status ................................. Taxes
Item 21. Underwriter ................................ Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ........................... Performance Related
Information
Item 23. Financial Statements ....................... Not Applicable
(incorporated by
reference)
</TABLE>
(xx)
<PAGE>
WRL SERIES FUND, INC.
Meridian/INVESCO Global Sector Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................... Cover Page
Item 2. Synopsis ...................................... Not Applicable
Item 3. Condensed Financial Information ............... Not Applicable
Item 4. General Description of Registrant ............. The Meridian/INVESCO Global Sector
Portfolio and the Fund; The Fund
and its Shares
Item 5. Management of the Fund ........................ Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance ... Not Applicable
Item 6. Capital Stock and other Securities ............ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered .......... Purchase and Redemption of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase ...................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ..................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................... Cover Page
Item 11. Table of Contents ............................. Table of Contents
</TABLE>
(xxi)
<PAGE>
WRL SERIES FUND, INC.
Meridian/INVESCO Global Sector Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 12. General Information and History ............ Not Applicable
Item 13. Investment Objective and Policies .......... Investment Objective and Policies
Item 14. Management of the Registrant ............... Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities ...................... Redemption
of Shares
Item 16. Investment Advisory and Other
Services ................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ............................ and Brokerage
Item 18. Capital Stock and Other Securities ......... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered ................... Redemption of Shares
Item 20. Tax Status ................................. Taxes
Item 21. Underwriter ................................ Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ........................... Performance Related
Information
Item 23. Financial Statements ....................... Not Applicable
</TABLE>
(xxii)
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. Quality Growth Portfolio
C.A.S.E. Growth & Income Portfolio
C.A.S.E. Growth Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................... Cover Page
Item 2. Synopsis ...................................... Not Applicable
Item 3. Condensed Financial Information ............... Financial Highlights
Item 4. General Description of Registrant ............. The C.A.S.E. Quality Growth Portfolio, C.A.S.E.
Growth & Income Portfolio and C.A.S.E. Growth
Portfolio and the Fund; The Fund and its
Shares
Item 5. Management of the Fund ........................ Management of the
Fund
Item 5.A. Management's Discussion of Fund Performance ... Not Applicable
Item 6. Capital Stock and other Securities ............ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered .......... Purchase and Redemption of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase ...................... Purchase and
Redemption of Shares
Item 9. Pending Legal Proceedings ..................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................... Cover Page
Item 11. Table of Contents ............................. Table of Contents
</TABLE>
(xxiii)
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. Quality Growth Portfolio
C.A.S.E. Growth & Income Portfolio
C.A.S.E. Growth Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 12. General Information and History ............. Not Applicable
Item 13. Investment Objective and Policies ........... Investment Objective and Policies
Item 14. Management of the Registrant ................ Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities ....................... Redemption
of Shares
Item 16. Investment Advisory and Other
Services .................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ............................. and Brokerage
Item 18. Capital Stock and Other Securities .......... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered .................... Redemption of Shares
Item 20. Tax Status .................................. Taxes
Item 21. Underwriter ................................. Not Applicable
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ............................ Performance Related
Information
Item 23. Financial Statements ........................ Not Applicable
(incorporated by
reference)
</TABLE>
(xxiv)
<PAGE>
WRL SERIES FUND, INC.
Meridian/INVESCO Global Sector Portfolio
Meridian/INVESCO US Sector Portfolio
Meridian/INVESCO Foreign Sector Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page .................................... Cover Page
Item 2. Synopsis ...................................... Not Applicable
Item 3. Financial Highlights .......................... Not Applicable
Item 4. General Description of Registrant ............. The Meridian/INVESCO
Global Sector Portfolio,
Meridian/INVESCO US
Sector Portfolio and
Meridian/INVESCO
Foreign Sector
Portfolio and The
Fund; The Fund and
its Shares
Item 5. Management of the Fund ........................ Management of the
Fund
Item 5A. Management's Discussion of
Fund Performance .............................. Not Applicable
Item 6. Capital Stock and other Securities ............ The Fund and its
Shares
Item 7. Purchase of Securities Being Offered .......... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ...................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ..................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page .................................... Cover Page
Item 11. Table of Contents ............................. Table of Contents
Item 12. General Information and History ............... Not Applicable
</TABLE>
(xxv)
<PAGE>
WRL SERIES FUND, INC.
Meridian/INVESCO Global Sector Portfolio
Meridian/INVESCO US Sector Portfolio
Meridian/INVESCO Foreign Sector Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 13. Investment Objective and Policies ............ Investment Objective
and Policies
Item 14. Management of the Registrant ................. Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities......................... Redemption of Shares
Item 16. Investment Advisory and Other
Services ..................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices .............................. and Brokerage
Item 18. Capital Stock and Other Securities ........... Not Applicable
Purchase and
Item 19. Purchase, Redemption and Pricing of Redemption
Securities Being Offered ..................... of Shares
Item 20. Tax Status ................................... Taxes
Item 21. Underwriter .................................. Not Applicable
Item 22. Calculations of Performance Data ............. Calculation of
Performance
Related Information
Item 23. Financial Statements ......................... Not Applicable
</TABLE>
(xxvi)
<PAGE>
WRL SERIES FUND, INC.
Janus Balanced Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ................................... Cover Page
Item 2. Synopsis ..................................... Not Applicable
Item 3. Financial Highlights ......................... Not Applicable
Item 4. General Description of Registrant ............ The Janus Balanced Portfolio and
The Fund; The Fund and its Shares
Item 5. Management of the Fund ....................... Management of the
Fund
Item 5A. Management's Discussion of
Fund Performance ............................. Not Applicable
Item 6. Capital Stock and other Securities ........... The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ......... Purchase and
Redemption of Shares;
Valuation of Shares
Item 8. Redemption or Repurchase ..................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings .................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ................................... Cover Page
Item 11. Table of Contents ............................ Table of Contents
Item 12. General Information and History .............. Not Applicable
Item 13. Investment Objective and Policies ............ Investment Objective
and Policies
</TABLE>
(xxvii)
<PAGE>
WRL SERIES FUND, INC.
Janus Balanced Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................. Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities......................... Redemption of Shares
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices .............................. and Brokerage
Item 18. Capital Stock and Other Securities ........... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered...................... Redemption of Shares
Item 20. Tax Status ................................... Taxes
Item 21. Underwriter .................................. Not Applicable
Item 22. Calculations of Performance Data ............. Calculation of
Performance
Related Information
Item 23. Financial Statements ......................... Not Applicable
</TABLE>
(xxviii)
<PAGE>
WRL SERIES FUND, INC.
Leisure Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ....................................... Not Applicable
Item 3. Financial Highlights ........................... Not Applicable
Item 4. General Description of Registrant .............. The Leisure Portfolio and The Fund;
The Fund and its Shares
Item 5. Management of the Fund ......................... Management of the
Fund
Item 5A. Management's Discussion of
Fund Performance ............................... Not Applicable
Item 6. Capital Stock and other Securities ............. The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ........... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ....................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ...................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ..................................... Cover Page
Item 11. Table of Contents .............................. Table of Contents
Item 12. General Information and History ................ Not Applicable
Item 13. Investment Objective and Policies .............. Investment Objective
and Policies
</TABLE>
(xxix)
<PAGE>
WRL SERIES FUND, INC.
Leisure Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................... Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities........................... Redemption of Shares
Item 16. Investment Advisory and Other
Services ....................................... Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ................................ and Brokerage
Item 18. Capital Stock and Other Securities ............. Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered........................ Redemption of Shares
Item 20. Tax Status ..................................... Taxes
Item 21. Underwriter .................................... Not Applicable
Item 22. Calculations of Performance Data ............... Calculation of
Performance
Related Information
Item 23. Financial Statements ........................... Not Applicable
</TABLE>
(xxx)
<PAGE>
WRL SERIES FUND, INC.
International Equity Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER PROSPECTUS
- ----------- ----------
PART A.
- -------
<S> <C>
Item 1. Cover Page ..................................... Cover Page
Item 2. Synopsis ....................................... Not Applicable
Item 3. Financial Highlights ........................... Not Applicable
Item 4. General Description of Registrant .............. The International Equity Portfolio
and The Fund; The Fund and its
Shares
Item 5. Management of the Fund ......................... Management of the
Fund
Item 5A. Management's Discussion of
Fund Performance ............................... Not Applicable
Item 6. Capital Stock and other Securities ............. The Fund and its
Shares
Item 7. Purchase of Securities Being Offered ........... Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ....................... Purchase and
Redemption of
Shares
Item 9. Pending Legal Proceedings ...................... Not Applicable
PART B. LOCATION IN STATEMENT
- ------- OF ADDITIONAL INFORMATION
-------------------------
Item 10. Cover Page ..................................... Cover Page
Item 11. Table of Contents .............................. Table of Contents
Item 12. General Information and History ................ Not Applicable
Item 13. Investment Objective and Policies .............. Investment Objective
and Policies
</TABLE>
(xxxi)
<PAGE>
WRL SERIES FUND, INC.
International Equity Portfolio
Cross Reference Sheet (Continued)
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN
ITEM NUMBER STATEMENT OF
- ----------- ADDITIONAL
INFORMATION
-----------
<S> <C>
Item 14. Management of the Registrant ................... Management of the
Fund
Item 15. Control Persons and Principal Purchase and
Holders of Securities........................... Redemption of Shares
Item 16. Investment Advisory and Other
Services........................................ Management of the
Fund
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices ................................ and Brokerage
Item 18. Capital Stock and Other Securities ............. Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and
Securities Being Offered........................ Redemption of Shares
Item 20. Tax Status ..................................... Taxes
Item 21. Underwriter .................................... Not Applicable
Item 22. Calculations of Performance Data ............... Calculation of
Performance
Related Information
Item 23. Financial Statements ........................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
BOND PORTFOLIO
GLOBAL PORTFOLIO
(REGISTERED TRADEMARK)
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO]
Telephone: (800) 851-9777
(813) 585-6565
[JANUS SYMBOL]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Growth Portfolio, Bond Portfolio and
Global Portfolio of the Fund (collectively, "Portfolios").
The investment objective of the Growth Portfolio is growth of capital. The
investment objective of the Bond Portfolio is to seek the highest possible
current income within the confines of the primary goal of insuring the
protection of capital by investing in debt securities issued by the U.S.
Government and its agencies and in medium to high-quality corporate debt
securities. The investment objective of the Global Portfolio is to seek
long-term growth of capital in a manner consistent with preservation of
capital, primarily through investments in common stocks of foreign and
domestic issuers. The Global Portfolio's investment in foreign securities
involves special risks that should be considered carefully before investing.
There can be, of course, no assurance that the Portfolios will achieve their
objectives.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Janus Capital Corporation serve as the investment adviser
("Investment Adviser") and the sub-adviser ("Sub-Adviser") respectively, to
the Portfolios. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolios bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
The Janus symbol is a registered mark of Janus Capital Corporation.
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
BOND PORTFOLIO
GLOBAL PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone (813) 585-6565
(800) 851-9777
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS ................... 1
<S> <C>
THE GROWTH PORTFOLIO, BOND PORTFOLIO
AND GLOBAL PORTFOLIO AND THE FUND ..... 4
MANAGEMENT OF THE FUND ................. 9
DIVIDENDS AND DISTRIBUTIONS ............ 10
TAXES .................................. 11
PURCHASE AND REDEMPTION OF SHARES ..... 11
VALUATION OF SHARES .................... 11
THE FUND AND ITS SHARES ................ 11
PERFORMANCE INFORMATION ................ 12
GENERAL INFORMATION .................... 13
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the tables below for a share of capital stock
outstanding of the Growth and Bond Portfolios, respectively, for the years
ended December 31, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988, and 1987
and for the period October 2, 1986, through December 31, 1986, is taken from
each Portfolio's audited financial statements incorporated by reference in
the Statement of Additional Information. The per share data and ratios for
the period October 2, 1986, through December 31, 1986, are not annualized
amounts or percentages. The Fund's Annual Report contains additional
performance information for each Portfolio. A copy of the Annual Report may
be obtained without charge upon request.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
------------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ......... $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97
Income From
Investment Operations
Net Investment Income ....... .26 .22 .28 .36 .27 .30 .19
Net Gains or Losses on
Securities (both realized
and unrealized) ............. 10.97 (2.41) .79 .52 10.75 (.33) 6.29
------------- ----------- ----------- ----------- ----------- ----------- ----------
Total Income (Loss) From
Investment Operations ....... 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48
------------- ----------- ----------- ----------- ----------- ----------- ----------
Less Distributions
Dividends (from net
investment income) .......... (.24) (.22) (.28) (.36) (.27) (.30) (.19)
Distributions (from
capital gains) .............. (3.14) .00 (.37) (.95) (1.97) (.04) (1.41)
------------- ----------- ----------- ----------- ----------- ----------- ----------
Distributions in excess
of capital gains ............ .00 (.03) .00 .00 .00 .00 .00
------------- ----------- ----------- ----------- ----------- ----------- ----------
Total Distributions ......... (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60)
------------- ----------- ----------- ----------- ----------- ----------- ----------
Net Asset Value,
End of Period ............... $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85
============= =========== =========== =========== =========== =========== ==========
Total Return* ............... 47.12% (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ............... $1,195,174 $814,383 $934,810 $711,422 $393,511 $129,057 $74,680
Ratio of Expenses to
Average Net Assets** ........ .86% .84% .87% .86% .90% 1.00% 1.00%
Ratio of Net Investment
Income to Average
Net Assets .................. .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18%
Portfolio Turnover Rate .... 130.48% 107.33% 77.91% 77.70% 7.27% 157.01% 123.80%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERIOD FROM
10/2/86 TO
1988 1987 12/31/86
---------- ---------- --------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ......... $11.14 $10.14 $10.00
Income From
Investment Operations
Net Investment Income ....... .31 .21 .00
Net Gains or Losses on
Securities (both realized
and unrealized) ............. 1.83 1.00 .14
---------- ---------- --------------
Total Income (Loss) From
Investment Operations ....... 2.14 1.21 .14
---------- ---------- --------------
Less Distributions
Dividends (from net
investment income) .......... (.31) (.21) .00
Distributions (from
capital gains) .............. .00 .00 .00
---------- ---------- --------------
Distributions in excess
of capital gains ............ .00 .00 .00
---------- ---------- --------------
Total Distributions ......... (.31) (.21) .00
---------- ---------- --------------
Net Asset Value,
End of Period ............... $12.97 $11.14 $10.14
========== ========== ==============
1
<PAGE>
PERIOD FROM
10/2/86 TO
1988 1987 12/31/86
---------- ---------- --------------
Total Return* ............... 18.62% 10.90% 5.84%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ............... $28,497 $15,815 $ 716
Ratio of Expenses to
Average Net Assets** ........ 1.00% 1.00% .19%
Ratio of Net Investment
Income to Average
Net Assets .................. 2.50% 1.84% .03%
Portfolio Turnover Rate .... 76.27% 222.13% 8.55%
</TABLE>
* THE TOTAL RETURN SHOWN FOR 1986 IS FOR THE THREE MONTH PERIOD ENDED DECEMBER
31, 1986 AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE PORTFOLIO REFLECTS
THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND INCLUDES REINVESTMENT
OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT REFLECT THE CHARGES AGAINST THE
CORRESPONDING SUB-ACCOUNTS OR THE CHARGES AND DEDUCTIONS UNDER THE
APPLICABLE POLICY OR ANNUITY CONTRACT.
** RATIO IS NOT ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIODS
ENDED DECEMBER 31, 1986, 1987, 1988 AND 1989 FOR WHICH PERIODS THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 6.76%,
1.90%, 1.49% AND 1.13%, RESPECTIVELY, ABSENT THE ADVISORY FEE WAIVER BY
WESTERN RESERVE LIFE.
1
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginningof Period .............. $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29
Income From
Investment Operations
Net Investment Income ........... .69 .63 .72 .75 .86 .79 .75
Net Gains or Losses on
Securities
(both realized and unrealized) . 1.55 (1.44) .95 .32 1.30 (.16) .78
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total Income (Loss) From
Investment Operations ........... 2.24 (.81) 1.67 1.07 2.16 .63 1.53
---------- ---------- ---------- ---------- ---------- ---------- ---------
Less Distributions
Dividends (from net
investment income) .............. (.69) (.63) (.72) (.75) (.86) (.79) (.75)
Distributions (from
capital gains) .................. .00 .00 (.89) (.32) (.03) .00 .00
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total Distributions ............. (.69) (.63) (1.61) (1.07) (.89) (.79) (.75)
---------- ---------- ---------- ---------- ---------- ---------- ---------
Net Asset Value,
End of Period ................... $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $10.07
========== ========== ========== ========== ========== ========== =========
Total Return* ................... 22.99% (6.94%) 13.38% 6.79% 18.85% 6.21% 14.65%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ................... $96,972 $71,064 $90,715 $56,820 $22,291 $10,143 $7,025
Ratio of Expenses to
Average Net Assets** ............ .61% .59% .64% .70% .70% .69% .70%
Ratio of Net Investment
Income to Average
Net Assets ...................... 6.45% 5.94% 5.94% 6.49% 8.02% 8.82% 8.60%
Portfolio Turnover Rate ......... 120.54% 131.73% 149.02% 80.73% 33.47% 18.09% 23.26%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERIOD FROM
10/2/86 TO
1988 1987 12/31/86
--------- ---------- --------------
<S> <C> <C> <C>
Net Asset Value,
Beginningof Period .............. $ 9.22 $ 10.28 $ 10.00
Income From
Investment Operations
Net Investment Income ........... .90 .25 .13
Net Gains or Losses on
Securities
(both realized and unrealized) . .07 (.89) .15
--------- ---------- --------------
Total Income (Loss) From
Investment Operations ........... .97 (.64) .28
--------- ---------- --------------
Less Distributions
Dividends (from net
investment income) .............. (.90) (.38) .00
Distributions (from
capital gains) .................. .00 (.04) .00
--------- ---------- --------------
Total Distributions ............. (.90) (.42) .00
--------- ---------- --------------
Net Asset Value,
End of Period ................... $ 9.29 $ 9.22 $ 10.28
========= ========== ==============
Total Return* ................... 7.73% (5.66%) 11.49%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ................... $3,372 $ 1,400 $ 127
Ratio of Expenses to
Average Net Assets** ............ .70% .86% .12%
Ratio of Net Investment
Income to Average
Net Assets ...................... 8.96% 7.17% 1.51%
Portfolio Turnover Rate ......... 21.54% 134.76% 123.68%
</TABLE>
2
<PAGE>
* THE TOTAL RETURN SHOWN FOR 1986 IS FOR THE THREE MONTH PERIOD ENDED DECEMBER
31, 1986 AND IS NOT ANNUALIZED. THE TOTAL RETURN OF THE PORTFOLIO REFLECTS
THE ADVISORY FEE AND ALL OTHER PORTFOLIO EXPENSES AND INCLUDES REINVESTMENT
OF DIVIDENDS AND CAPITAL GAINS; IT DOES NOT REFLECT THE CHARGES AGAINST THE
CORRESPONDING SUB-ACCOUNTS OR THE CHARGES AND DEDUCTIONS UNDER THE
APPLICABLE POLICY OR ANNUITY CONTRACT.
** RATIO IS NOT ANNUALIZED AND IS NET OF ADVISORY FEE WAIVER FOR THE PERIODS
ENDED DECEMBER 31, 1986, 1987, 1988, 1989 AND 1991, FOR WHICH PERIODS THE
ANNUALIZED RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 6.37%,
2.12%, 1.07%, 0.82% AND 0.82%, RESPECTIVELY, ABSENT THE ADVISORY FEE WAIVER
BY WESTERN RESERVE LIFE.
2
<PAGE>
GLOBAL PORTFOLIO
The information contained in the table below for a share of capital stock
outstanding of the Global Portfolio for the years ended December 31, 1995,
1994, and 1993, and for the period December 3, 1992 (commencement of
operations), through December 31, 1992, is taken from the Portfolio's audited
financial statements incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for this Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
PERIOD FROM
12/3/92 TO
1995 1994 1993 12/31/92
---------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 13.12 $ 13.62 $ 10.16 $ 10.00
Income From Investment Operations
Net Investment Income (Loss) ................................... .10 .10 .04 (.02)
Net Gains or Losses on Securities (both realized and unrealized) 2.91 .10 3.72 .18
----------- ----------- ---------- --------------
Total Income (Loss) From Investment Operations ................ 3.01 .20 3.76 .16
----------- ----------- ---------- --------------
Less Distributions
Dividends (from net investment income) ......................... .00 (.10) (.04) .00
Dividends in excess of net investment income ................... .00 (.01) .00 .00
Distributions (from capital gains) ............................. (.61) (.56) (.26) .00
Distributions in excess of capital gains ....................... .00 (.03) .00 .00
----------- ----------- ---------- --------------
Total Distributions .......................................... (.61) (.70) (.30) .00
----------- ----------- ---------- --------------
Net Asset Value, End of Period ................................... $ 15.52 $ 13.12 $ 13.62 $ 10.16
=========== =========== ========== ==============
Total Return* .................................................... 23.06% .25% 35.05% 1.62%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) .......................... $289,506 $261,778 $99,094 $ 508
Ratio of Expenses to Average Net Assets** ........................ .99% 1.01% 1.09% 2.48%
Ratio of Net Investment Income to Average Net Assets ............ .75% .73% .30% (2.23%)
Portfolio Turnover Rate .......................................... 130.60% 192.06% 79.93% .00%
<FN>
* The total return shown for 1992 is for the period from December 3, 1992
through December 31, 1992 and is not annualized. The total return of the
Portfolio reflects the advisory fee and all other Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect
the charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized for the period ended December 31, 1992.
</FN>
</TABLE>
3
<PAGE>
THE GROWTH PORTFOLIO, BOND PORTFOLIO
AND GLOBAL PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Growth Portfolio, Bond Portfolio and Global Portfolio are series
of the Fund. The Fund consists of several series, or separate investment
portfolios, which offer shares for investment by the Separate Accounts. This
Prospectus describes only the Growth, Bond and Global Portfolios.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The Portfolios' investment objectives and, unless otherwise noted, their
investment policies and techniques, may be changed by the Board of Directors
of the Fund without shareholder or Policyholder approval. A change in the
investment objectives or policies of a Portfolio may result in that Portfolio
having an investment objective or policies different from that which a
Policyholder deemed appropriate at the time of investment.
GROWTH PORTFOLIO
The investment objective of the Growth Portfolio is growth of capital.
The Growth Portfolio will invest substantially all of its assets in common
stocks when the portfolio manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected in industries and companies that the portfolio
manager believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser's analysis and selection process focuses
on stocks issued by companies with earnings growth potential. In particular,
the Growth Portfolio intends to buy stocks with earnings growth potential
that may not be recognized by the market. Securities are selected solely for
their growth potential; investment income is not a consideration.
The Growth Portfolio may invest up to 25% of its assets in foreign
securities, as described below and in the Statement of Additional
Information. (See "Foreign Investments and Special Risks", page 7.)
Although the Portfolio's assets will be invested primarily in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, high grade commercial paper, corporate bonds and debentures,
warrants, preferred stocks or certificates of deposit of commercial banks or
other debt securities when the Sub-Adviser perceives an opportunity for
capital growth from such securities, or so that the Portfolio may receive a
return on its uninvested cash. See the Statement of Additional Information
for further descriptions of such securities. In the latter case, investment
income may increase and may constitute a larger portion of the return on the
Portfolio's investments, and the Portfolio may not participate in market
advances or declines to the extent it would if the Portfolio were fully
invested in common stocks. The Portfolio may invest up to 25% of its assets
in securities of issuers in a single industry. The Growth Portfolio does not
currently hold or intend to invest more than 5% of its assets in
non-investment grade securities. See the Statement of Additional Information
for further information concerning such securities and bond ratings.
The Growth Portfolio may also invest in repurchase agreements and reverse
repurchase agreements. See "Certain Portfolio Policies and Techniques -
Repurchase and Reverse Repurchase Agreements", page 6.
BOND PORTFOLIO
The investment objective of the Bond Portfolio is to seek the highest
possible current income within the confines of the primary goal of insuring
the protection of capital by investing at least 65%, and generally a higher
percentage of its assets in debt securities issued by the U.S. Government and
its agencies and in medium to high-quality corporate debt securities.
Generally, the Portfolio invests in corporate debt securities having a
rating within the three highest grades as determined by Moody's Investors
Service, Inc. ("Moody's") (Aaa or Aa or A) or Standard & Poor's Corporation
("S&P") (AAA or AA or A). The Portfolio may, however, invest in debt
securities within the fourth highest grade as determined by Moody's (Baa) or
S&P (BBB), if the Sub-Adviser determines such investments meet the
Portfolio's investment objective and the debt securities' ratings are
supported by an internal credit review that the Sub-Adviser will conduct in
4
<PAGE>
each such instance. Bonds rated Baa by Moody's or BBB by S&P are considered
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security for such bonds 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. The Portfolio may invest up to 25% of its assets
in securities of issuers in a single industry. The Portfolio does not
currently hold or intend to invest more than 5% of its assets in
non-investment grade securities. See the Statement of Additional Information
for further information concerning such securities and bond ratings.
An increase in interest rates tends to reduce the market value of fixed
income investments, and a decline in interest rates tends to increase their
value. The Bond Portfolio's performance is, accordingly, quite sensitive to
market interest rate fluctuations. In order to take advantage of differences
in
4
<PAGE>
securities prices and yields, or of fluctuations in interest rates,
consistent with its investment objective, the Portfolio may trade for
short-term profits. The Portfolio may also invest in repurchase agreements
and reverse repurchase agreements. (See "Certain Portfolio Policies and
Techniques -Repurchase and Reverse Repurchase Agreements" and "Fixed-Income
Investing", page 6.)
The Portfolio may invest up to 25% of its assets in foreign securities, as
described in the Statement of Additional Information. (See "Foreign
Investments and Special Risks", page 7.)
GLOBAL PORTFOLIO
The investment objective of the Global Portfolio is long-term growth of
capital in a manner consistent with preservation of capital, primarily
through investments in common stocks of foreign and domestic issuers. The
Portfolio seeks to invest in companies and other organizations on a worldwide
basis, regardless of country of organization or place of principal business
activity, as well as domestic and foreign governments, government agencies
and other governmental entities. Realization of income is not a significant
investment consideration and any income realized on the Portfolio's
investments will, therefore, be incidental to the Portfolio's objective.
The Portfolio's assets will normally be invested in securities of issuers
from at least five different countries, including the United States, although
the Portfolio may at times, on a temporary basis as determined by the
Sub-Adviser, invest all its assets in fewer than five or even a single
country. When recommending allocations of the Portfolio's investments among
geographic regions and individual countries, and among assets denominated in
U.S. and foreign currencies, the Sub-Adviser considers various factors, such
as prospects for relative economic growth among countries, regions or
geographic areas; expected levels of inflation; government policies
influencing business conditions; and the outlook for currency relationships.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth in a manner consistent with preservation of
capital, changes in the Portfolio will generally be made whenever the
Sub-Adviser believes they are advisable, typically 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
ordinarily will be made without reference to the length of time a security
has been held, a significant number of short-term transactions may result.
The rate of portfolio turnover will not be a limiting factor when changes are
deemed to be appropriate. However, certain tax rules may restrict the
Portfolio's ability to sell securities in some circumstances when the
security has been held for an insufficient length of time. Increased
portfolio turnover necessarily results in correspondingly higher brokerage
costs for the Portfolio which are ultimately borne by the shareholders and
Policyholders.
The Sub-Adviser seeks to reduce the risks associated with these
considerations through diversification and active professional management.
The Portfolio is designed for long-term investors who can accept worldwide
investment risk. As with any long-term investment, the value of shares when
sold may be higher or lower than when purchased.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the portfolio manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected from industries and companies that the portfolio
manager believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate.
Although the assets of the Portfolio are ordinarily invested in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, corporate bonds and debentures, high-grade commercial paper,
preferred stocks, certificates of deposits or other securities of U.S.
issuers when the Sub-Adviser perceives an opportunity for capital growth from
such securities, or so that the Portfolio may receive a competitive return on
its uninvested cash. The Portfolio's investments in debt securities will be
made in securities of U.S. and foreign companies, the U.S. Government,
foreign governments, and U.S. and foreign governmental agencies and
instrumentalities and other governmental entities. The Portfolio may invest
up to 25% of its assets in securities of issuers in a single industry. The
Portfolio does not presently intend to invest more than 5% of its assets in
debt securities rated less than investment grade. When the Portfolio invests
in such securities, investment income may increase and may constitute a
larger portion of the return on the Portfolio's investments, and the
Portfolio may not participate in market advances or declines to the extent
that it would if it were fully invested. Although the Portfolio may engage in
repurchase agreements, it does not presently intend to do so.
BANK OBLIGATIONS. Because the Portfolio may invest (up to 100%) of its
5
<PAGE>
assets in bank obligations, an investment in the Portfolio should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
5
<PAGE>
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER DERIVATIVE INSTRUMENTS.
Subject to certain limitations, each Portfolio may engage in hedging
strategies involving futures contracts and related options, forward currency
contracts, and interest rate swaps, caps and floors. A put option gives the
holder the right, upon payment of a premium, to deliver a specified amount of
a security to the writer of the option on or before a fixed date at a
predetermined price. A call option gives the holder the right, upon payment
of a premium, to call upon the writer to deliver a specified amount of a
security on or before a fixed date at a predetermined price. A Portfolio may
engage in hedging strategies to attempt to reduce the overall level of
investment risk that normally would be expected to be associated with the
Portfolio's securities, and to attempt to protect the Portfolio against
market movements that might adversely affect the value of the Portfolio's
securities or the price of securities that the Portfolio is considering
purchasing. There can be no assurance, however, that the use of these
instruments by a Portfolio will assist it in achieving its investment
objective. Generally, the use of hedging strategies involves investment risks
and transaction costs to which the Portfolio would not be subject absent the
use of these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect a Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets using these
instruments, and such markets do not move in a direction adverse to the
Portfolio, the Portfolio could be left in a less favorable position than if
such hedging strategy had not been used. The use of hedging strategies
involves special risks, which include: 1) the risk that interest rates,
securities prices and currency markets will not move in the directions
anticipated; 2) imperfect correlation between the price of the hedging
instruments and movements in the prices of the securities or currencies
underlying the hedging transaction; 3) the fact that skills needed to use
these strategies are different from those needed to select portfolio
securities; 4) the possible absence of a liquid secondary market for any
particular instrument at any time; and 5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. The loss from
investing in futures is potentially unlimited. Further information on these
instruments, hedging strategies and risk considerations relating to them is
set forth in the Statement of Additional Information.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by a Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers
a method of earning income on idle cash. The repurchase agreement is
effectively secured by the value of the underlying security. A risk
associated with repurchase agreements is the failure of the seller to
repurchase the securities as agreed, which may cause a Portfolio to suffer a
loss if the market value of such securities declines before they can be
liquidated on the open market. In the event of bankruptcy or insolvency of
the seller, a Portfolio may encounter delays and incur costs in liquidating
the underlying security. Repurchase agreements not terminable within seven
days are considered illiquid securities and are subject to the limit stated
below.
When a Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities or to earn
additional income on portfolio securities, such as Treasury bills and notes.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations
in the value of its assets.
ILLIQUID SECURITIES. A Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions on resale.
However, certain restricted securities that are not registered for sale to
the general public but that can be resold to institutional investors ("Rule
144A Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of a Portfolio's investments could be impaired
if such trading does not further develop or declines. The Sub-Adviser will
determine the liquidity of Rule 144A Securities under guidelines approved by
the Board of Directors of the Fund.
WHEN-ISSUED SECURITIES. A Portfolio may purchase new issues of U.S.
Government securities on a "when-issued" basis. However, a Portfolio does
not intend to invest more than 20% of its assets in when-issued securities.
Because actual payment for and delivery of when-issued securities generally
take place 15 to 45 days after the purchase date, a Portfolio that purchases
when-issued securities bears the risk that interest rates and the security's
value at the time of delivery may have changed prior to delivery of the when-
issued security.
6
<PAGE>
FIXED-INCOME INVESTING. The performance of the Bond Portfolio and the debt
component of other Portfolios, depends primarily on interest rate changes,
the average weighted maturity of that Portfolio and the quality of securities
held. The debt components of a Portfolio will tend to decrease in value when
interest rates rise and increase when interest rates fall. The Portfolio may
vary the average maturities of its portfolio of debt securities based on the
portfolio manager's analysis of interest rate trends and other factors.
Generally, shorter term securities are less sensitive to interest rate
changes, but longer term securities offer higher yields. The Portfolio's
share price and yield will also depend, in part, on the quality of its
investment in debt securities. For example, while U.S. Government securities
generally are of high quality, government securities that are not backed by
the
6
<PAGE>
full faith and credit of the United States and other debt securities,
including those of foreign governments, may be affected by changes in the
creditworthiness of the issuer of the security. The extent that such changes
are reflected in a Portfolio's share price will depend upon the extent of the
Portfolio's investment in such securities.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES. The Growth and Bond
Portfolios may invest in zero coupon bonds or "strips." However, the Growth
Portfolio does not presently intend to do so, and the Bond Portfolio does not
intend to invest more than 10% of its assets in zero coupon bonds or
"strips". Zero coupon bonds do not make regular interest payments; rather,
they are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. "Strips"
are debt securities that are stripped of their interest after the securities
are issued, but otherwise are comparable to zero coupon bonds. The market
value of "strips" and zero coupon bonds generally fluctuates in response to
changes in interest rates to a greater degree than interest-paying securities
of comparable term and quality. The Portfolios may also invest in pay-in-kind
and step coupon securities. For a description of these securities, see "Zero
Coupon, Pay-In-Kind and Step Coupon Securities" in the Statement of
Additional Information.
SPECIAL SITUATIONS. The Portfolios may invest in "special situations" from
time to time. A special situation arises when, in the opinion of the
portfolio manager, the securities of a particular issuer will be recognized
and appreciate in value due to a specific development with respect to that
issuer. Developments creating a special situation might include, among
others, a new product or process, a management change, a technological
breakthrough, or other extraordinary corporate event, or differences in
market supply of and demand for the security. 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 impact of this strategy on a Portfolio will depend on a
Portfolio's size and the extent of the holdings of the special situation
issuer relative to its total assets.
LENDING AND BORROWING. Each Portfolio may lend its portfolio securities to
qualified institutional buyers for the purpose of realizing additional
income. Such loans must be continuously secured by liquid assets at least
equal to the market value of the securities loaned and may not together with
any other outstanding loans exceed 25% of a Portfolio's total assets.
Securities lending may involve some credit risk to a Portfolio if the
borrower defaults and the Portfolio is delayed or prevented from recovering
the collateral or is otherwise required to cover a transaction in the
security loaned. To secure borrowings, a Portfolio may not mortgage or pledge
its securities in amounts that exceed 15% of its net assets, at the time the
loan or borrowing is made. If portfolio securities are loaned, collateral
values will be continuously maintained at no less than 100% by
marking-to-market daily. If a material event is to be voted upon affecting a
Portfolio's investment in securities which are on loan, the Portfolio will
take such action as may be appropriate in order to vote its shares. The
Portfolios do not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment.
Each Portfolio may borrow money from or lend money to other funds that
permit such transactions and are also advised by the Sub-Adviser and if the
Portfolio seeks and obtains permission to do so from the SEC. There is no
assurance that such permission would be granted. The Portfolios may also
borrow money from banks. Any such loans or borrowings are expected to be
short-term in nature and used for temporary or emergency purposes, such as to
provide cash for redemptions, and will not exceed 25% of a Portfolio's net
assets at the time the loan or borrowing is made. In accordance with the
requirements of current California insurance regulations, each Portfolio will
restrict borrowings to no more than 10% of total assets, except that a
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 25% of total assets, each Portfolio may conduct
borrowings in accordance with such revised limits.
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Growth and Bond Portfolios may
each invest up to 25% of net assets at the time of purchase in the securities
of foreign issuers and obligors.
Investments may be made in both domestic and foreign companies. In
selecting investments in foreign securities for the Portfolios, the
Sub-Adviser considers a variety of factors which may include the political
and economic conditions in a country, the prospect for changes in the value
of its currency and the liquidity of the investment in that country's
securities markets. If appropriate and available, the Sub-Adviser may
purchase foreign securities through dollar-denominated American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other types of receipts or shares evidencing ownership
of the underlying foreign securities. While ADRs are dollar-denominated
receipts that are issued by domestic banks and traded in the United States,
7
<PAGE>
EDRs are typically issued by European banks, and GDRs may be issued by either
domestic or foreign banks. In addition, the Portfolios may invest indirectly
in foreign securities through foreign investment funds or trusts (including
passive foreign investment companies).
Investing in foreign securities involves opportunities and risks that
differ from those involved with investing solely in U.S. markets. The
Sub-Adviser believes that there is substantial opportunity from a
professionally managed portfolio of securities selected from the U.S. and
foreign markets. This
7
<PAGE>
investment framework seeks to take advantage of the investment opportunities
created by the global economy. Accordingly, an investor may benefit from
worldwide access to investment opportunities, without being constrained by
the location of a company's headquarters or the trading market for its
shares.
At the same time, these opportunities involve considerations and risks
that may not be encountered in U.S. investments. For example, changes in
currency exchange rates and exchange rate controls may affect the value of
foreign securities and the value of their dividend or interest payments, and
therefore a Portfolio's share prices and returns. Foreign companies generally
are subject to tax laws and accounting, auditing, and financial reporting
standards, practices and requirements that differ from those applicable to
U.S. companies. There is generally less publicly available information about
foreign companies and less securities and other governmental regulation and
supervision of foreign companies, stock exchanges and securities brokers and
dealers. A Portfolio may encounter difficulties in enforcing obligations in
foreign countries and negotiating favorable brokerage commission rates.
Securities of some foreign companies are less liquid, and their prices more
volatile, than securities of comparable U.S. companies. Security trading
practices abroad may offer less protection to investors such as the
Portfolios than the practices of domestic securities trading. Custody charges
are generally higher for foreign securities than for domestic securities.
The considerations noted above may be intensified in the case of
investments in developing countries or countries with limited or developing
capital markets. In particular, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers
located in developing countries may have limited marketability and may be
subject to more abrupt or erratic price fluctuations.
At times, securities held by a Portfolio may be listed on foreign
exchanges or traded in foreign markets which are open on days (such as
Saturday) when a Portfolio does not compute its price or accept orders for
the purchase, redemption or exchange of its shares. As a result, the net
asset value of a Portfolio may be significantly affected by trading on days
when shareholders cannot make transactions.
In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolios; political
or social instability or war; or diplomatic developments which could affect
U.S. investments in those countries. These latter considerations generally
are more of a concern in developing countries. Developing countries may also
have economies that are based on only a few industries. Although investments
in companies domiciled in developing countries may be subject to potentially
greater risk than investments in developed countries, the Portfolios will not
invest in any securities of issuers located in developing countries if the
Sub-Adviser determines these securities to be speculative.
To the extent a Portfolio invests in international foreign securities
markets, changes in the Portfolio's share price, particularly with respect to
the Global Portfolio, may have a reduced correlation with movements in the
U.S. markets. A Portfolio's share price reflects the movements of both the
prices of securities in which the Portfolio is invested and the currencies in
which the investments are denominated. Because the foreign securities in
which a Portfolio may invest include those that are denominated in foreign
currencies, or that otherwise have values that depend on the performance of
foreign currencies relative to the U.S. dollar, the relative strength of the
U.S. dollar may be, to that extent, an important factor in the performance of
a Portfolio. In an effort to manage exchange rate risks, a Portfolio may
enter into foreign currency exchange contracts (agreements to exchange one
currency for another at a future date). A Portfolio may exchange foreign
currencies for U.S. dollars and for other foreign currencies in the normal
course of business, and may purchase and sell currencies through currency
exchange contracts in order to fix a price for securities they have agreed to
buy or sell. The Sub-Adviser may also seek to hedge some or all of a
Portfolio's investments denominated in foreign currency against a decline in
the value of that currency relative to U.S. dollars, by entering into
contracts to exchange that currency for U.S. dollars (not exceeding the value
of the Portfolio's assets denominated in that currency), or by participating
in options or futures contracts with respect to such currency. This type of
hedge may minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in that currency.
A Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the
Sub-Adviser believed that a particular currency may decline relative to the
U.S. dollar, a Portfolio could enter into a contract to sell that currency (up
to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable
or to appreciate relative to the U.S. dollar. As a non-fundamental operating
policy, a Portfolio will not enter into currency exchange contracts if, as a
8
<PAGE>
result, more than 10% of its assets would be committed to the consummation of
cross-hedge contracts, and will instruct its custodian bank to set aside
high-grade, liquid assets to cover the Portfolio's purchase obligations under
this type of contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which a Portfolio would not be subject absent the use of
these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect a Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets using these
8
<PAGE>
hedging instruments, and such markets do not move in a direction adverse to
the Portfolio, the Portfolio could be left in a less favorable position than
if such hedging strategy had not been used. The use of hedging strategies
involves special risks, which include: 1) the risk that interest rates,
securities prices and currency markets will not move in the directions
anticipated; 2) imperfect correlation between the price of the hedging
instruments and movements in the prices of the securities or currencies
underlying the hedging transaction; 3) the fact that the skills needed to use
these strategies are different from those needed to select portfolio
securities; 4) the possible absence of a liquid secondary market for any
particular instrument at any time; and 5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. See the
Statement of Additional Information for further information concerning these
risks.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolios and as such may not
be changed without the approval of the shareholders of the Portfolios.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. See
"Financial Highlights" for each Portfolio on pages 1-3 for more information
on historical turnover rates. The Growth Portfolio and the Bond Portfolio may
engage frequently in short-term trading. High turnover and short-term trading
involve correspondingly greater commission expenses and transaction costs for
the Growth Portfolio and to a lesser extent, higher transaction costs for the
Bond Portfolio. The Global Portfolio's annual turnover is not expected to
exceed 200%, although the rate of portfolio turnover will not be a limiting
factor when changes are deemed to be appropriate. The Global Portfolio may
engage in short-term trading. High turnover and short-term trading involve
correspondingly higher transaction costs which are ultimately borne by the
Policyholders. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and Janus Capital Corporation as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund. These officers are employees of WRL and
receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly traded international insurance
group. The Investment Adviser has served as the investment adviser to the
Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in
accordance with the Portfolios' stated investment objectives and policies. As
compensation for its services to the Portfolios, the Investment Adviser
receives monthly compensation at the annual rate of 0.50% of the average
daily net assets of the Bond Portfolio, and 0.80% of the average daily net
assets of the Growth Portfolio and the Global Portfolio. For the fiscal year
ended December 31, 1995, the Fund paid the Investment Adviser advisory fees
of 0.50%, 0.80% and 0.80% of the average daily net assets of the Bond
Portfolio, the Growth Portfolio and the Global Portfolio, respectively.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolios the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolios' custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
9
<PAGE>
relations with the shareholders of the Portfolios, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolios, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolios'
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolios pay all other expenses incurred in their operations,
including general administrative expenses. Accounting services are provided
for the Portfolios by the Investment Adviser. The Investment Adviser has
voluntarily undertaken, until at least April 30, 1997, to pay expenses on
behalf of the Portfolios to
9
<PAGE>
the extent normal operating expenses (including investment advisory fees but
excluding interest, taxes, brokerage fees, commissions and extraordinary
charges) exceed, as a percentage of each Portfolio's average daily net
assets, 0.70% for the Bond Portfolio, 1.00% for the Growth Portfolio and
1.00% for the Global Portfolio. For the fiscal year ended December 31, 1995,
the actual expenses of the Bond Portfolio, the Growth Portfolio and the
Global Portfolio, as a percentage of each Portfolio's average daily net
assets, were .61%, .86% and .99%, respectively.
THE SUB-ADVISER
Janus Capital Corporation, located at 100 Fillmore Street, Denver,
Colorado 80206, serves as the Sub-Adviser to the Portfolios. Thomas H. Bailey
is the President of Janus Capital Corporation. Kansas City Southern
Industries, Inc. ("KCSI") owns 83% of the Sub-Adviser. The Sub-Adviser
provides investment management and related services to other mutual funds,
and individual, corporate, charitable and retirement accounts. See
"Management of the Fund-The Sub-Adviser" in the Statement of Additional
Information for a more detailed description of the previous experience of
Janus Capital Corporation as an investment adviser.
Scott W. Schoelzel has served as the portfolio manager for the Growth
Portfolio since January 2, 1996. Mr. Schoelzel also serves as co-portfolio
manager of other mutual funds. Mr. Schoelzel is a Vice President of the
Sub-Adviser, where he has been employed since 1994. From 1991 to 1993, Mr.
Schoelzel was a portfolio manager with Founders Asset Management, Denver,
Colorado. Prior to 1991, he was a general partner of Ivy Lane Investments,
Denver, Colorado (a real estate investment brokerage).
Ronald V. Speaker has served as portfolio manager for the Bond Portfolio
since 1988. Mr. Speaker also serves as portfolio manager of other mutual
funds. Mr. Speaker is also an Executive Vice President of Janus Investment
Fund and Janus Aspen Series and previously served as a securities analyst and
research associate of the Sub-Adviser (from 1986).
Helen Y. Hayes has served as portfolio manager of the Global Portfolio
since its inception. Ms. Hayes also serves as a portfolio manager of other
mutual funds. Ms. Hayes is also an Executive Vice President of Janus
Investment Fund and Janus Aspen Series. Ms. Hayes has been employed by the
Sub-Adviser since 1987.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for all Portfolios. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolios and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolios. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolios.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net
assets of the Growth and Global Portfolios and 0.25% of the average daily net
assets of the Bond Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolios. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. In addition, the Sub-Adviser may occasionally place portfolio business
with broker-dealers affiliated with the Investment Adviser or the
Sub-Adviser; in such event, the Sub-Adviser always will seek best execution.
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board of Directors, the Portfolios may
transfer uninvested cash balances on a daily basis into certain joint trading
accounts. Assets in the joint trading accounts are invested in money market
instruments. All other participants in the joint trading accounts will be
registered mutual funds or other clients of the Sub-Adviser or its
affiliates. The Portfolios will participate in the joint trading accounts
only to the extent that the investments of the joint trading accounts are
consistent with each Portfolio's investment policies and restrictions. The
Sub-Adviser anticipates that the investments made by a Portfolio through the
joint trading accounts will be at least as advantageous to that Portfolio as
if the Portfolio had made such investment directly. (See "The Sub-Adviser" in
the Statement of Additional Information.)
PERSONAL SECURITIES TRANSACTIONS
10
<PAGE>
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolios intend to distribute substantially all of the net
investment income, if any. Dividends from investment
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<PAGE>
income, if any, of the Portfolios normally are declared and paid
semi-annually in additional shares of the Portfolios at net asset value.
Distributions of net realized capital gains from security transactions and
net gains from foreign currency transactions, if any, normally are declared
and paid in additional shares of the Portfolios at the end of the fiscal
year.
TAXES
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, a Portfolio is not subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions, and net short-term capital gain, if any) and any net capital
gain (the excess of net long-term capital gain over net short-term capital
loss) that it distributes to its shareholders. It is each Portfolio's
intention to distribute all such income and gains.
Shares of each Portfolio are offered only to the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
each Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat each Portfolio's assets as assets of the
related separate account, these limitations also apply to each Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter or within 30 days
thereafter no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of a Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting a Portfolio and its shareholders; see
the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
A Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open.
11
<PAGE>
Net asset value of a Portfolio's share is computed by dividing the value
of the net assets of the Portfolio by the total number of shares outstanding
in the Portfolio.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolios are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis. (See the Statement of Additional
Information for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments
11
<PAGE>
received under the variable annuity contracts, it is conceivable that, in the
future, it may become disadvantageous for variable life insurance Separate
Accounts and variable annuity Separate Accounts to invest in the Fund
simultaneously. Neither the Life Companies nor the Fund currently foresees
any such disadvantages or conflicts, either to variable life insurance
policyowners or to variable annuity contractowners. After being notified by
one or more of the Life Companies of a potential or existing conflict, the
Fund's Board of Directors will determine if a material conflict exists and
what action, if any, should be taken in response thereto. Such action could
include the sale of Fund shares by one or more of the Separate Accounts,
which could have adverse consequences. Material conflicts could result from,
for example, (1) changes in state insurance laws, (2) changes in Federal
income tax laws, or (3) differences in voting instructions between those
given by variable life insurance policyowners and those given by variable
annuity contractowners. If the Board of Directors were to conclude that
separate funds should be established for variable life and variable annuity
separate accounts, the affected Life Companies will bear the attendant
expenses, but variable life insurance policyowners and variable annuity
contractowners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolios and of each of the other portfolios have equal
voting rights, except that only shares of a particular portfolio will be
entitled to vote on matters concerning only that portfolio. Each issued and
outstanding share of a Portfolio is entitled to one vote and to participate
equally in dividends and distributions declared by that Portfolio and, upon
liquidation or dissolution, to participate equally in the net assets of such
Portfolio remaining after satisfaction of outstanding liabilities. The shares
of each Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
held in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from Policyholders having voting interests in the
corresponding sub-accounts of the Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
If the 1940 Act or any regulation thereunder should be amended, or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of a Portfolio's total
return or yield in connection with the total return for the appropriate
Separate Account in advertisements, sales literature or reports to
Policyholders or to prospective investors. Total return and yield quotations
for a Portfolio reflect only the performance of a hypothetical investment in
the Portfolio during the particular time period shown as calculated based on
the historical performance of the Portfolio during that period. Such
quotations do not in any way indicate or project future performance.
Quotations of total return and yield will not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant, the prospectuses for the Policies
and the Annuity Contracts contain additional performance information.
The total return of a Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When a
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations for a Portfolio are expressed as average annual compound rates of
return for each of the periods quoted, reflect the deduction of a
proportionate share of a Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
returns for a Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
12
<PAGE>
The Fund may also, from time to time, compare performance information for
a Portfolio in advertisements, sales literature and reports to Policyholders
or to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research
12
<PAGE>
firms which rank mutual funds according to overall performance, investment
objective, and assets. Unmanaged indices may assume the reinvestment of
dividends but usually do not reflect any "deduction" for the expense of
operating or managing a fund. In connection with a ranking, a Portfolio will
also provide additional information with respect to the ranking, including
the particular category to which it relates, the number of funds in the
category, the period and criteria on which the ranking is based, and the
effect of fee waivers and/or expense reimbursements.
The Bond Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolios' performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Policyholders, at least semi-annually,
reports showing the Portfolios' compositions and other information. An annual
report containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolios'
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
13
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
BOND PORTFOLIO
GLOBAL PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00001-05/96
14
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
BOND PORTFOLIO
GLOBAL PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Growth Portfolio, Bond Portfolio and Global Portfolio of the WRL Series Fund,
Inc. (the "Fund"). A copy of the Prospectus may be obtained from the Fund by
writing the Fund at 201 Highland Avenue, Largo, Florida 34640 or by calling
the Fund at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
JANUS CAPITAL CORPORATION
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00002 - 05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF ADDITIONAL INFORMATION TO PAGE IN PROSPECTUS
------------------------------ --------------------------
<S> <C> <C>
Investment Objectives and Policies 1 4
Investment Restrictions 1 9
Repurchase and Reverse Repurchase Agreements 4 6
Lending of Portfolio Securities 5 7
Foreign Securities 5 7
Non-Investment Grade Debt Securities 6 4
Zero Coupon, Pay-In-Kind and Step Coupon
Securities 6 7
Investments in Futures, Options and Other
Derivative Instruments 7 6
Management of the Fund 18 9
Directors and Officers 18 9
The Investment Adviser 20 9
The Sub-Adviser 21 10
Joint Trading Accounts 22 10
Portfolio Transactions and Brokerage 23 10
Portfolio Turnover 23 9
Placement of Portfolio Brokerage 23 10
Purchase and Redemption of Shares 25 11
Offering of the Shares and Determination of
Offering Price 25 11
Net Asset Valuation 25 11
Investment Experience Information 26 12
Calculation of Performance Related Information 26 12
Total Return 26 12
Total Return for the Portfolios 26 12
Yield Quotations for the Bond Portfolio 27 13
Taxes 27 11
Capital Stock of the Fund 29 11
Registration Statement 29 N/A
Financial Statements 29 13
Appendix A - Description of Portfolio Securities A-1 6
Appendix B - Description of Selected Corporate Bond
and Commercial Paper Ratings B-1 4
</TABLE>
i
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Growth Portfolio, Bond Portfolio and
Global Portfolio (the "Portfolios") of the Fund are described in the
Portfolios' Prospectus. Shares of the Portfolios are sold only to the
separate accounts of Western Reserve Life Assurance Co. of Ohio ("WRL") and
to separate accounts of certain of its affiliated life insurance companies
(collectively, the "Separate Accounts") to fund the benefits under certain
variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolios' investment objectives and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objectives or policies of a
Portfolio may result in the Portfolios' having investment objectives or
policies different from those which a Policyholder deemed appropriate at the
time of investment.
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of a Portfolio are represented or (ii) more than 50% of the
outstanding shares of a Portfolio. A complete statement of all such
fundamental policies is set forth below.
INVESTMENT RESTRICTIONS - GROWTH AND BOND PORTFOLIOS
A Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by
physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) A Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the
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<PAGE>
meaning of Commodity Futures Trading Commission regulations if the aggregate
initial margin deposits and premiums required to establish positions in
futures contracts and related options that do not fall within the definition
of bona fide hedging transactions would exceed 5% of the fair market value of
the Portfolio's net assets, after taking into account unrealized profits and
losses on such contracts it has entered into and (ii) enter into any futures
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total
assets.
(B) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to provide
margin or guarantee positions in options, futures contracts, swaps, forward
contracts or other derivative instruments or the segregation of assets in
connection with such transactions;
(C) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short;
(D) A Portfolio may not purchase securities on margin, except that a
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, forward contracts, and other derivative instruments shall not be
deemed to constitute purchasing securities on margin;
(E) A Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the
value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets
will be reduced within three business days to the extent necessary to comply
with the 25% restriction. This policy shall not prohibit reverse repurchase
agreements or deposits of assets to provide margin or guarantee positions in
connection with transactions in options, future contracts, swaps, forward
contracts, or other derivative instruments or the segregation of assets in
connection with such transactions;
(F) A Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or any securities for which the
Board of Directors or the Sub-Adviser has made a determination of liquidity,
as permitted under the 1940 Act;
(G) A Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to money market funds or to securities received as dividends, through offers
to exchange, or as a result of reorganization, consolidation, or merger. If
the Portfolio invests in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money
market fund;
(H) A Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(I) A Portfolio may not invest more than 25% of a its net assets at the
time of purchase in the securities of foreign issuers and obligors;
(J) A Portfolio may not invest in companies for the purpose of exercising
control or management; and
(K) A Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
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INVESTMENT RESTRICTIONS - GLOBAL PORTFOLIO
The Portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of
any one issuer if immediately thereafter, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; or (b) with
respect to 100% of the Portfolio's assets, own more than either (i) 10% in
principal amount of the outstanding debt securities of an issuer, or (ii) 10%
of the outstanding voting securities of an issuer, except that such
restrictions shall not apply to Government securities, bank money market
instruments or bank repurchase agreements;
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances;
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities);
4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses;
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements);
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities;
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio's investment in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value;
(B) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish
positions in futures contracts and related options that do not fall within
the definition of bona fide hedging transactions would exceed 5% of the fair
market value of the Portfolio's net assets, after taking into account
unrealized profits and losses on such contracts it has entered into and (ii)
enter into any futures contracts or options on futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions and options on futures contracts would exceed the market
value of its total assets;
(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward
futures contracts are not deemed to constitute selling securities short;
(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, provided that margin
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payments and other deposits in connection with transactions in options,
futures, swaps and forward contracts shall not be deemed to constitute
purchasing securities on margin;
(E) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization;
(F) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or the
segregation of assets in connection with such contracts;
(G) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(H) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements or deposits of assets to margin or guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets
in connection with such contracts;
(I) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act;
(J) The Portfolio may not invest in companies for the purpose of
exercising control or management; and
(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of a
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending and use of options, futures, and other derivative instruments. In
addition, such laws and regulations may require the Portfolios' investments
in foreign securities to meet additional diversification and other
requirements.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
In a repurchase agreement, a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. A
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs
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to a Portfolio in connection with bankruptcy proceedings), it is the policy
of each Portfolio to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by the Sub-Adviser.
In a reverse repurchase agreement, a Portfolio sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and
agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, a Portfolio will maintain cash
and appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. A Portfolio will enter into reverse
repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
The Global Portfolio does not intend to invest more than 5% of its assets
in either repurchase or reverse repurchase agreements.
LENDING OF PORTFOLIO SECURITIES (ALL PORTFOLIOS)
Each of the Portfolios may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
of the Portfolios must receive any dividends or interest paid by the issuer
on such securities; (c) each of the Portfolios must have the right to call
the loan and obtain the securities loaned at any time upon notice of not more
than five business days, including the right to call the loan to permit
voting of the securities; and (d) each of the Portfolios must receive either
interest from the investment of collateral or a fixed fee from the borrower.
Securities loaned by a Portfolio remain subject to fluctuations in market
value. A Portfolio may pay reasonable finders, custodian and administrative
fees in connection with a loan. Securities lending, as with other extensions
of credit, involves the risk that the borrower may default. Although
securities loans will be fully collateralized at all times, a Portfolio may
experience delays in, or be prevented from, recovering the collateral. During
the period that the Portfolio seeks to enforce its rights against the
borrower, the collateral and the securities loaned remain subject to
fluctuations in market value. The Portfolios do not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote
if it were considered important with respect to the investment. A Portfolio
may also incur expenses in enforcing its rights. If a Portfolio has sold a
loaned security, it may not be able to settle the sale of the security and
may incur potential liability to the buyer of the security on loan for its
costs to cover the purchase.
FOREIGN SECURITIES (ALL PORTFOLIOS)
Subject to the limitations set forth above, the Portfolios may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It is possible that market quotations for foreign
securities will not be readily available. In such event, these securities
shall be valued at fair market value as determined in good faith by the
Sub-Adviser under the supervision of the Board of Directors. If it should
become necessary, a Portfolio could encounter greater difficulties in
invoking legal processes abroad than would be the case in the United States.
Transaction costs with respect to foreign securities may be higher. The
Investment Adviser and the Sub-Adviser will consider these and other factors
before investing in foreign securities. The Portfolios will not concentrate
their investments in any particular foreign country.
To the extent a Portfolio invests directly in foreign securities, a
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government
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regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
Portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different
time zones, a Portfolio may be required to complete a currency exchange
transaction at a time outside of normal business hours in the counterparty's
location, making prompt settlement of such transaction impossible. This
exposes a Portfolio to an increased risk that the counterparty will be unable
to settle the transaction. Although the counterparty in such transactions is
often a bank or other financial institution, currency transactions are
generally not covered by insurance otherwise applicable to such institutions.
For a more detailed explanation regarding the special risks of investing in
foreign securities, see "Foreign Investments and Special Risks" in the
Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES (ALL PORTFOLIOS)
A Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities")
as determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or
Standard & Poor's (BBB). The Portfolios do not currently intend to invest
more than 5% of their assets in non-investment grade securities. Before
investing in any lower-grade debt securities, the Sub-Adviser will determine
that such investments meet the Portfolios' investment objectives and that the
lower-grade debt securities' ratings are supported by an internal credit
review, which the Sub-Adviser will conduct in each such instance. Lower-grade
debt securities usually have moderate to poor protection of principal and
interest payments, have certain speculative characteristics (see Appendix B
for a description of the ratings), and involve greater risk of default or
price declines due to changes in the issuer's creditworthiness than
investment-grade debt securities. Because the market for lower-grade debt
securities may be thinner and less active than for investment grade debt
securities, there may be market price volatility for these securities and
limited liquidity in the resale market. Market prices for lower-grade debt
securities may decline significantly in periods of general economic
difficulty or rising interest rates. Through portfolio diversification and
credit analysis, investment risk can be reduced, although there can be no
assurance that losses will not occur.
The quality limitation set forth in a Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES (BOND AND GROWTH
PORTFOLIOS ONLY)
The Portfolios may invest in zero coupon, pay-in-kind and step coupon
securities. Zero coupon and step coupon bonds are issued and traded at a
discount from their face amounts. They do not entitle the holder to any
periodic payment of interest prior to maturity or prior to a specified date
when the securities begin paying current interest. The discount from the face
amount or par value depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. Pay-in-kind securities may pay all or a portion of
their interest or dividends in the form of additional securities. Because
they do not pay current income, the price of pay-in-kind securities can be
very volatile when interest rates change.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue
discount on such securities that accrues that year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal
Revenue Code, the Portfolios must distribute its investment company taxable
income, including the original issue discount accrued on zero coupon or step
coupon bonds. Because the Portfolios will not receive cash payments on a
current basis in respect of accrued original-issue discount on zero coupon
bonds or step coupon bonds during the period before interest payments begin,
in some years the Portfolios may have to distribute cash obtained from other
sources in order to satisfy the distribution requirements under the Code. The
Portfolios might obtain such cash from selling other portfolio holdings.
These actions are likely to reduce the assets to which the Portfolios'
expenses could be allocated and to reduce the rate of return for the
Portfolios. In some circumstances, such sales might be necessary in order to
satisfy cash
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distribution requirements even though investment considerations might
otherwise make it undesirable for the Portfolios to sell the securities at
the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having similar
maturities and credit quality.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS (ALL
PORTFOLIOS)
Futures Contracts. Each Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies or contracts based on financial indices including interest rates
or indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are
made through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a Portfolio
will incur brokerage fees when it buys or sells futures contract.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against
potential changes in interest or currency exchange rates or the price of a
security or a securities index which might correlate with or otherwise
adversely affect either the value of a Portfolio's securities or the prices
of securities which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the
delivery date. However, both the buyer and seller are required to deposit
"initial margin" for the benefit of an FCM when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be maintained in
cash or certain high-grade liquid assets. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments with an FCM to settle the change in value on a daily basis.
The party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments are similar to good faith
deposits or performance bonds, unlike margin extended by a securities broker,
and initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Portfolio's investment limitations.
In the event of the bankruptcy of an FCM that holds margin on behalf of a
Portfolio, the Portfolio may be entitled to return of margin owed to the
Portfolio only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser will attempt to minimize the risk by careful
monitoring of the creditworthiness of the FCM's with which the Portfolios do
business and by depositing margin payments in a segregated account with the
custodian when practical or otherwise required by law.
Although a Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost
of foregoing other potential investments.
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The acquisition or sale of a futures contract may occur, for example, when
a Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. The Portfolio also could seek
to protect against potential price declines by selling portfolio securities
and investing in money market instruments. However, since the futures market
is more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility
of having to buy equity securities at higher prices. This technique is
sometimes known as an anticipatory hedge. Since the fluctuations in the value
of futures contracts should be similar to those of equity securities, a
Portfolio could take advantage of the potential rise in the value of equity
securities without buying them until the market has stabilized. At that time,
the futures contracts could be liquidated and the Portfolio could buy equity
securities on the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to futures
contracts will consist of high-grade liquid assets from its portfolio in an
amount equal to the difference between the contract price and the aggregate
value of the initial and variation margin payments made by the Portfolio with
respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal price relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make or
take delivery, liquidity in the futures market could be reduced and prices in
the futures market distorted. Third, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of the foregoing distortions, a correct
forecast of general price trends by the Sub-Adviser still may not result in a
successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolios, if the Sub-Adviser's investment
judgment is incorrect, a Portfolio's overall performance could be worse than
if the Portfolio had not entered into futures contracts. For example, if a
Portfolio has attempted to hedge against the effects of a possible decrease
in prices of securities held by the Portfolio and prices increase instead,
the Portfolio may lose part or all of the benefit of the increased value of
these securities because of offsetting losses in the Portfolio's futures
positions. In addition, if the Portfolio has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may, but will not necessarily, be at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to a Portfolio will not match exactly the Portfolio's current or
potential investments. A Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests - for example, by hedging
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investments in portfolio securities with a futures contract based on a broad
index of securities - which involves a risk that the futures position will
not correlate precisely with the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the
underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between a Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. A Portfolio may buy or sell futures
contracts with a greater or lesser value than the securities it wishes to
hedge or is considering purchasing in order to attempt to compensate for
differences in historical volatility between the futures contract and the
securities, although this may not be successful in all cases. If price
changes in a Portfolio's futures positions are poorly correlated with its
other investments, its futures positions may fail to produce desired gains or
result in losses that are not offset by the gains in the Portfolio's other
investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached, it may be
impossible for a Portfolio to enter into new positions or close out existing
positions. If the secondary market for a futures contract is not liquid
because of price fluctuation limits or otherwise, a Portfolio may not be able
to promptly liquidate unfavorable positions and potentially be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets
held to cover its futures positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each of the Portfolios intend to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. Such guidelines presently require that to the extent that a
Portfolio enters into futures contracts or options on a futures position that
are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.
Options on Futures Contracts. A Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a
futures contract at a specified price on or before a specified date. The
purchase and writing of options on futures contracts is similar in some
respects to the purchase and writing of options on individual securities. See
"Options on Securities" on page 13. Transactions in options on futures
contracts will not be made for speculation and will not be made other than to
attempt to hedge against potential changes in interest rates or currency
exchange rates or the price of a security or a securities index which might
correlate with or otherwise adversely affect either the value of the
Portfolio's securities or the prices of securities which the Portfolio is
considering buying at a later date.
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The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at the expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract may
constitute a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option a Portfolio has written is exercised, the Portfolio will incur
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, a
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities.
For example, a Portfolio may buy a put option on a futures contract to
attempt to hedge the Portfolio's securities against the risk of falling
prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs.
In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
Forward Contracts. Each Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed
price (which may be in U.S. dollars or a foreign currency) at a future date
which is individually negotiated between currency traders and their
customers. A Portfolio may invest in forward currency contracts with stated
contract values of up to the value of the Portfolio's assets.
A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell
a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward currency
contract to sell an amount of that foreign currency (or a proxy currency
whose performance is expected to replicate the performance of that currency)
for U.S. dollars approximating the value of some or all of the portfolio
securities denominated in that currency (not exceeding the value of the
Portfolio's assets denominated in that currency) or by participating in
options or futures contracts with respect to the currency, or, when the
Sub-Adviser believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, the Portfolios may enter into a forward currency
contract to buy that foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge seeks to minimize the effect of
currency appreciation as well as depreciation, but does not protect against a
decline in the security's value relative to other securities denominated in
the foreign currency.
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A Portfolio also may enter into a forward currency contract with respect
to a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, a
Portfolio could enter into a contract to sell that currency or a proxy
currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting the
Portfolio's currency exposure from one foreign 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 to the Portfolio if
the Sub-Adviser's projection of future exchange rates is inaccurate.
A Portfolio also may enter into forward contracts to buy or sell at a
later date instruments in which a Portfolio may invest directly or on
financial indices based on those instruments. The market for those types of
forward contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the
Fund's custodian will place cash or high-grade liquid assets in a segregated
account of a Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in
the segregated account declines, additional cash or high-grade liquid assets
will be placed in the account on a daily basis so that the value of the
account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of
the segregated account, a Portfolio may buy call options permitting the
Portfolio to buy the amount of foreign currency subject to the hedging
transaction by a forward sale contract or the Portfolio may buy put options
permitting the Portfolio to sell the amount of foreign currency subject to a
forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event a Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unforeseen changes in currency prices may
result in poorer overall performance for a Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent
value of the proceeds of or rates of return on the Portfolio's foreign
currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedging transaction generally
will not be precise. In addition, a Portfolio may not always be able to enter
into forward contracts at attractive prices and accordingly may be limited in
its ability to use these contracts in seeking to hedge the Portfolio's
assets.
Also, with regard to a Portfolio's use of cross-hedging transactions,
there can be no assurance that historical correlations between the movement
of certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are subject of the cross-
hedging transaction are denominated.
Options on Foreign Currencies. A Portfolio may buy put and call options
and may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which
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futures contracts or forward contracts on foreign currencies may be utilized.
For example, a decline in the U.S. dollar value of a foreign currency in
which portfolio securities are denominated will reduce the U.S. 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, a Portfolio may buy put options on the foreign
currency. If the value of the currency declines, the Portfolio will have the
right to sell such currency for a fixed amount in U.S. dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to a
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to a Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs.
Each of the Portfolios may write options on foreign currencies for the
same types of hedging purposes. For example, in attempting to hedge against a
potential decline in the U.S. dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates, a Portfolio could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities will be offset
by the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. 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 the Portfolio
to hedge the increased cost up to the amount of premium. 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
received, and only if exchange rates move in the expected direction. If that
does not occur, the option may be exercised and the Portfolio would be
required to buy 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 lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
Each of the Portfolios may write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign
currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other foreign currency held in its portfolio. A call option is
also covered if the Portfolio has a call on the same foreign currency and in
the same principal amount as the call written if the exercise price of the
call held (i) is equal to or less than the exercise price of the call written
or (ii) is greater than the exercise price of the call written, and if the
difference is maintained by the Portfolio in cash or high-grade liquid assets
in a segregated account with the Fund's custodian.
Each of the Portfolios may also write call options on foreign currencies
for cross-hedging purposes that may not be deemed to be covered. A call
option on a foreign currency is for cross-hedging purposes if it is not
covered but is designed to provide a hedge against a decline due to an
adverse change in the exchange rate in the U.S. dollar value of a security
which the Portfolio owns or has the right to acquire and which is denominated
in the currency underlying the option. In such circumstances, the Portfolio
collateralizes the option by maintaining, in a segregated account with the
Fund's custodian, cash or high-grade liquid assets in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked-to-market
daily.
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A Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in
which the Portfolio is permitted to invest directly. A Portfolio will effect
such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions)
deemed creditworthy, and only pursuant to procedures adopted by the
Sub-Adviser for monitoring the creditworthiness of those entities. To the
extent that an option bought or written by a Portfolio in a negotiated
transaction is illiquid, the value of an option bought or the amount of the
Portfolio's obligations under an option written by the Portfolio, as the case
may be, will be subject to the Portfolio's limitation on illiquid
investments. In the case of illiquid options, it may not be possible for the
Portfolio to effect an offsetting transaction at the time when the
Sub-Adviser believes it would be advantageous for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, a Portfolio may write covered put and call options and may buy put and
call options and warrants on securities that are traded on United States and
foreign securities exchanges and over-the-counter. A Portfolio also may write
call options that are not covered for cross-hedging purposes. A Portfolio may
write and buy options on the same types of securities that the Portfolio
could buy directly and may buy options on financial indices as described
above with respect to futures contracts. There are no specific limitations on
the Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by a Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with
a value equal to the exercise price in a segregated account with its
custodian or (ii) holds a put on the same security and in the same principal
amount as the put written and the exercise price of the put held is equal to
or greater than the exercise price of the put written. The premium paid by
the buyer of an option will reflect, among other things, the relationship of
the exercise price to the market price and the volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates.
A call option written by a Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid
assets in a segregated account with its custodian.
A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. A Portfolio
would write a call option for cross-hedging purposes, instead of writing a
covered call option, when the premium to be received from the cross-hedge
transaction would exceed that which would be received from writing a covered
call option and the Sub-Adviser believes that writing the option would
achieve the desired hedge.
If a put or call option written by a Portfolio was exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks
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could be reduced by entering into an offsetting transaction. The Portfolio
retains the premium received from writing a put or call option whether or not
the option is exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit a Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to
the option to be used for other portfolio investments. If a Portfolio desires
to sell a particular security on which the Portfolio has written a call
option, the Portfolio will effect a closing transaction prior to or
concurrent with the sale of the security.
A Portfolio may realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing
the option or the price received from a sale transaction is more than the
premium paid to buy the option; a Portfolio may realize a loss from a closing
transaction if the price of the purchase transaction is more than the premium
received from writing the option or the price received from a sale
transaction is less than the premium paid to buy the option. Because
increases in the market of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options with the result that a Portfolio would have to exercise the options
in order to realize any profit. If a Portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or the Portfolio delivers the
underlying security upon exercise. Reasons for the absence of a liquid
secondary market may include the following: (i) there may be insufficient
trading interest in certain options, (ii) restrictions may be imposed by a
national securities exchange on which the option is traded ("Exchange") on
opening or closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or unforeseen
circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation ("OCC") may not
at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that
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class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the OCC as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
Each of the Portfolios may write options in connection with buy-and-write
transactions; that is, a Portfolio may buy a security and then write a call
option against that security. The exercise price of the call a Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when
it is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in
the price of the underlying security alone. If the call options are exercised
in such transactions, a Portfolio's maximum gain will be the premium received
by it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset by the amount of
premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus
the amount by which the market price of the security is below the exercise
price.
A Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, a Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
A Portfolio may buy call options to attempt to hedge against an increase
in the price of securities that the Portfolio may buy in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option brought by a Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to
protect the value of a Portfolio's investments from interest rate or currency
exchange rate fluctuations, the Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. The Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. A Portfolio
also may enter into these transactions to attempt to
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protect against any increase in the price of securities the Portfolio may
consider buying at a later date. A Portfolio does not intend to use these
transactions as a speculative investment. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The exchange commitments can involve payments to be made
in the same currency or in different currencies. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter
instruments and their use involves risks specific to the markets in which
they are entered into. A Portfolio will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap
will be calculated on a daily basis and an amount of cash or high-grade
liquid assets having an aggregate net asset value of at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If a Portfolio enters into an interest rate swap on other than a
net basis, the Portfolio would maintain a segregated account in the full
amount accrued on a daily basis of the Portfolio's obligations with respect
to the swap. A Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest
rating categories of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. The Sub-Adviser
will monitor the creditworthiness of all counterparties on an ongoing basis.
If there is a default by the other party to such a transaction, the Portfolio
will have contractual remedies pursuant to the agreements related to the
transaction.
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. The Sub-Adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent a Portfolio sells (i.e., writes) caps and
floors, it will maintain in a segregated account cash or high-grade liquid
assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Portfolio's obligations with respect to any
caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by a Portfolio; although a Portfolio does not presently
intend to engage in such transactions in excess of 5% of its total assets.
These transactions may in some instances involve the delivery of securities
or other underlying assets by a Portfolio or its counterparty to
collateralize obligations under the swap. Under the documentation currently
used in those markets, the risk of loss with respect to interest rate swaps
is limited to the net amount of the interest payments that a Portfolio is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, a Portfolio would risk the loss of the
net amount of the payments that the Portfolio contractually is entitled to
receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques, that become
available as the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. The Sub-Adviser may use these
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opportunities to the extent they are consistent with the each Portfolio's
respective investment objectives and are permitted by each Portfolio's
respective investment limitations and applicable regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolios invest. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected
manner, a Portfolio may not achieve the desired benefits of futures, options,
swaps and forwards or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies, forward contracts
and other negotiated or over-the-counter instruments, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.
A Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to a Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that a Portfolio will be able to use those instruments effectively
for the purposes set forth above.
In connection with certain of its hedging transactions, a Portfolio must
place assets in a segregated account with the Fund's custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be
disposed of for so long as the Portfolio maintains the positions giving rise
to the segregation requirement. Segregation of a large percentage of the
Portfolio's assets could impede implementation of the Portfolio's investment
policies or the Portfolio's ability to meet redemption requests or other
current obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the Securities and Exchange
Commission ("SEC"). To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject
to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received
or initial margin or collateral posted due to the potential additional margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections
17
<PAGE>
provided to traders on organized exchanges are available with respect to such
transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the OCC,
thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on a national securities exchange may be
more readily available than in the over-the-counter market, potentially
permitting a Portfolio to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result,
the OCC may, if it determines that foreign government restrictions or taxes
would prevent the orderly settlement of foreign currency option exercises, or
would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in
the mechanics of delivery of currency, the fixing of dollar settlement prices
or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in
foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) low trading
volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 -1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western
Corporation; Vice President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2) CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 -present), Chief Executive
Officer (1982 -present) President (1978 - 1987 and December, 1992 -present),
Director (1978 - present), Western Reserve
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
18
<PAGE>
Life Assurance Co. of Ohio; Chairman of the Board of Directors and Chief
Executive Officer (1988 - February, 1991), President (1988 - 1989), Director
(1976 - February, 1991), Executive Vice President (1972 - 1988), Pioneer
Western Corporation (financial services), Largo, Florida; President and
Director (1985 - September, 1990) and Director (December, 1990 - present);
Idex Management, Inc. (investment adviser), Largo, Florida; Trustee (1987 -
present) Chairman (December, 1989 - September, 1990 and November, 1990
-present) and President and Chief Executive Officer (November, 1986 -
September, 1990), IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment
companies), all of Largo, Florida.
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2) TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2) SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995), Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991) University of
South Florida.
ALAN M. YAEGER (1, 2) EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive Vice
President (June, 1993 - present), Chief Financial Officer (December, 1995 -
present), Senior Vice President (1981 - June, 1993) and Actuary (1972 -
present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. For the year ended
December 31, 1995, the Bond, Growth and Global Portfolios' share of
Directors' fees and expenses paid by the Fund were $1,255, $10,513, and
$4,495, respectively. The following table provides compensation amounts paid
to disinterested Directors of the Fund for the fiscal year ended December 31,
1995.
19
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charges), as elected by the directors. It is not anticipated that
the Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
WRL (the "Investment Adviser") serves as the investment adviser to the
Portfolios pursuant to an Investment Advisory Agreement dated February 26,
1991 with the Fund on behalf of the Growth and Bond Portfolios and an
Investment Advisory Agreement dated July 13, 1992 with the Fund on behalf of
the Global Portfolio. The Investment Adviser is a wholly-owned subsidiary of
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance
company which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a
financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group.
The Investment Advisory Agreements were most recently approved by the
Fund's Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 18,
1996. The Investment Advisory Agreements provide that they will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolios, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreements
may be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of a Portfolio and terminate
automatically in the event of assignment (within the meaning of the 1940
Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Portfolios and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreements. For further information about the management of the
Portfolios, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1995, 1994 and
1993, the Investment Adviser was paid fees for its services to the Portfolios
in the following amounts:
20
<PAGE>
ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
PORTFOLIO 1995 1994 1993
- ------------ -------------- ------------- ------------
<S> <C> <C> <C>
Bond $ 409,862 $ 407,667 $ 387,264
Growth 7,847,750 6,850,340 6,840,711
Global 2,075,054 1,600,706 232,026
----------- ---------- -----------
Total $10,332,666 $8,858,713 $7,460,001
=========== ========== ==========
</TABLE>
Payment of Expenses. The Investment Adviser provides investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolios, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolios by the Investment Adviser. The Fund pays all
other expenses incurred in its operation and all of the Portfolios' general
administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses of registering the shares under
Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), interest, certain taxes, charges of the
custodian, fees and expenses of Fund non-interested directors, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, SEC fees, advisory fees, certain insurance premiums, costs of
corporate meetings, costs of maintenance of corporate existence, investor
services (including allocable telephone and personnel expenses),
extraordinary expenses, and other expenses properly payable by the Fund.
Depending upon the nature of the lawsuit, litigation costs may be borne by
the Fund.
Expenses that relate exclusively to a particular Portfolio, such as
brokerage commissions, custodian fees, and registration fees for shares, are
paid by that Portfolio. Other expenses are allocated to the Portfolios in an
equitable manner determined by the Portfolios' Investment Adviser.
The Investment Adviser has voluntarily undertaken, until as least April
30, 1997, to pay expenses on behalf of each Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of a Portfolio's average daily net assets, .70% for
the Bond Portfolio, 1.00% for the Growth Portfolio and 1.00% for the Global
Portfolio. There were no expenses paid by the Investment Adviser on behalf of
the Growth and Bond Portfolios for the fiscal years ended December 31, 1995,
1994 and 1993 inasmuch as the normal operating expenses of these Portfolios
did not exceed the limitations described above.
Prior to May 1, 1994, the Investment Adviser had voluntarily undertaken to
pay expenses on behalf of the Global Portfolio to the extent normal operating
expenses (including investment advisory fees but excluding interest, taxes,
brokerage fees, commissions and extraordinary charges) exceeded 2.50% of the
first $30 million of assets, 2.00% of the next $70 million of assets, and
1.50% of the assets in excess of $100 million. There were no expenses paid by
the Investment Adviser on behalf of the Global Portfolio for the fiscal years
ended December 31, 1995, 1994 and 1993 inasmuch as the normal operating
expenses of the Global Portfolio did not exceed the limitations described
above.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Janus Capital Corporation (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolios pursuant to a Sub-Advisory Agreement dated February 26,
1991 on behalf of the Growth and Bond Portfolios and a Sub-Advisory Agreement
dated July 13, 1992, on behalf of the Global Portfolio. The Sub-Advisory
Agreements were most recently approved by the Board of Directors of the Fund,
21
<PAGE>
including a majority of the Directors who were not "interested persons" of
the Fund (as defined in the 1940 Act), on March 18, 1996. The Sub-Advisory
Agreements provide that they will continue in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Portfolios, and (b) by a majority of the
Directors who are not parties to such Agreement or "interested persons" (as
defined in the 1940 Act) of any such party. The Sub-Advisory Agreements may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolios and
terminate automatically in the event of assignment (within the meaning of the
1940 Act) or termination of the Investment Advisory Agreements.
Pursuant to the Sub-Advisory Agreements, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolios. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolios and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolios. Such managers consider
analyses from various sources, make the necessary decisions and effect
transactions accordingly. The Sub-Adviser bears all of its expenses in
connection with the performance of its services under the Sub-Advisory
Agreements, such as compensating and furnishing office space for its officers
and employees connected with investment and economic research, trading and
investment management of the Portfolios. The method of computing the
Sub-Adviser's fee is set forth in the Prospectus. For the year ended December
31, 1995, 1994 and 1993 the Sub-Adviser was paid fees for its services to the
Portfolios in the following amounts:
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1995 1994 1993
- ------------ ------------- ------------- ------------
<S> <C> <C> <C>
Bond $ 204,931 $ 203,833 $ 193,632
Growth 3,923,875 3,425,888 3,420,355
Global 1,037,527 801,005 115,238
---------- ---------- ----------
Total $5,166,333 $4,430,726 $3,729,225
========== ========== ==========
</TABLE>
The Sub-Adviser, located at 100 Fillmore Street, Denver, Colorado 80206,
has been engaged in the management of the Janus funds since 1969. Janus
Capital Corporation also serves as investment adviser or sub-adviser to other
mutual funds, and for individual, corporate, charitable and retirement
accounts. The aggregate market value of the assets managed by the Sub-Adviser
was approximately $34 billion as of March 1, 1996. Kansas City Southern
Industries, Inc. ("KCSI") owns 83% of the Sub-Adviser. KCSI, whose address is
114 West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company whose largest subsidiary, the Kansas City Southern Railway
Company, is primarily engaged in the transportation industry. Other KCSI
subsidiaries are engaged in financial services and real estate.
JOINT TRADING ACCOUNTS
As described in the Prospectus, the Portfolios and other clients of the
Sub-Adviser and its affiliates may place assets in joint trading accounts for
the purpose of making short-term investments in money market instruments. The
Board of Directors of the Fund must approve the participation of each
Portfolio in these joint trading accounts, and procedures pursuant to which
the joint accounts will operate. The joint trading accounts are to be
operated pursuant to an exemptive order issued to the Sub-Adviser and certain
of its affiliates by the SEC. All joint account participants, including the
Portfolios, will bear the expenses of the joint trading accounts in
proportion to their investments. Financial difficulties of other participants
in the joint accounts could cause delays or other difficulties for the
Portfolios in withdrawing their assets from joint trading accounts.
22
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Growth Portfolio, Bond Portfolio
and Global Portfolio and the Fund - Portfolio Turnover" in the Prospectus. In
computing the portfolio turnover rate for each Portfolio, securities whose
maturities or expiration dates at the time of acquisition are one year or
less are excluded. Subject to this exclusion, the turnover rate for a
Portfolio is calculated by dividing (a) the lesser of purchases or sales of
portfolio securities for the fiscal year by (b) the monthly average of
portfolio securities owned by the Portfolio during the fiscal year. The
portfolio turnover rates for the years 1995, 1994 and 1993 were 130.48%,
107.33% and 77.91%, respectively, for the Growth Portfolio, 120.54%, 131.73%
and 149.02%, respectively, for the Bond Portfolio and 130.60%, 192.06% and
79.93%, respectively, for the Global Portfolio. The Fund's management is
unable to predict precisely the Growth Portfolio's or Global Portfolio's
future annual turnover rate, although annual turnover rates in excess of 150%
and 200%, respectively, are not presently anticipated. Higher turnover rates
tend to result in higher brokerage fees.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Securities
initially satisfying the basic policies and objectives of each Portfolio may
be disposed of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolios'
securities transactions. In placing orders, it is the policy of the
Portfolios to obtain the most favorable net results, taking into account
various factors, including price, dealer spread or commissions, if any, size
of the transaction and difficulty of execution. While the Sub-Adviser
generally will seek reasonably competitive spreads or commissions, the
Portfolios will not necessarily be paying the lowest spread or commission
available. The Portfolios do not have any obligation to deal with any broker,
dealer or group of brokers or dealers in the execution of transactions in
portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolios and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security being traded; the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the desired timing of the trade; the
activity existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement
services; financial stability; the existence of actual or apparent
operational problems of any broker or dealer; and research products or
services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio
23
<PAGE>
strategy; access to research analysts, corporate management personnel,
industry experts, economists and government officials; comparative
performance evaluation and technical measurement services and quotation
services, and products and other services (such as third party publications,
reports and analyses, and computer and electronic access, equipment,
software, information and accessories that deliver, process or otherwise
utilize information), including the research described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. The Sub-Adviser
may use such research products and services in servicing other accounts in
addition to the Portfolios. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that
do not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that a Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the
Sub-Adviser. Conversely, such supplemental information obtained by the
placement of business for the Sub-Adviser will be considered by and may be
useful to the Sub-Adviser in carrying out its obligations to the Portfolios.
When a Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Normally, all the Portfolios will deal directly with the underwriters or
dealers who make a market in the securities involved unless better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes.
The cost of portfolio securities transactions of the Portfolios that are
transactions with principals will consist primarily of brokerage commissions
or dealer or underwriter spreads between the bid and asked price, although
purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer. No stated commission is generally applicable
to securities traded in the U.S. over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups.
Securities held by one or more of the Portfolios may also be held by other
separate accounts, mutual funds or other accounts for which the Investment
Adviser or Sub-Adviser serves as an adviser, or held by the Investment
Adviser or Sub-Adviser for their own accounts. Because of different
investment objectives or other factors, a particular security may be bought
by the Investment Adviser or Sub-Adviser for one or more clients when one or
more clients are selling the same security. If purchases or sales of
securities for one or more of the Portfolios or other entities for which they
act as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of a Portfolio as
well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio(s) with those to be sold
or purchased for such other accounts or companies in order to obtain
favorable execution and lower brokerage commissions. In that event,
allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Sub-Adviser in the manner it
considers to be most equitable and
24
<PAGE>
consistent with its fiduciary obligations to a Portfolio and to such other
accounts or companies. In some cases this procedure may adversely affect the
size of the position obtainable for a Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolios, and
reviews the prices and commissions, if any, paid by the Portfolios to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
In addition, the Sub-Adviser may occasionally place portfolio business with
affiliated brokers of the Investment Adviser or the Sub-Adviser, including:
DST Securities, Inc., 301 West 11th Street, Kansas City, Missouri 64105; and
InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida 33518. As stated
above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
The Growth Portfolio paid aggregate commissions for the years ended
December 31, 1995, 1994 and 1993, in the amount of $1,577,115, $1,466,443 and
$1,022,522, respectively. For the years ended December 31, 1995, 1994 and
1993, the Bond Portfolio did not pay any brokerage commissions. For the year
ended December 31, 1995 the Growth Portfolio did not pay any brokerage
commissions to DST Securities, Inc. For the years ended December 31, 1994 and
1993, the Growth Portfolio paid commissions to DST Securities, Inc. in the
amount of $2,796 and $85,404, respectively. The percentage of the Growth
Portfolio's aggregate brokerage commissions and aggregate dollar amount of
transactions paid to DST Securities, Inc. during the Growth Portfolio's most
recent fiscal year did not exceed one percent.
The Global Portfolio paid aggregate commissions for the years ended
December 31, 1995, 1994 and 1993 in the amount of $712,827, $241,051 and
$53,250. The aggregate commissions paid by the Global Portfolio in 1995 were
substantially higher than in 1994 because of a relative increase in the
amount of its total assets invested in foreign securities, the purchase and
sale of which typically involve higher brokerage commissions.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of one or more of
the Portfolios in accordance with the allocation instructions received from
holders of the Policies and the Annuity Contracts. Such allocation rights are
further described in the prospectuses and disclosure documents for the
Policies and the Annuity Contracts. Shares of the Portfolios are sold and
redeemed at their respective net asset values as described in the Prospectus.
Net asset value of each of the Portfolio's shares is determined, once daily,
as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day which
the Exchange is open. (Currently the Exchange is closed on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.)
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares of the
Portfolio outstanding.
NET ASSET VALUATION
As stated in the Prospectus and above, the net asset value of a
Portfolio's share is determined, once daily, as of the close of the regular
session of business on the Exchange (usually 4:00 p.m., Eastern time), on
each day the Exchange is open. The per share net asset value of each
Portfolio is determined by dividing the total value of the securities and
other assets, less liabilities, by the total number of shares outstanding. In
determining asset value, securities listed on the national securities
25
<PAGE>
exchanges and the NASDAQ National Market are valued at the closing prices on
such markets, or if such a price is lacking for the trading period
immediately preceding the time of determination, such securities are valued
at their current bid price. Foreign securities and currencies are converted
to U.S. dollars using the exchange rate in effect at the close of the
Exchange. Other securities which are traded on the over-the-counter market
are valued at bid price. Other securities for which quotations are not
readily available are valued at fair values as determined in good faith by
the Sub-Adviser under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis discussed above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of each of the Portfolios. It does not represent or project future
investment performance.
The Growth and Bond Portfolios commenced operations on October 2, 1986.
The Global Portfolio commenced operations on December 3, 1992. The rates of
return shown below depict the actual investment experience of each Portfolio
for the periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
TOTAL RETURN
The rates of return shown below are based on the actual investment
performance, after the deduction of investment advisory fees and direct
Portfolio expenses. The rates are average annual compounded rates of return
for the periods ended on December 31, 1995.
The rates of return do not reflect charges or deductions against the
Series Life Account or the Series Annuity Account, or charges and deductions
against the Policies or the Annuity Contracts. Accordingly, these rates of
return do not illustrate how actual investment performance will affect
benefits under the Policies or the Annuity Contracts. Where relevant, the
prospectuses for the Policies and the Annuity Contracts contain performance
information about these products. Moreover, these rates of return are not an
estimate, projection or guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard and Poor's
Index of 500 Common Stocks, a widely used measure of stock market
performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
FUND PORTFOLIO INCEPTION* 5 YEARS 4 YEARS 3 YEARS 2 YEARS 1 YEAR
- --------------------------- ------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Growth 17.63% 18.06% 9.46% 11.94% 16.15% 47.12%
Bond 8.48% 10.50% 8.50% 9.08% 6.98% 22.99%
Global 18.67% N/A N/A 18.55% 11.07% 23.06%
Standard & Poor's
Index of 500 Common
Stocks 14.68% 16.59% 13.36% 15.34% 18.07% 37.58%
</TABLE>
- -----------------------------------------------------------------------------
* The Growth and Bond Portfolios commenced operations on October 2, 1986. The
Global Portfolio commenced operations on December 3, 1992.
Additional information regarding the investment performance of the
Portfolios appears in the Prospectus.
A. Total Return for the Portfolios
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)(n) = ERV
26
<PAGE>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable
The total return quotation calculations for a Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
B. Yield Quotations for the Bond Portfolio
The yield quotations for the Bond Portfolio are based on a specific
thirty-day period and are computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
the average daily number of shares outstanding during the
period that were
c = entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The yield of the Bond Portfolio as computed above for the thirty day
period ended December 31, 1995 was 5.75%.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts, and the holders thereof.
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months - options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
27
<PAGE>
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while a particular
foreign government and its agencies, instrumentalities and political
subdivisions all are considered the same issuer. For information concerning
the consequences of failure to meet the requirements of section 817(h), see
the respective prospectuses for the Policies or the Annuity Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
Dividends and interest received by each Portfolio may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes
on capital gains in respect of investments by foreign investors.
The Portfolios may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolios will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if a
Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in a
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation,
the Portfolio will be required to include in income each year its pro rata
share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), even if they are not distributed to the Portfolio; those
amounts would be subject to the Distribution Requirement. In most instances
it will be very difficult, if not impossible, to make this election because
of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to a
Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting
28
<PAGE>
hedging position during the period of the hedge for purposes of determining
whether the Portfolio satisfies the Short-Short Limitation. Thus, only the
net gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation. The Portfolio intends that, when it engages
in hedging transactions, they will qualify for this treatment, but at the
present time it is not clear whether this treatment will be available for all
of the Portfolio's hedging transactions. To the extent this treatment is not
available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
Policyholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Aggressive Growth Portfolio, Balanced
Portfolio, Utility Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, Leisure Portfolio, International Equity Portfolio, Janus Balanced
Portfolio, Value Equity Portfolio, Meridian/INVESCO Global Sector Portfolio,
Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolios or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio described in this
Statement of Additional Information for the year ended December 31, 1995 and
the report of the Fund's independent accountants are included in the Fund's
1995 Annual Report and are incorporated herein by reference to such report.
29
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolios will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolios acquire ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolios, reflecting an agreed upon market rate of interest for
the period from the time of a Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. A Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While a Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the Securities and Exchange Commission has taken
the position that repurchase agreements of greater than seven days together
with other illiquid investments should be limited to an amount not in excess
of 15% of a Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, a Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, a Portfolio could be
ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by a Portfolio upon liquidation of the
securities may be limited.
A-1
<PAGE>
9. Reverse Repurchase Agreement. A reverse repurchase agreement involves
the sale of securities held by the Portfolios, with an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
The Portfolios will use the proceeds of the reverse repurchase agreements to
purchase other money market securities maturing, or under an agreement to
resell, at a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. The Portfolio will utilize reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds from the transaction is greater than the interest expense of the
reverse repurchase transaction.
10. Asset-Backed Securities. A Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. A Portfolio will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.
11. Mortgage-Backed Securities. A Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral is passed through to the security holder. Mortgage-backed
bonds are general obligations of their issuers, payable out of the issuers'
general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities exhibit characteristics of both
pass-through and mortgage-backed bonds. Mortgage-backed securities also
include other debt obligations secured by mortgages on commercial real estate
or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.
12. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13. Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security receives interest payments from
the same underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the
prices of stripped mortgage-backed securities can be significantly affected
by changes in interest rates as well. As interest rates fall, prepayment
rates tend to increase, which in turn tends to reduce prices of
"interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.
A-2
<PAGE>
14. Zero Coupon Bonds. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the principal
payment are stripped from an outstanding Treasury bond by the Federal Reserve
Bank. Bonds issued by the Resolution Funding Corporation (REFCORP) and the
Financial Corporation (FICO) also can be stripped in this fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells the
coupon payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities (CATS), Treasury Investment Growth Receipts (TIGRS), and generic
Treasury Receipts (TRs), are stripped U.S. Treasury securities separated into
their component parts through custodial arrangements established by their broker
sponsors. FICO bonds have been stripped in this fashion. The Portfolios have
been advised that the staff of the Division of Investment Management of the
Securities and Exchange Commission does not consider such privately stripped
obligations to be U.S. Government securities, as defined by the 1940 Act.
Therefore, the Portfolios will not treat such obligations as U.S. Government
securities for purposes of the 65% portfolio composition ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds are
originated in the form of a zero coupon bond and are not created by stripping
an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond
does not pay current income, its price can be very volatile when interest
rates change. In calculating its dividends, the fund takes into account as
income a portion of the difference between a zero coupon bond's purchase
price and its face value.
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 on 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, or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
B-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S CORPORATION
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
B-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO]
Telephone: (800) 851-9777
(813) 585-6565
[J.P. MORGAN LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Money Market Portfolio of the Fund (the
"Portfolio").
The investment objective of the Portfolio is to obtain maximum current
income consistent with preservation of principal and maintenance of
liquidity. There can be, of course, no assurance that the Portfolio will
achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and J.P. Morgan Investment Management Inc. serve as the investment
adviser ("Investment Adviser") and the sub-adviser ("Sub-Adviser"),
respectively, to the Portfolio. See "The Investment Adviser" and "The
Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolio
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolio bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
AN INVESTMENT IN THE PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL HIGHLIGHTS ........................ 1
THE MONEY MARKET PORTFOLIO AND THE FUND .... 2
MANAGEMENT OF THE FUND ...................... 4
DIVIDENDS AND DISTRIBUTIONS ................. 6
TAXES ....................................... 6
PURCHASE AND REDEMPTION OF SHARES ........... 6
VALUATION OF SHARES ......................... 6
THE FUND AND ITS SHARES ..................... 7
PERFORMANCE INFORMATION ..................... 7
GENERAL INFORMATION ......................... 8
</TABLE>
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FINANCIAL HIGHLIGHTS
The information contained in the tables below for a share of capital stock
outstanding of the Portfolio, for the years ended December 31, 1995, 1994,
1993, 1992, 1991, 1990, 1989, 1988 and 1987 and for the period October 2,
1986 through December 31, 1986 is taken from the Portfolio's audited
financial statements incorporated by reference in the Statement of Additional
Information. The per share data and ratios for the period October 2, 1986,
through December 31, 1986 are not annualized amounts or percentages. The
Fund's Annual Report contains additional performance information for the
Portfolio. A copy of the Annual Report may be obtained without charge upon
request.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income From Investment Operations
Net Investment Income .................. .05 .04 .02 .03 .05 .07 .07
Net Gains or Losses on Securities
(both realized and unrealized) ....... .00 .00 .00 .00 .00 .00 .00
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total Income (Loss)
From Investment Operations ......... .05 .04 .02 .03 .05 .07 .07
---------- ---------- ---------- ---------- ---------- ---------- ---------
Less Distributions
Dividends (from net investment income) (.05) (.04) (.02) (.03) (.05) (.07) (.07)
Distributions (from capital gains) .... .00 .00 .00 .00 .00 .00 .00
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total Distributions .................. (.05) (.04) (.02) (.03) (.05) (.07) (.07)
---------- ---------- ---------- ---------- ---------- ---------- ---------
Net Asset Value, End of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ========== =========
Total Return* ............................ 5.40% 3.44% 2.45% 3.03% 5.25% 7.09% 8.09%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) . $80,544 $93,081 $45,782 $45,600 $33,695 $24,931 $6,233
Ratio of Expenses to Average Net Assets** .56% .60% .66% .70% .70% .66% .70%
Ratio of Net Investment Income to
Average Net Assets ..................... 5.30% 3.59% 2.41% 2.99% 5.07% 7.09% 7.82%
Portfolio Turnover Rate .................. N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERIOD FROM
10/2/86 TO
1988 1987 12/31/86
--------- -------- --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .... $ 1.00 $1.00 $1.00
Income From Investment Operations
Net Investment Income .................. .05 .04 .01
Net Gains or Losses on Securities
(both realized and unrealized) ....... .00 .00 .00
--------- -------- --------------
Total Income (Loss)
From Investment Operations ......... .05 .04 .01
--------- -------- --------------
Less Distributions
Dividends (from net investment income) (.05) (.04) (.01)
Distributions (from capital gains) .... .00 .00 .00
--------- -------- --------------
Total Distributions .................. (.05) (.04) (.01)
--------- -------- --------------
Net Asset Value, End of Period ........... $ 1.00 $1.00 $1.00
========= ======== ==============
Total Return* ............................ 5.77% 4.56% 1.14%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) . $5,114 $ 582 $ 101
Ratio of Expenses to Average Net Assets** .70% .89% .12%
Ratio of Net Investment Income to
Average Net Assets ..................... 6.26% 4.83% 1.14%
Portfolio Turnover Rate .................. N/A N/A N/A
</TABLE>
* The total return shown for 1986 is for the three month period ended
December 31, 1986 and is not annualized. The total return of the Portfolio
reflects the advisory fee and all other Portfolio expenses and includes
reinvestment of dividends and capital gains; it does not reflect the
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<PAGE>
charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is not annualized and is net of advisory fee waiver for the
periods ended December 31, 1986, 1987, 1988 and 1989, for which periods
the annualized ratio of expenses to average net assets would have been
6.33%, 1.63%, 1.16% and 0.84%, respectively, absent the advisory fee
waiver by Western Reserve Life.
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<PAGE>
THE MONEY MARKET PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolio is a series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment
by the Separate Accounts. This Prospectus describes only the Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE
The Portfolio's investment objective and, unless otherwise noted, its
investment policies and techniques, may be changed by the Board of Directors
of the Fund without shareholder or Policyholder approval. A change in the
investment objective or policies of the Portfolio may result in the Portfolio
having an investment objective or policies different from that which a
Policyholder deemed appropriate at the time of investment.
The objective of the Portfolio is to obtain maximum current income
consistent with preservation of principal and maintenance of liquidity. The
Portfolio seeks to maintain a constant net asset value of $1.00 per share,
although there can be no assurance that this will be achieved. The Portfolio
uses the amortized cost method of securities valuation.
The Portfolio seeks to achieve its objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days by
investing in the following U.S. dollar-denominated securities which have
effective maturities of not more than 13 months and which, in accordance with
guidelines adopted by the Board of Directors, are determined to present
minimal credit risks. (See Appendix A of the Statement of Additional
Information for a more detailed description of certain of these instruments.)
Such instruments may include the following:
1. Obligations issued or guaranteed by the U.S. Government and backed by the
full faith and credit of the United States. These securities include U.S.
Treasury securities, obligations of the Government National Mortgage
Association, the Farmers Home Administration and the Export Import Bank.
The Portfolio may also invest in obligations issued or guaranteed by U.S.
Government agencies or instrumentalities where the Portfolio must look
principally to the issuing or guaranteeing agency for ultimate repayment.
Some examples of agencies or instrumentalities issuing these obligations
are the Federal Farm Credit System, the Federal Home Loan Banks and the
Federal National Mortgage Association.
2. Domestic and certain foreign bank obligations including time deposits,
certificates of deposit, bankers' acceptances and other bank obligations.
The Portfolio may invest in high quality U.S. dollar-denominated
obligations of (i) banks, savings and loan associations and savings banks
which have more than $2 billion in total assets and are organized under
U.S. Federal or state law, (ii) foreign branches of these banks or of
foreign banks of equivalent size (Euros) and (iii) U.S. branches or
subsidiaries of foreign banks of equivalent size (Yankees). The Portfolio
may also invest in obligations of international banking institutions
designated or supported by national governments to promote economic
reconstruction, development or trade between nations (e.g., the European
Investment Bank, the Inter-American Development Bank, or the World Bank).
These obligations may be supported by appropriated but unpaid commitments
of their member countries, and there is no assurance these commitments
will be undertaken or met in the future.
3. Asset-backed securities, which directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets such as motor vehicle or credit
card receivables. Asset-backed securities provide periodic payments that
generally consist of both interest and principal payments. Consequently,
the life of an asset-backed security varies with the prepayment experience
of the underlying debt instruments.
4. Commercial paper, including variable amount master demand notes (see
Appendix A of the Statement of Additional Information), and corporate
bonds issued by U.S. corporations. The Portfolio may also invest in bonds
and commercial paper of foreign issuers if the obligation is U.S.
dollar-denominated and is not subject to foreign withholding tax.
5. Repurchase and reverse repurchase agreements. (See "Certain Portfolio
Policies and Techniques - Repurchase and Reverse Repurchase Agreements",
below.)
2
<PAGE>
The Portfolio will limit its investments to those securities which, in
accordance with guidelines adopted by the Board of Directors of the Fund,
present minimal credit risks. In addition, the Portfolio will limit its
investment in the securities (other than U.S. Government securities and
securities that benefit from certain types of credit enhancement
arrangements) of any one issuer to no more than 5% of the Portfolio's total
assets, measured at the time of purchase, except at any time for an
investment in a single issuer of up to 25% of the Portfolio's total assets
held for not more than three business days. Also, the Portfolio will not
purchase any security (other than a U.S. Government security) unless (i) it
(or a comparable security of the same issuer) is rated with the highest
rating assigned to short-term debt securities by at least two nationally
recognized statistical rating organizations
2
<PAGE>
("NRSROs"), such as Moody's Investors Service, Inc. and Standard & Poor's
Corporation, (ii) it (or a comparable security of the same issuer) is rated
by only one NRSRO, and is rated by that NRSRO with the highest such rating,
or (iii) it is not rated and is determined to be of comparable quality as
determined by the Board of Directors of the Fund. The Board of Directors of
the Fund must approve or ratify the acquisition of any unrated security or a
security rated by only one NRSRO. For a more detailed discussion of
applicable quality requirements, see "Investment Objective and Policies" in
the Statement of Additional Information. These standards must be satisfied at
the time an investment is made. If the quality of the investment later
declines below the quality required for purchase, the Portfolio shall dispose
of the investment in accordance with procedures adopted by the Board of
Directors, except in certain circumstances where there is a finding by the
Fund's Directors that disposing of the investment would not be in the
Portfolio's best interest. For a description of NRSRO ratings, see Appendix B
to the Statement of Additional Information.
The Portfolio may also invest in securities on a when-issued or delayed
delivery basis and in certain privately-placed securities. The Portfolio may
also loan its portfolio securities. For a discussion of these investments and
for more information on foreign investments, see "Certain Portfolio Policies
and Techniques" below.
The Portfolio operates under a rule of the Securities and Exchange
Commission ("SEC") that permits it, subject to certain conditions, to use the
amortized cost method of valuing its shares. See "Quality and Diversification
Requirements" and "Purchase and Redemption of Shares -Net Asset Valuation" in
the Statement of Additional Information for a description of certain of these
conditions.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
FOREIGN INVESTMENT INFORMATION. The Portfolio may invest in certain U.S.
dollar-denominated foreign securities including, but not limited to, certain
foreign bank obligations. See "Foreign Investments" in the Statement of
Additional Information. Investment in securities of foreign issuers and in
obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers.
There may be limited publicly available information with respect to foreign
issuers, and foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those
applicable to domestic companies. The Portfolio may only invest in foreign
securities that are not subject to foreign withholding tax.
Investors should realize that the value of the Portfolio's investments in
foreign securities may be adversely affected by changes in political or
social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of funds or assets,
or imposition of (or change in) exchange control or tax regulations in those
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether
favorably or unfavorably, in areas such as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position; it may also be more difficult to obtain and
enforce a judgment against a foreign issuer. Any foreign investments made by
the Portfolio must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of foreign
investments.
BANK OBLIGATIONS. Because the Portfolio may invest (up to 100%) of its
assets in bank obligations, an investment in the Portfolio should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by the Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers
a method of earning income on idle cash. The repurchase agreement is
effectively secured by the value of the underlying security. A risk
associated with repurchase agreements is the failure of the seller to
repurchase the securities as agreed, which may cause the Portfolio to suffer
a loss if the market value of such securities declines before they can be
3
<PAGE>
liquidated on the open market. In the event of bankruptcy or insolvency of
the seller, the Portfolio may encounter delays and incur costs in liquidating
the underlying security. Repurchase agreements not terminable within seven
days are considered illiquid securities and are subject to the limit stated
below.
When the Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities, or to earn
additional income on portfolio securities such as U.S. Treasury bills and
notes. While a reverse repurchase agreement is outstanding, the Portfolio
3
<PAGE>
will maintain cash and other liquid assets in a segregated custodial account
to cover its obligation under the agreement. Reverse repurchase agreements
are considered a form of borrowing by the Portfolio for purposes of the 1940
Act and, therefore, a form of leverage. Leverage may cause any gains or
losses of the Portfolio to be magnified.
ILLIQUID SECURITIES. The Portfolio may invest up to 10% of the market
value of its net assets in securities that are considered illiquid because of
the absence of a readily available market or due to legal or contractual
restrictions on resale ("restricted securities"). However, certain restricted
securities that are not registered for sale to the general public but that
can be resold to institutional investors ("Rule 144A Securities") may not be
considered illiquid, provided that a dealer or institutional trading market
exists. The institutional trading market is relatively new and liquidity of
the Portfolio's investments could be impaired if such trading does not
further develop or declines. The Sub-Adviser will determine the liquidity of
Rule 144A Securities under guidelines approved by the Board of Directors of
the Fund.
WHEN-ISSUED SECURITIES. The Portfolio may purchase securities on a
"when-issued" basis. However, the Portfolio does not intend to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets less liabilities other than the obligations
created by these commitments. Because actual payment for and delivery of
when-issued securities generally take place 15 to 45 days after the purchase
date, the Portfolio bears the risk that interest rates and the security's
value at the time of delivery may have changed prior to delivery of the
when-issued security. While a commitment is outstanding, the Portfolio
maintains with its custodian a segregated account with high-grade liquid
securities in an amount at least equal to these commitments.
LENDING AND BORROWING. The Portfolio may lend its portfolio securities for
the purpose of realizing additional income. Such loans must be continuously
secured by liquid assets at least equal to the market value of the securities
loaned and may not together with any other outstanding loans exceed 25% of
the Portfolio's total assets. Securities lending may involve some credit risk
to the Portfolio if the borrower defaults and the Portfolio is delayed or
prevented from recovering the collateral or is otherwise required to cover a
transaction in the security loaned. The Portfolio does not have the right to
vote securities on loan, but would terminate the loan and regain the right to
vote if it were considered important with respect to the investment. (See
"Lending of Portfolio Securities" in the Statement of Additional
Information.)
The Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the
value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets
will be reduced within three business days to the extent necessary to comply
with the 25% restriction. To secure borrowings, the Portfolio may not
mortgage or pledge its securities in amounts that exceed 15% of its net
assets at the time the borrowing is made. In accordance with the requirements
of California insurance regulations, the Portfolio will restrict borrowings
to no more than 10% of total assets, except that the Portfolio may
temporarily borrow amounts equal to as much as 25% of total assets if such
borrowing is necessary to meet redemptions. If California's insurance
regulations are changed at some future time to permit borrowings in excess of
10%, but less than 25% of total assets, the Portfolio may conduct borrowings
in accordance with such revised limits.
OTHER INVESTMENT COMPANIES
The Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in the securities of money market funds, which are
investment companies. The Portfolio may not invest (i) more than 5% of its
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company. The
Portfolio will indirectly bear its proportionate share of any investment
advisory fees and expenses paid by the funds in which it invests, in addition
to the investment advisory fee and expenses paid by the Portfolio.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of the shareholders of the Portfolio.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The Portfolio
does not have a stated portfolio turnover rate, as securities of the type in
4
<PAGE>
which it invests are excluded in the usual calculation of that rate.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and J.P. Morgan Investment Management Inc. as Sub-Adviser,
the Fund requires no employees other than its executive officers, none of
whom devotes full time to the affairs of the Fund. These officers are
employees of WRL and receive no compensation from the Fund. The Statement of
Additional Information contains the names of and general background
information regarding each Director and executive officer of the Fund.
4
<PAGE>
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly traded international insurance
group. The Investment Adviser has served as the investment adviser to the
Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.40% of the average
daily net assets of the Portfolio. Prior to May 1, 1996, the Investment
Adviser received monthly compensation for its services at the annual rate of
0.50% of the average daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser. The Investment Adviser has
voluntarily undertaken, until at least April 30, 1997, to pay expenses on
behalf of the Portfolio to the extent normal operating expenses (including
investment advisory fees but excluding interest, taxes, brokerage fees,
commissions and extraordinary charges) exceed 0.70% as a percentage of the
Portfolio's average daily net assets. No expenses were paid by the Investment
Adviser on behalf of the Portfolio for the fiscal year ended December 31,
1995 because the Portfolio's expenses did not exceed the voluntary expense
limitation.
THE SUB-ADVISER
J.P. Morgan Investment Management Inc., located at 522 Fifth Avenue, New
York, New York 10036, serves as the Sub-Adviser to the Portfolio. Keith M.
Schappert is the President and Chief Executive Officer of the Sub-Adviser.
The Sub-Adviser is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. The Sub-Adviser provides investment management and related
services for corporate, public, and union employee benefit funds,
foundations, endowments, insurance companies and government agencies.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser also provides statistical and analytical
information and reports as may reasonably be required by the Investment
Adviser. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.15% of the average daily net
assets of the Portfolio. Prior to May 1, 1996, the Portfolio's previous
Sub-Adviser, Janus Capital Corporation, received for its services 0.25% of
the average daily net assets of the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
5
<PAGE>
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. In addition, the Sub-Adviser may occasionally place portfolio business
with broker-dealers affiliated with the Investment Adviser or the
Sub-Adviser; in such event, the Sub-Adviser always will seek best execution.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy (the "Ethics Policy") that has
been adopted by the Board of Directors of the Fund. Access Persons are
required to follow the guidelines established by this Ethics Policy in
connection with all personal securities
5
<PAGE>
transactions and are subject to certain prohibitions on personal trading. The
Fund's Sub-Advisers, pursuant to Rule 17j-1 and other applicable laws, and
pursuant to the terms of the Ethics Policy, must adopt and enforce their own
Code of Ethics and Insider Trading Policies appropriate to their operations.
Each Sub-Adviser is required to report to the Board of Directors on a
quarterly basis with respect to the administration and enforcement of such
Ethics Policy, including any violations thereof which may potentially affect
the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio intends to distribute substantially all of the net
investment income, if any. Dividends from investment income of the Portfolio
normally are declared daily and reinvested monthly in additional shares of
the Portfolio at net asset value. Distributions of net realized capital gains
from security transactions normally are declared and paid in additional
shares of the Portfolio at the end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income and net short-term capital
gain, if any) and any net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its
shareholders. It is the Portfolio's intention to distribute all such income
and gains.
Shares of the Portfolio are offered only to the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter or within 30 days
thereafter no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
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commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
The Board of Directors has determined that the most appropriate method for
valuing the securities of the Portfolio is the amortized cost method. Under
this method, the net asset value of Portfolio shares is expected to remain at
a constant $1.00 per share, although there can be no assurance that the
Portfolio will be able to maintain a stable net asset value. (See the
Statement of Additional Information for details concerning the valuation
method, including the conditions under which it may be used.)
6
<PAGE>
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
the variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio will be entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
held in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from Policyholders having voting interests in the
corresponding sub-accounts of the Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
If the 1940 Act or any regulation thereunder should be amended, or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield will not reflect charges or deductions against the Separate
Accounts or charges and deductions against the Policies or the Annuity
Contracts. Where relevant, the prospectuses for the Policies and the Annuity
Contracts contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations for the Portfolio are expressed as average annual compound rates
of return for each of the periods quoted, reflect the deduction of a
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<PAGE>
proportionate share of the Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
returns for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare performance information
for the Portfolio in advertisements, sales literature and reports to
Policyholders or to prospective investors to: (1) the Standard & Poor's Index
of 500 Common Stocks, the Dow Jones Industrial Average or other widely
recognized indices; (2) other mutual funds whose performance is reported by
Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity Research &
Data Service
7
<PAGE>
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; (3) an
appropriate industry average such as Donoghue's Money Fund Average; and (4)
the Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds according to overall
performance, investment objective, and assets. Unmanaged indices may assume
the reinvestment of dividends but usually do not reflect any "deduction" for
the expense of operating or managing a fund. In connection with a ranking,
the Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified seven-day period if
that level of income were generated for 52 consecutive weeks and expressed as
an annual percentage rate of return. The quotation of compound effective
yield for the Portfolio refers to the same calculation adjusted to reflect
the compounding effect of earnings on reinvested dividends. For the seven-day
period ended December 31, 1995, the Portfolio yield was 5.32% and was
equivalent to a compound effective yield of 5.46%.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's compositions and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, NY 10036
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00078-05/96
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<PAGE>
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Money Market Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of
the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00095 - 05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF ADDITIONAL INFORMATION TO PAGE IN PROSPECTUS
------------------------------ --------------------------
<S> <C> <C>
Investment Objective and Policies 1 2
------------------------------ --------------------------
Investment Restrictions 1 4
Foreign Investments 2 3
Repurchase and Reverse Repurchase
Agreements 2 3
Lending of Portfolio Securities 3 4
Quality and Diversification Requirements 3 2
Other Investment Companies 4 4
Management of the Fund 4 4
Directors and Officers 4 4
The Investment Adviser 5 5
The Sub-Adviser 7 5
Portfolio Transactions and Brokerage 7 5
Portfolio Turnover 7 4
Placement of Portfolio Brokerage 7 5
Purchase and Redemption of Shares 9 6
Offering of the Shares and Determination of
Offering Price 9 7
Net Asset Valuation 10 6
Investment Experience Information 10 7
Calculation of Performance Related Information 11 7
Total Return 11 7
Total Return 11 7
Yield Quotations 11 8
Taxes 12 6
Capital Stock of the Fund 13 7
Registration Statement 13 N/A
Financial Statements 13 8
Appendix A - Description of Portfolio Securities A-1 2
Appendix B - Description of Selected Corporate Bond
and Commercial Paper Ratings B-1 2
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Money Market Portfolio (the "Portfolio")
of the Fund is described in the Portfolio's Prospectus. Shares of the
Portfolio are sold only to the separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from those which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities or obligations of U.S.
branches of U.S. banks);
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities;
4. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate (including real estate limited partnerships),
commodities, or commodity contracts or interests in oil, gas or mineral
exploration or development programs or leases. However, the Portfolio may
purchase debt securities or commercial paper issued by companies which invest
in real estate or interests therein, including real estate investment trusts;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or the segregation of assets in connection with
such transactions;
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<PAGE>
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short;
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions;
(D) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% restriction. This policy shall not prohibit reverse
repurchase agreements or the segregation of assets in connection with such
transactions;
(E) The Portfolio may not invest more than 10% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act;
(F) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to securities received as dividends, through offers to exchange, or as a
result of reorganization, consolidation, or merger;
(G) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
securities of companies engaged in those businesses;
(H) The Portfolio may not invest in companies for the purpose of
exercising control or management; and
(I) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
FOREIGN INVESTMENTS
The Portfolio may invest in certain U.S. dollar denominated foreign
securities that are not subject to foreign withholding tax at the time of
purchase. Foreign investment may be made directly in securities of foreign
issuers.
For a description of the risks associated with investing in foreign
securities, see "Certain Portfolio Policies and Techniques", in the
Prospectus.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. The
Portfolio may
2
<PAGE>
engage in a repurchase agreement with respect to any security in which it is
authorized to invest. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility of
a decline in the market value of the underlying securities, as well as delays
and costs to the Portfolio in connection with bankruptcy proceedings), it is
the policy of the Portfolio to limit repurchase agreements to those parties
whose creditworthiness has been reviewed and found satisfactory by the
Sub-Adviser.
In a reverse repurchase agreement, the Portfolio sells a portfolio
security to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash and appropriate liquid assets in a segregated custodial account
to cover its obligation under the agreement. The Portfolio will enter into
reverse repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) the
Portfolio must receive any dividends or interest paid by the issuer on such
securities; (c) the Portfolio must have the right to call the loan and obtain
the securities loaned at any time upon notice of not more than five business
days, including the right to call the loan to permit voting of the
securities; and (d) the Portfolio must receive either interest from the
investment of collateral or a fixed fee from the borrower. Securities loaned
by the Portfolio remain subject to fluctuations in market value. The
Portfolio may pay reasonable finders, custodian and administrative fees in
connection with a loan. Securities lending, as with other extensions of
credit, involves the risk that the borrower may default. Although securities
loans will be fully collateralized at all times, the Portfolio may experience
delays in, or be prevented from, recovering the collateral. During the period
that the Portfolio seeks to enforce its rights against the borrower, the
collateral and the securities loaned remain subject to fluctuations in market
value. The Portfolio may also incur expenses in enforcing its rights. If the
Portfolio has sold a loaned security, it may not be able to settle the sale
of the security and may incur potential liability to the buyer of the
security on loan for its costs to cover the purchase.
QUALITY AND DIVERSIFICATION REQUIREMENTS
For the purpose of maintaining a stable net asset value per share, the
Portfolio will (i) limit its investment in the securities (other than U.S.
Government securities and securities that benefit from certain types of
credit enhancement arrangements) of any one issuer to no more than 5% of its
total assets, measured at the time of purchase, except at any time for an
investment in a single issuer of up to 25% of the Portfolio's total assets
held for not more than three business days; and (ii) limit investments to
securities that present minimal credit risks and securities (other than U.S.
Government securities) that are rated within the highest short-term rating
category by at least two nationally recognized statistical rating
organizations ("NRSROs") or by the only NRSRO that has rated the security.
Securities which originally had a maturity of over one year are subject to
more complicated, but generally similar rating requirements. A description of
illustrative credit ratings is set forth in Appendix B to this Statement of
Additional Information. The Portfolio may also purchase unrated securities
that are of comparable quality to the rated securities described above as
determined by the Board of Directors. Additionally, if the issuer of a
particular security has issued other securities of comparable priority and
security and which have been rated in accordance with (ii) above, that
security will be deemed to have the same rating as such other rated
securities.
In addition, the Board of Directors of the Fund has adopted procedures
which (i) require the Fund's Directors to approve or ratify purchases by the
Portfolio of securities (other than U.S. Government securities) that are
rated by only one NRSRO or that are unrated; (ii) require the Portfolio to
maintain a dollar-weighted average portfolio maturity of not more than 90
days and to invest only in
3
<PAGE>
securities with a remaining maturity of not more than 13 months; and (iii)
require the Portfolio, in the event of certain downgradings of or defaults on
portfolio holdings, to dispose of the holdings, subject in certain
circumstances to a finding by the Fund's Directors that disposing of the
holding would not be in the Portfolio's best interest.
OTHER INVESTMENT COMPANIES
The Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in the securities of money market funds, which are
investment companies. The Portfolio may not invest (i) more than 5% of its
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company. The
Portfolio will indirectly bear its proportionate share of any investment
advisory fees and expenses paid by the funds in which it invests, in addition
to the investment advisory fee and expenses paid by the Portfolio.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
JOHN R. KENNEY (1, 2) CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present) President (1978 - 1987 and December, 1992
- present), Director (1978 - present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President (1988 - 1989), Director (1976 -February, 1991),
Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 - present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present) Chairman
(December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
4
<PAGE>
RICHARD B. FRANZ, II (1, 2) TREASURER (DOB 7/12/50). Senior Vice President
(1987 - present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2) SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995), Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991) University of
South Florida.
ALAN M. YAEGER (1, 2) EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive Vice
President (June, 1993 - present), Chief Financial Officer (December, 1995 -
present), Senior Vice President (1981 - June, 1993) and Actuary (1972 -
present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. For the year ended
December 31, 1995, the Money Market Portfolio's share of Directors' fees and
expenses paid by the Fund was $528. The following table provides compensation
amounts paid to disinterested Directors of the Fund for the fiscal year ended
December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the director. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund -The
Investment Adviser" in the Prospectus.
5
<PAGE>
Western Reserve Life Assurance Co. of Ohio ("WRL" or the "Investment
Adviser") serves as the investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement dated April 30, 1996 with the Fund. The
Investment Adviser is a wholly-owned subsidiary of First AUSA Life Insurance
Company ("First AUSA"), a stock life insurance company which is wholly-owned
by AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act), on December 4, 1995. The
Investment Advisory Agreement provides that subsequent to its approval by the
Portfolio's initial shareholder, it will continue in effect for an initial
term ending April 22, 1998, and will continue in effect from year to year
thereafter, if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such contract or "interested
persons" of any such party. The Investment Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminate
automatically in the event of assignment (within the meaning of the 1940
Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Portfolio and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1995, 1994 and
1993, the Investment Adviser was paid fees for its services to the Portfolio
in the amount of $422,357, $351,798 and $224,406, respectively.
Payment of Expenses. The Investment Adviser provides investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Fund pays all other
expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses of registering the shares under
Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), interest, certain taxes, charges of the
custodian, fees and expenses of Fund non-interested directors, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, Securities and Exchange Commission ("SEC") fees, advisory fees,
certain insurance premiums, costs of corporate meetings, costs of maintenance
of corporate existence, investor services (including allocable telephone and
personnel expenses), extraordinary expenses, and other expenses properly
payable by the Fund. Depending upon the nature of the lawsuit, litigation
costs may be borne by the Fund.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolio in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until as least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees
6
<PAGE>
but excluding interest, taxes, brokerage fees, commissions and extraordinary
charges) exceed, as a percentage of the Portfolio's average daily net assets,
0.70%. There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the fiscal years ended December 31, 1995, 1994 and 1993
inasmuch as the normal operating expenses of the Portfolio did not exceed the
limitations described above.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
J.P. Morgan Investment Management Inc. (the "Sub-Adviser") serves as the
Sub-Adviser for the Portfolio pursuant to a Sub-Advisory Agreement dated
April 30, 1996. The Sub-Advisory Agreement was approved by the Board of
Directors of the Fund, including a majority of the Directors who were not
"interested persons" of the Fund (as defined in the 1940 Act), on December 4,
1995. The Sub-Advisory Agreement provides that subsequent to its approval by
a majority of the outstanding shares of the Portfolio, it will continue in
effect for an initial term ending April 22, 1998, and will continue in effect
from year to year thereafter, if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding shares of the
Portfolio, and (b) by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Sub-Advisory Agreement may be terminated without penalty on 60
days' written notice at the option of either party or by the vote of the
shareholders of the Portfolio and terminates automatically in the event of
assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. Such managers consider
analyses from various sources, make the necessary decisions and effect
transactions accordingly. The Sub-Adviser bears all of its expenses in
connection with the performance of its services under the Sub-Advisory
Agreement, such as compensating and furnishing office space for its officers
and employees connected with investment and economic research, trading and
investment management of the Portfolio. The method of computing the
Sub-Adviser's fee is set forth in the Prospectus.
For the years ended December 31, 1995, 1994 and 1993, Janus Capital
Corporation, the Portfolio's previous sub-adviser, was paid fees in the
amount of $211,178, $176,549 and $112,155, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Money Market Portfolio and the Fund
- - Portfolio Turnover" in the Prospectus. In computing the portfolio turnover
rate for a portfolio, securities whose maturities or expiration dates at the
time of acquisition are one year or less are excluded. Subject to this
exclusion, the turnover rate for a portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of portfolio securities owned by the portfolio
during the fiscal year. The Portfolio does not have a stated portfolio
turnover rate, as securities of the type in which it invests are excluded in
the usual calculation of that rate.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of
7
<PAGE>
the Portfolio to seek the best overall terms available, taking into account
various factors, including price, dealer spread or commissions, if any, size
of the transaction and difficulty of execution. While the Sub-Adviser
generally will seek reasonably competitive spreads or commissions, the
Portfolio will not necessarily be paying the lowest spread or commission
available. The Portfolio does not have any obligation to deal with any
broker, dealer or group of brokers or dealers in the execution of
transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best overall terms" (prompt and
reliable execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub- Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security being traded; the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the desired timing of the trade; the
activity existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement
services; financial stability; the existence of actual or apparent
operational problems of any broker or dealer; and research products or
services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio strategy;
access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services, and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information), including the research described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. The Sub-Adviser
may use such research products and services in servicing other accounts in
addition to the Portfolio. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that
do not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that a Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the
Sub-Adviser. Conversely, such supplemental information obtained by the
placement of business for the Sub-Adviser will be considered by and may be
useful to the Sub-Adviser in carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Purchases and sales of securities for the Portfolio usually are principal
transactions, and normally, the Portfolio will deal directly with the
underwriters or dealers who make a market in the securities involved unless
better prices and execution are available elsewhere. Such dealers usually act
as
8
<PAGE>
principals for their own account. On occasion, securities may be purchased
directly from the issuer. Bonds and money market securities are generally
traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The cost of portfolio securities transactions
of the Portfolio that are transactions with principals will consist primarily
of brokerage commissions or dealer or underwriter spreads between the bid and
asked price, although purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer. No stated commission
is generally applicable to securities traded in the U.S. over-the-counter
markets, but the prices of those securities include undisclosed commissions
or mark-ups.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
In addition, the Sub-Adviser may occasionally place portfolio business with
affiliated brokers of the Investment Adviser or the Sub-Adviser, including:
InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida 34618. As stated
above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
For the years ended December 31, 1995, 1994 and 1993, the Portfolio did
not pay any brokerage commissions.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset value as described in the Prospectus. Net asset value of
the Portfolio's shares is
9
<PAGE>
determined, once daily, as of the close of the regular session of business on
the New York Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time),
on each day in which the Exchange is open. (Currently the Exchange is closed
on New Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.)
Net asset value of the Portfolio's share is computed by dividing the value
of the net assets of the Portfolio by the total number of shares of the
Portfolio outstanding.
NET ASSET VALUATION
The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. It operates under Rule 2a-7 (the "Rule") of the
SEC under the 1940 Act, which permits the Portfolio to value its portfolio on
the basis of amortized cost. Under the amortized cost method of valuation, a
security is initially valued at its cost, and thereafter there is assumed a
constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
The method does not take into account unrealized capital gains or losses.
As long as it uses the Rule, the Portfolio will be required to abide by a
number of conditions. Those conditions which affect its investment policies
are that the Portfolio must (i) not maintain a dollar weighted portfolio
average in excess of 90 days; (ii) limit its investments, including
repurchase agreements, to those instruments which are denominated in U.S.
dollars, which the Board of Directors (or its delegatee) determines present
minimal credit risks and which are, or whose issuers are rated with respect
to comparable securities, with the highest rating category as determined by
at least two NRSROs (that are not affiliated persons, as defined in Section
2(a)(3)(C) of the 1940 Act, of the issuer, guarantor or provider of credit
support for the instrument) or otherwise by the NRSRO(s) required under the
Rule as amended, or, in the case of an instrument that is not rated, of
comparable quality as determined by the Board; (iii) not invest more than 5%
of its total assets in securities issued by, subject to puts from, or
guaranteed by, a particular issuer, except as permitted by the Rule; (iv) not
invest more than 5% of its total assets in Second Tier Securities, as defined
in the Rule, and shall further limit the amount of any such investment in
Second Tier Securities, as required by the Rule; and (v) not purchase any
instruments with a remaining maturity of more than 397 calendar days. Under
the Rule, the maturity of an instrument is generally considered to be its
stated maturity (or in the case of an instrument called for redemption, the
date on which the redemption payment must be made), with special exceptions
for certain variable and floating rate instruments. Repurchase agreements and
securities loan agreements are, in general, treated as having a maturity
equal to the period scheduled until repurchase or return, or, if subject to
demand, equal to the notice period.
Use of the amortized cost method may result in periods during which value,
as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During periods of
declining interest rates, the daily yield on shares of the Portfolio may tend
to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the Portfolio resulted in lower aggregate portfolio
value on a particular day, a prospective investor in the Portfolio would be
able to obtain a somewhat higher yield than would result from investment in a
fund utilizing solely market values, and existing investors in that fund
would receive less investment income. The converse would apply in a period of
rising interest rates.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on October 2, 1986. The rates of return
shown below depict the actual investment experience of the Portfolio for the
periods shown.
10
<PAGE>
CALCULATION OF PERFORMANCE RELATED INFORMATION
TOTAL RETURN
The rates of return shown below are based on the actual investment
performance, after the deduction of investment advisory fees and direct
Portfolio expenses. The rates are average annual compounded rates of return
for the periods ended on December 31, 1995.
The rates of return do not reflect charges or deductions against the
Series Life Account or the Series Annuity Account, or charges and deductions
against the Policies or the Annuity Contracts. Accordingly, these rates of
return do not illustrate how actual investment performance will affect
benefits under the Policies or the Annuity Contracts. Where relevant, the
prospectuses for the Policies and the Annuity Contracts contain performance
information about these products. Moreover, these rates of return are not an
estimate, projection or guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard and Poor's
Index of 500 Common Stocks, a widely used measure of stock market
performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1995
<TABLE>
<CAPTION>
PORTFOLIO INCEPTION* 5 YEARS 4 YEARS 3 YEARS 2 YEARS 1 YEAR
- --------------------------- ------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Money Market 4.98% 3.91% 3.57% 3.76% 4.42% 5.40%
Standard & Poor's 14.68% 16.59% 13.36% 15.34% 18.07% 37.58%
Index of 500 Common
Stocks
</TABLE>
- -----------------------------------------------------------------------------
* The Portfolio commenced operations on October 2, 1986.
Additional information regarding the investment performance of the
Portfolio appears in the Prospectus.
A. Total Return
Total return quotations for the Portfolio are computed by finding the
average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period).
</TABLE>
The total return quotation calculations for the Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
B. Yield Quotations
From time to time the Portfolio may quote its yield in reports or other
communications to policyholders or in advertising material. Yield quotations
are expressed in annualized terms and reflect dividends of the Portfolio
declared and reinvested daily based upon the net investment income earned by
the Portfolio each day. The Portfolio's yields fluctuate and the yield on any
day for any past period is not an indication as to future yields on any
investment in the Portfolio's shares. Future yields are not guaranteed.
Yield is computed in accordance with a standardized method required by the
SEC. The yields set forth on page 9 of the Prospectus were for the seven day
period ended on December 31, 1995. The current yield for the Portfolio is an
annualization, without compounding, of the portfolio rate of return,
11
<PAGE>
and is computed by determining the net change in the value of a hypothetical
pre-existing account in the Portfolio having a balance of one share at the
beginning of a seven calendar day period for which yield is to be quoted,
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with dividends
declared on the original shares and any such additional shares, but does not
include realized gains and losses or unrealized appreciation and
depreciation. The Portfolio may also calculate the compound effective
annualized yields by adding 1 to the base period return (calculated as
described above), raising that sum to a power equal to 365/7, and subtracting
1. The yield quotations for the Portfolio do not take into consideration any
deductions imposed by the Series Life Account or the Series Annuity Account.
Yield information is useful in reviewing the Portfolio's performance in
seeking to meet its investment objective, but, because yields fluctuate, such
information cannot necessarily be used to compare an investment in shares of
the Portfolio with bank deposits, savings accounts and similar investment
alternatives, which often provide an agreed or guaranteed fixed yield for a
stated period of time. Also, the Portfolio's yields cannot always be compared
with yields determined by different methods used by other funds. It should be
emphasized that yield is a function of the kind and quality of the
instruments in the Portfolio, portfolio maturity and operating expenses.
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts, and the holders thereof.
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or other income
derived with respect to its business of investing in securities ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities,
that were held for less than three months ("Short-Short Limitation"); (3) at
the close of each quarter of the Portfolio's taxable year, at least 50% of
the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs, and other securities
that, with respect to any one issuer, do not exceed 5% of the value of the
Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of 817(h), all securities of the same issuer, all interests in the
same real property project, and all interests in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while a particular foreign
government and its agencies, instrumentalities and
12
<PAGE>
political subdivisions all are considered the same issuer. For information
concerning the consequences of failure to meet the requirements of section
817(h), see the respective prospectuses for the Policies or the Annuity
Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
Policyholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Bond Portfolio, Growth Portfolio, Global Portfolio,
Short-to-Intermediate Government Portfolio, Emerging Growth Portfolio,
Equity- Income Portfolio, Aggressive Growth Portfolio, Balanced Portfolio,
Utility Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E. Quality
Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, Janus Balanced Portfolio, Leisure Portfolio, International Equity
Portfolio, Meridian/ INVESCO US Sector Portfolio, Meridian/INVESCO Foreign
Sector Portfolio, Meridian/INVESCO Global Sector Portfolio, Value Equity
Portfolio and Money Market Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the SEC, Washington, D.C., a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
securities to which this Statement of Additional Information relates. If
further information is desired with respect to the Portfolio or such
securities, reference is made to the Registration Statement and the exhibits
filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report and are
incorporated herein by reference to such report.
13
<PAGE>
A-
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolio acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolio, reflecting an agreed upon market rate of interest for
the period from the time of the Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. The Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While the Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the SEC has taken the position that repurchase
agreements of greater than seven days together with other illiquid
investments should be limited to an amount not in excess of 10% of the
Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, the Portfolio could
be ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by the Portfolio upon liquidation of
the securities may be limited.
A-1
<PAGE>
9. Reverse Repurchase Agreement. A reverse repurchase agreement involves
the sale of securities held by the Portfolio, with an agreement to repurchase
the securities at an agreed upon price, date and interest payment. The
Portfolio will use the proceeds of the reverse repurchase agreements to
purchase other money market securities maturing, or under an agreement to
resell, at a date simultaneous with or prior to the expiration of the reverse
repurchase agreement. The Portfolio will utilize reverse repurchase
agreements when the interest income to be earned from the investment of the
proceeds from the transaction is greater than the interest expense of the
reverse repurchase transaction.
10. Asset-Backed Securities. The Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior- subordinated structures and
over-collateralization. The Portfolio will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.
A-2
<PAGE>
APPENDIX B
Description of the highest commercial paper, bond and other short-and
long-term rating categories assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors
Service, Inc. ("Fitch") and Duff and Phelps, Inc. ("Duff").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign
(+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment
of short-term promissory obligations and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return
of funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well established access to a range of financial markets and assured sources
of alternative liquidity. Issues rated Prime-2 (P-2) have a strong capacity
for repayment of short-term promissory obligations. This ordinarily will be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which
reflects an assurance of timely payment only slightly less in degree than the
strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of a timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BOND AND LONG-TERM RATINGS
Bonds rated Aaa by Moody's 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 on such issues.
Bonds rated AAA is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay principal and interest.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and subject to slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judged by
Fitch to be of safety virtually beyond question and are readily salable,
whose merits are not unlike those of the AAA class, but whose margin of
safety is less strikingly broad. The issue may be the obligation of a small
company, strongly secured but influenced as to rating by the lesser financial
power of the enterprise and more local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt.
B-1
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
BALANCED PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO] [AEGON LOGO]
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Short-to-Intermediate Government
Portfolio and the Balanced Portfolio of the Fund (collectively, the
"Portfolios").
The investment objective of the Short-to-Intermediate Government Portfolio
is to seek as high a level of current income as is consistent with
preservation of capital by investing primarily in U.S. Government securities.
The investment objective of the Balanced Portfolio is to seek preservation of
capital, reduced volatility, and superior long-term risk-adjusted returns by
investing primarily in common stock, convertible securities and fixed-income
securities. A minimum of 25% of the Balanced Portfolio's assets will always
be invested in non-convertible fixed-income securities. There can be, of
course, no assurance that the Portfolios will achieve their objectives.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and AEGON USA Investment Management, Inc. ("AEGON Management") serve
as the investment adviser (the "Investment Adviser") and the sub-adviser (the
"Sub-Adviser"), respectively, to the Portfolios. WRL and AEGON Management are
each direct or indirect wholly-owned subsidiaries of AEGON USA, Inc., a
financial services holding company. See "The Investment Adviser" and "The
Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the
Portfolios bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
BALANCED PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights .................................................................. 1
The Short-to-Intermediate Government Portfolio and Balanced Portfolio and the Fund ... 2
Management of the Fund ................................................................ 7
Dividends and Other Distributions ..................................................... 8
Taxes ................................................................................. 8
Purchase and Redemption of Shares ..................................................... 9
Valuation of Shares ................................................................... 9
The Fund and Its Shares ............................................................... 9
Performance Information ............................................................... 10
General Information ................................................................... 10
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
The information contained in the table below for a share of capital stock
of the Short-to-Intermediate Government Portfolio outstanding for the period
December 3, 1992 (commencement of operations) through December 31, 1992 and
for the years ended December 31, 1995, 1994 and 1993, is taken from the
Portfolio's audited financial statements as incorporated by reference in the
Statement of Additional Information. The Fund's Annual Report contains
additional performance information for the Portfolio. A copy of the Annual
Report may be obtained without charge upon request.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, 12/3/92 TO
1995 1994 1993 12/31/92
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .............................. $ 9.72 $ 10.30 $ 10.02 $10.00
Income From Investment Operations
Net Investment Income ........................................... .60 .50 .36 .02
Net Gains or Losses on Securities (both realized and unrealized) .70 (.58) .29 .02
---------- ---------- ---------- -------------
Total Income (Loss) From Investment Operations ................. 1.30 (.08) .65 .04
---------- ---------- ---------- -------------
Less Distributions
Dividends (from net investment income) .......................... (.60) (.50) (.35) (.02)
---------- ---------- ---------- -------------
Distributions (from capital gains) .............................. .00 .00 (.02) .00
---------- ---------- ---------- -------------
Total Distributions ............................................... (.60) (.50) (.37) (.02)
---------- ---------- ---------- -------------
Net Asset Value, End of Period .................................... $ 10.42 $ 9.72 $ 10.30 $10.02
========== ========== ========== =============
Total Return* ..................................................... 13.54% (.43%) 4.58% .45%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........................... $23,588 $20,356 $24,864 $2,509
Ratio of Expenses to Average Net Assets** ......................... .78% 0.81% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets ............. 5.84% 4.95% 3.44% 3.24%
Portfolio Turnover Rate ........................................... 51.82% 93.70% 28.64% .00%
</TABLE>
- -----------------------------------------------------------------------------
* The total return shown for 1992 is for the period from December 3, 1992
through December 31, 1992, and is not annualized. The total return of the
Portfolio reflects the advisory fee and all other Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect
the charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized and is net of advisory fee waiver for years 1993 and
1992 for which periods the annualized ratio of expenses to average net
assets would have been 1.02% and 1.41%, respectively, absent the advisory
fee waiver by Western Reserve Life.
1
<PAGE>
BALANCED PORTFOLIO
The information contained in the table below for a share of capital stock
of the Balanced Portfolio outstanding for the period March 1,
1994 (commencement of operations) through December 31, 1994 and for the year
ended December 31, 1995, is taken from the Portfolio's audited financial
statements as incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for the Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, 3/1/94 TO
1995 12/31/94
--------------- --------------
<S> <C> <C>
Net Asset Value,
Beginning of Period .......... $ 9.24 $ 10.00
Income From Investment
Operations
Net Investment Income ........ (.44) .34
Net Gains or Losses on
Securities (both realized
and unrealized) ............ 1.38 (.76)
--------------- --------------
Total Income
(Loss) From
Investment Operations ..... 1.82 (.42)
--------------- --------------
Less Distributions .............
Dividends (from net
investment income) ......... (.43) (.34)
Distributions (from capital
gains) ..................... (.00) .00
--------------- --------------
Total Distributions ............ (.43) (.34)
--------------- --------------
Net Asset Value, End of Period $ 10.63 $ 9.24
=============== ==============
Total Return* .................. 19.80% (5.73%)
Ratios/Supplemental Data ......
Net Assets, End of Period
(000 omitted) ................ $31,114 $19,422
Ratio of Expenses to Average
Net Assets** ................. .97% 1.00%
Ratio of Net Investment Income
to Average Net Assets ........ (4.38%) 4.27%
Portfolio Turnover Rate ........ 98.55% 57.73%
</TABLE>
* The total return shown for 1994 is for the ten month period ended December
31, 1994, and is not annualized. The total return of the Portfolio
reflects the advisory fee and all other Portfolio expenses and includes
reinvestment of dividends and capital gains; it does not reflect the
charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized and is net of advisory fee waiver for the period ended
December 31, 1994, for which period the annualized ratio of expenses to
average net assets would have been 1.34% absent the advisory fee waiver by
Western Reserve Life.
THE SHORT-TO-INTERMEDIATE
GOVERNMENT PORTFOLIO AND
BALANCED PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Short-to-Intermediate Government Portfolio and the Balanced
Portfolio are series of the Fund. The Fund consists of several series, or
separate investment portfolios, which offer shares for investment by the
Separate Accounts. This Prospectus describes only the Short-to-Intermediate
Government Portfolio and Balanced Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The Portfolios' investment objectives and, unless otherwise noted, their
investment policies and techniques, may be changed by the Board of Directors
of the Fund without shareholder or Policyholder approval. A change in the
investment objectives or policies of a Portfolio may result in that Portfolio
having an investment objective or policies different from that which a
2
<PAGE>
Policyholder deemed appropriate at the time of investment. There can be, of
course, no assurance that the Portfolios will achieve their investment
objectives.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
The investment objective of the Short-to-Intermediate Government Portfolio
is to seek as high a level of current income as is consistent with
preservation of capital.
The Short-to-Intermediate Government Portfolio seeks to achieve its
objective by investing primarily in U.S. Government securities and certain
other securities as described below. Under normal conditions, at least 65% of
the Portfolio's total assets will be invested in U.S. Government securities,
including repurchase agreements with respect to U.S. Government securities.
The Short-to-Intermediate Government Portfolio seeks to manage share price
stability by investing in obligations with short or intermediate maturities
that are not as sensitive to interest rate changes as obligations with longer
maturities. In selecting securities for the Short-to-Intermediate Government
Portfolio, the Advisers attempt to maintain the Short-to-Intermediate
Government Portfolio's overall sensitivity to interest rates in a range
similar to the average for short-term to intermediate-term Government bonds
with an aggregate average dollar-weighted remaining maturity of one to seven
years. The Short-to-Intermediate Government Portfolio's dollar-weighted
average maturity may be longer than seven years from time to time, but will
not exceed ten years under normal conditions. The Short-to-Intermediate
Government Portfolio may hold individual securities with maturities of more
than ten years as long as its average maturity remains within this limit.
A more detailed description of the Short-to-Intermediate Government
Portfolio's investment policies and a glossary
2
<PAGE>
further describing certain investment securities mentioned in the discussions
that follow are contained in the Statement of Additional Information.
The Short-to-Intermediate Government Portfolio will normally invest at
least 65% of the value of its total assets in U.S. Government securities,
including such securities subject to repurchase agreements. The
Short-to-Intermediate Government Portfolio may also invest in debt securities
of all types, e.g., bonds, debentures, notes, equipment lease and trust
certificates, asset-backed securities, taxable municipal bonds, bond
warrants, obligations issued or guaranteed by supranational issuers and
participation certificates in pools of mortgage loans or collateralized
mortgage obligations assembled for sale to investors by governmental agencies
("mortgage securities"). The Short-to-Intermediate Government Portfolio may
also invest in commercial paper.
U.S. Government securities are securities issued by or guaranteed by the
U.S. Government or its agencies or instrumentalities. U.S. Government
securities have varying degrees of government backing. They may be backed by
the credit of the U.S. Government as a whole or only by the issuing agency or
instrumentality. For example, securities issued by the Financing Corporation
are supported only by the credit of the Financing Corporation, and not by the
U.S. Government. Securities issued by the Federal Home Loan Bank and the
Federal National Mortgage Association (FNMA) are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
U.S. Treasury bonds, notes, and bills, and some agency securities, such as
those issued by the Government National Mortgage Association (GNMA), are
backed by the full faith and credit of the U.S. Government as to payment of
principal and interest and are the highest quality U.S. Government
securities. The Short-to-Intermediate Government Portfolio itself, and its
share price and yield, are not guaranteed by the U.S. Government. (See
Appendix A in the Statement of Additional Information for a further
description of certain of the portfolio securities.)
Corporate debt securities in which the Short-to-Intermediate Government
Portfolio invests will generally have a rating within the three highest
grades as determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa
or A) or Standard & Poor's Corporation ("S&P") (AAA, AA or A). The
Short-to-Intermediate Government Portfolio may, however, invest in debt
securities within the fourth highest grade as determined by Moody's (Baa) or
S&P (BBB), if the Sub-Adviser determines the debt securities' ratings are
supported by an internal credit review that the Sub-Adviser will conduct in
each such instance. Bonds rated Baa by Moody's or BBB by S&P are considered
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security for such bonds 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.
The Short-to-Intermediate Government Portfolio may purchase
mortgage-backed securities issued by government and non-government entities
such as banks, mortgage lenders, or other financial institutions.
Mortgage-backed securities include mortgage pass-through securities,
mortgage-backed bonds, and mortgage pay-through securities. A mortgage pass-
through security is a pro-rata interest in a pool of mortgages where the cash
flow generated from the mortgage collateral is passed through to the security
holder. Mortgage-backed bonds are general obligations of their issuers,
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of mortgages. Mortgage pay-through securities exhibit
characteristics of both pass-through and mortgage-backed bonds.
Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Short-to-Intermediate Government Portfolio may invest in them if it is
determined they are consistent with the Short-to-Intermediate Government
Portfolio's investment objective and policies.
The Short-to-Intermediate Government Portfolio may also invest in
Collateralized Mortgage Obligations ("CMOs"). CMOs are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. The Short-to-Intermediate Government Portfolio also may invest in
securities backed by automobile receivables and credit-card receivables and
other securities backed by other types of receivables or other assets. Credit
support for asset-backed securities may be based on the underlying assets
and/or provided through credit enhancements by a third party. Credit
enhancement techniques include letters of credit, insurance bonds, limited
guarantees (which are generally provided by the issuer), senior-subordinated
structures and over-collateralization. The Short-to-Intermediate Government
Portfolio will only purchase an asset-backed security if it is rated at least
"A" by S&P or Moody's.
Investments in commercial paper are limited to obligations rated Prime-1
by Moody's or A-1 by S&P. See Appendix B in the Statement of Additional
Information for further information concerning bond and commercial paper
ratings.
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The Short-to-Intermediate Government Portfolio may invest a portion of its
assets in very short-term instruments with remaining maturities of one year
or less, including U.S. Treasury bills and repurchase agreements. When it is
believed that market conditions warrant a temporary defensive position, the
Short-to-Intermediate Government Portfolio may invest up to 100% of its
assets in these instruments.
The Short-to-Intermediate Government Portfolio may invest up to 10% of its
total assets in foreign securities, as described in the Statement of
Additional Information. Foreign securities may be subject to foreign
government taxes which would reduce the income yield on such securities.
Foreign
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investments involve certain risks, such as political or economic instability
of the issuer or of the country of issue, the difficulty of predicting
international trade patterns, fluctuating exchange rates and the possibility
of imposition of exchange controls. Such securities may also be subject to
greater fluctuations in price than securities of domestic corporations or of
the U.S. Government. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad than in the United States, and, with
respect to certain foreign countries, there is a possibility of expropriation
or confiscatory taxation, or diplomatic developments which could affect
investment in those countries. Finally, in the event of a default on any such
foreign securities, it may be more difficult for the Short-to-Intermediate
Government Portfolio to obtain or to enforce a judgment against the issuers
of such securities. See the Statement of Additional Information regarding
risk associated with foreign securities.
The Short-to-Intermediate Government Portfolio may invest in U.S.
Government securities subject to repurchase agreements and may also engage in
reverse repurchase agreements involving U.S. Government securities. A
repurchase agreement involves the purchase of a U.S. Government security and
a simultaneous agreement to sell that security back to the seller (a bank or
broker-dealer) at a specified price and date or upon demand. If, however, the
seller failed to repurchase the securities as agreed, the
Short-to-Intermediate Government Portfolio may suffer a loss if the market
value of the securities declines before they can be liquidated on the open
market. The Short-to-Intermediate Government Portfolio will not enter into a
repurchase agreement or reverse repurchase agreement which would cause more
than 15% of its net assets to be subject to repurchase agreements or reverse
repurchase agreements not terminable within seven days, together with other
illiquid investments. The Short-to-Intermediate Government Portfolio will
seek to minimize credit risks associated with repurchase agreements by
entering into repurchase agreements only with those banks or broker-dealers
that are deemed creditworthy by the Sub-Adviser.
When the Short-to-Intermediate Government Portfolio invests in a reverse
repurchase agreement, it temporarily transfers possession of a portfolio
security to another party, such as a bank or broker-dealer, in return for
cash, and agrees to buy the security back at a future date and price. Reverse
repurchase agreements may be used to provide cash to satisfy unusually heavy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio securities. At the same time, reverse
repurchase agreements expose the Short-to-Intermediate Government Portfolio
to potential fluctuations in the value of its assets. At all times that a
reverse repurchase agreement is outstanding, the Short-to-Intermediate
Government Portfolio will maintain cash and/or liquid securities in a
segregated account at its custodian bank with a value at least equal to its
obligations under the reverse repurchase agreement. The Short-to-Intermediate
Government Portfolio will not engage in reverse repurchase transactions for
leveraging purposes.
BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to seek preservation
of capital, reduced volatility, and superior long-term risk-adjusted returns.
The Balanced Portfolio seeks to achieve its objective by investing
primarily in common stock, convertible securities and fixed-income
securities. The Balanced Portfolio may also invest in preferred stocks and
interests in real estate investment trusts ("REITs"). A minimum of 25% of the
Balanced Portfolio's assets will always be invested in non-convertible
fixed-income securities. In seeking current income and growth opportunities,
the Balanced Portfolio will primarily select companies with established
operating histories and potential for dividend growth. The Balanced Portfolio
will seek to achieve income yield in excess of the dividend income yield of
the Standard & Poor's Index of 500 Common Stocks.
In selecting equity securities and securities convertible into equity
securities for the Balanced Portfolio the Sub-Adviser typically seeks
companies which exhibit strong fundamental characteristics and considers
fundamental factors such as balance sheet quality, cash flow generation,
earnings and dividend growth record and outlook, and profitability levels.
The Sub-Adviser presently intends to consider these and other fundamental
characteristics in determining attractive investment opportunities. However,
the Sub-Adviser may select securities based on factors other than those
described above.
The Balanced Portfolio seeks to invest its assets primarily in
income-producing common or preferred stock when the Sub-Adviser believes that
the relevant market environment favors profitable investing in those
securities. The remainder of the Balanced Portfolio will ordinarily be
invested in debt obligations, typically some of which will be convertible
into common stock. However, the Balanced Portfolio may increase its cash
position when the Sub-Adviser determines that investment opportunities with
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desirable risk/ reward characteristics are unavailable. The Balanced
Portfolio does not presently intend to invest more than 20% of its total
assets in equity securities which do not pay a dividend. It is anticipated
that almost all of the equity securities in which the Balanced Portfolio
invests will be listed on a national securities exchange or on NASDAQ or will
be traded in the U.S. over-the-counter market.
The Balanced Portfolio may invest up to 25% of its total assets in
securities of foreign issuers. It is anticipated that most of the Balanced
Portfolio's investments in securities of foreign issuers will be American
Depositary Receipts (ADRs). ADRs are dollar-denominated receipts issued
generally by domestic banks and represent the deposit with the bank of a
security of a
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foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States. The Portfolio may also invest in American Depositary
Shares. The Balanced Portfolio does not intend to invest more than 5% of its
assets in debt obligations of foreign governments. Foreign securities may be
subject to foreign government taxes which would reduce the income yield on
such securities. Foreign investments involve certain risks, such as political
or economic instability of the issuer or of the country of issue, the
difficulty of predicting international trade patterns, fluctuating exchange
rates and the possibility of imposition of exchange controls. Such securities
may also be subject to greater fluctuations in price than securities of
domestic corporations or of the U.S. Government. In addition, there may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. There is generally less government
regulation of stock exchanges, brokers and listed companies abroad than in
the United States, and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in
the event of a default on any such foreign securities, it may be more
difficult for the Balanced Portfolio to obtain or to enforce a judgment
against the issuers of such securities. See the Statement of Additional
Information regarding risk associated with foreign securities.
The Balanced Portfolio may invest in government securities, corporate
bonds and debentures, high-grade commercial paper, preferred stocks,
certificates of deposit or other securities of U.S. issuers when the
Sub-Adviser perceives attractive opportunities from such securities, or so
that the Balanced Portfolio may receive a competitive return on its
uninvested cash. The Balanced Portfolio may invest in debt securities of U.S.
and foreign issuers.
U.S. Government securities are described under the section entitled
"Investment Objectives of the Portfolios--Short-to-Intermediate Government
Portfolio," p.2. The Balanced Portfolio itself, and its share price and
yield, are not guaranteed by the U.S. Government. (See Appendix A in the
Statement of Additional Information for a further description of certain of
the portfolio securities.)
The Balanced Portfolio may invest in zero coupon bonds or "strips". Zero
coupon bonds do not make regular interest payments; rather, they are sold at
a discount from face value. Principal and accreted discount (representing
interest accrued but not paid) are paid at maturity. "Strips" are debt
securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The issuers of all
zero coupon bonds, and the obligor of all "strips" purchased by the Balanced
Portfolio, will be the U.S. Government and its agencies or instrumentalities.
The market value of "strips" and zero coupon bonds generally fluctuates in
response to changes in interest rates to a greater degree than
interest-paying securities of comparable term and quality. The Balanced
Portfolio may also invest in step coupon securities. For a description of
these securities, see "Zero Coupon and Step Coupon Securities" in Appendix B
to the Statement of Additional Information.
Corporate debt securities in which the Balanced Portfolio invests will
generally have a rating within the four highest grades as determined by
Moody's (Aaa, Aa, A, or Baa) or S&P (AAA, AA, A, or BBB). Bonds rated Baa by
Moody's or BBB by S&P are considered medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security for such bonds 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. The Balanced
Portfolio does not currently intend to invest more than 5% of its assets in
debt securities rated less than investment grade (commonly referred to as
junk bonds) -i.e., below the four highest grades as determined by Moody's or
S&P, or in unrated securities deemed by the Sub-Adviser to be of comparable
quality. The Balanced Portfolio will not invest in rated securities that, at
the time of investment, are rated below "B" by Moody's or "B" by S&P ("b" in
the case of Moody's preferred stock ratings) or, if unrated, are judged by
the Sub-Adviser not to possess investment qualities at least equivalent to a
"B" or "b" rating. Securities rated "B" or "b" are predominantly speculative
with respect to their issuers' capacity to make payments of both principal
and interest or of preferred stock dividend and sinking fund obligations in
accordance with the securities' obligations. While such securities will
likely possess some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse
conditions. Bonds and preferred stock rated "B" or "b" are not considered
investment grade securities. In the event that ratings decline after the
Balanced Portfolio's investment in such securities, the Sub-Adviser will
consider all such factors as it deems relevant to the advisability of
retaining such securities. To the extent that the Balanced Portfolio invests
in fixed-income debt securities, regardless of investment grade, investment
income may increase and may constitute a larger portion of the return on the
Balanced Portfolio's investments, and the Balanced Portfolio may not
participate in stock market advances or declines to the extent that it would
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if it were fully invested in equity securities.
Investments in commercial paper are limited to obligations rated Prime-1
by Moody's or A-1 by S&P. See Appendix A in the Statement of Additional
Information for further information concerning bond and commercial paper
ratings.
The Portfolio may invest in convertible securities. Convertible securities
may include corporate notes or preferred stock, but ordinarily are a
long-term debt obligation of the issuer convertible 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
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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. In evaluating investment in
a convertible security, primary emphasis will be given to the attractiveness
of the underlying common stock. The convertible debt securities in which the
Balanced Portfolio may invest are subject to the same rating criteria as the
Balanced Portfolio's investment in non-convertible debt securities.
The Balanced Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions on resale.
However, certain restricted securities that are not registered for sale to
the general public but that can be resold to institutional investors may not
be considered illiquid, provided that a dealer or institutional trading
market exists. The responsibility for determining the liquidity of such
securities has been delegated by the Board of Directors of the Fund to the
Sub-Adviser, subject to review by the Directors. The Sub-Adviser may treat
such securities as liquid only if they determine that a readily available
market for the securities exists. The Balanced Portfolio's investment in such
securities could have the effect of increasing the level of illiquidity of
the Balanced Portfolio to the extent that a dealer or institutional trading
market declines.
OTHER PORTFOLIO TECHNIQUES AND RISK FACTORS
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER DERIVATIVE INSTRUMENTS.
Subject to certain limitations, the Portfolios may engage in hedging
strategies involving options on securities, futures contracts and options
thereon, forward currency contracts, and interest rate swaps, caps and
floors. The Portfolios do not currently intend to engage in these strategies,
but may do so in the future. Prior to the Portfolios engaging in these
strategies, disclosure will be added to this Prospectus and the Statement of
Additional Information for the Portfolios.
LENDING OF PORTFOLIO SECURITIES. The Short-to-Intermediate Government
Portfolio may lend securities or make any other loan up to 30% of its total
assets, although this limitation does not apply to purchases of commercial
paper, debt securities or to repurchase agreements. The Balanced Portfolio
may lend securities or make any other loan up to 25% of its total assets,
although this limitation does not apply to purchases of commercial paper or
debt securities. Securities lending may involve some credit risk to the
Portfolios if the borrower defaults and the Portfolios are delayed or
prevented from recovering the collateral for the loan or are otherwise
required to cover a transaction in the security loaned. If a material event
is to be voted upon affecting the Portfolios' investment in securities which
are on loan, the Portfolios will take such action as may be appropriate in
order to vote its shares. The Portfolios do not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote
if it were considered important with respect to the investment. (See the
Statement of Additional Information for further information on lending of
securities.)
BORROWING. The Portfolios may borrow money from banks. Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of the Portfolios' total assets at the time the loan or borrowing
is made. To secure borrowings, the Short-to-Intermediate Government
Portfolio may not mortgage or pledge its securities in amounts that exceed
15% of its net assets, except in connection with reverse repurchase
agreements. The Portfolios may also borrow money from or lend money to other
funds that permit such transactions which are also advised by the
Sub-Adviser, provided the Portfolios seek and obtain permission to do so from
the SEC. There is no assurance that such permission would be granted. In
accordance with the requirements of current California insurance regulations,
the Portfolios will restrict borrowings to no more than 10% of total assets,
except that the Portfolios may temporarily borrow amounts equal to as much as
25% of total assets if such borrowing is necessary to meet redemptions. If
California's insurance regulations are changed at some future time to permit
borrowings in excess of 10%, but less than 25% of net assets (Balanced
Portfolio) or 15% of net assets (Short-to-Intermediate Government Portfolio),
the Portfolios may conduct borrowings in accordance with such revised limits.
FIXED-INCOME INVESTING The performance of the Short-to-Intermediate
Government Portfolio, and the debt component of the Balanced Portfolio,
depends primarily on interest rate changes, the average weighted maturity of
debt securities in the Portfolio and the quality of securities held. The debt
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component of a Portfolio will tend to decrease in value when interest rates
rise and increase when interest rates fall. A Portfolio may vary the average
maturities of its portfolio based on the portfolio manager's analysis of
interest rate trends and other factors. Generally, shorter term securities
are less sensitive to interest rate changes, but longer term securities offer
higher yields. A Portfolio's share price and yield will also depend, in part,
on the quality of its investments in debt securities. For example, while U.S.
Government securities generally are of high quality, government securities
that are not backed by the full faith and credit of the United States and
other debt securities, including those of foreign governments, may be
affected by changes in the creditworthiness of the issuer of the security.
The extent that such changes are
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reflected in a Portfolio's share price will depend upon the extent of the
Portfolio's investment in such securities.
BANK OBLIGATIONS. Because the Portfolios may invest (up to 100%) of their
assets in bank obligations, an investment in the Portfolios should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
OTHER INVESTMENT POLICIES AND RESTRICTIONS. The Portfolios are subject to
certain other investment policies and restrictions which are described in the
Statement of Additional Information, some of which are fundamental policies
of the Portfolios and as such may not be changed without the approval of a
majority of the Portfolios' shareholders and the Policyholders.
PORTFOLIO TURNOVER. A portfolio turnover rate is, in general, the
percentage computed by taking the lesser of purchases or sales of portfolio
securities (excluding certain short-term securities) for a year and dividing
it by the monthly average of the market value of such securities during the
year. The Portfolios' annual portfolio turnover rate is not expected to
exceed 100%, although the rate of portfolio turnover is not expected to be a
limiting factor when changes are deemed appropriate. The
Short-to-Intermediate Government Portfolio may engage in short-term trading
but does not expect to do so frequently. The Balanced Portfolio's annual
portfolio turnover rate of the common stock portion of the investments is
also not expected to exceed 100%. High turnover and short-term trading
involve correspondingly higher transaction costs for the Portfolios which are
ultimately borne by the shareholders and Policyholders. See "Portfolio
Transactions and Brokerage" in the Statement of Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Board meets regularly four times each
year and at other times as necessary. There are currently five Directors,
three of whom are not "interested persons" of the Fund within the meaning of
that term under the 1940 Act. By virtue of the functions performed by WRL as
Investment Adviser and AEGON Management as Sub-Adviser, the Fund requires no
employees other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of WRL and receive
no compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly-traded international
insurance group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in
accordance with the Portfolios' stated investment objective and policies. As
compensation for its services to the Short-to-Intermediate Government and
Balanced Portfolios, the Investment Adviser receives monthly compensation at
the annual rate of 0.60% and 0.80%, respectively, of the average daily net
assets of the Portfolios. For the fiscal year ended December 31, 1995, the
Fund paid WRL advisory fees at the annual rate of 0.60% and 0.80% of the
average daily net assets of the Short-to-Intermediate Government and Balanced
Portfolios, respectively.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolios the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolios' custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolios, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolios, including
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the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolios'
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolios pay all other expenses incurred in their operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolios to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of each Portfolio's average daily net assets. There were no
expenses paid by the Investment Adviser on behalf of the
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Portfolios for the fiscal year ended December 31, 1995. For the fiscal year
ended December 31, 1995, the expenses of the Short-to-Intermediate Government
Portfolio and the Balanced Portfolio, as a percentage of each Portfolio's
average daily net assets, were 0.78% and 0.97%, respectively.
THE SUB-ADVISER
AEGON USA Investment Management, Inc. ("AEGON Management" or the
Sub-Adviser) located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499,
serves as the Sub-Adviser to the Portfolios. AEGON Management is an indirect
wholly-owned subsidiary of AEGON and thus is an affiliate of WRL.
Clifford A. Sheets has served as the Portfolio Manager of the
Short-to-Intermediate Government Portfolio since its inception. Mr. Sheets
has been a Senior Vice President of the Sub-Adviser since 1990. Prior to
joining the Sub-Adviser, Mr. Sheets was head of the Fixed Income Management
Department of the Trust and Asset Management Group of Bank One, Indianapolis
NA. Jarrell D. Frey has also served as Portfolio Manager for the
Short-to-Intermediate Government Portfolio since May, 1995. Mr. Frey joined
the Sub-Adviser in 1994. Prior to joining the Sub-Adviser, Mr. Frey served
five years with Woodmen Accident and Life Company in Lincoln, NE where he
analyzed fixed income (both public and private debt offerings) and equity
securities.
Michael Van Meter has served as the Senior Portfolio Manager of the
Balanced Portfolio since its inception. Mr. Van Meter also serves as Chairman
of the Equity Investment Policy Committee of the Sub-Adviser. Mr. Van Meter
was President and Managing Partner of Perpetual Investment Advisors from 1983
to 1989, when AEGON acquired that firm.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolios. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolios and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolios. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolios.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to each Portfolio, less 50%
of the amount of any excess expenses paid by the Investment Adviser on behalf
of such Portfolio pursuant to the expense limitation described above. (See
"The Investment Adviser," p. 6.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolios. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. The
Sub-Adviser may occasionally place portfolio business with the affiliated
brokers of the Investment Adviser or the Sub-Adviser, including
InterSecurities, Inc. and AEGON USA Securities, Inc. In placing portfolio
business with all dealers, the Sub-Adviser seeks best execution of each
transaction and all brokerage placement must be consistent with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolios intend to distribute substantially all of the net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolios at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolios at the
end of the fiscal year.
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TAXES
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, a Portfolio is not subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions, and net short-term capital gain, if any) and any net capital
gain (the excess of net long-term capital gain over net short-term capital
loss) that it distributes to its shareholders. It is each Portfolio's
intention to distribute substantially all such income and gains.
Shares of each Portfolio are offered only to the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with
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respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
each Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat each Portfolio's assets as assets of the
related separate account, these limitations also apply to each Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below as of the end of each calendar quarter or within 30 days
thereafter no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of a Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting a Portfolio and its shareholders; see
the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
A Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of a Portfolio's share is computed by dividing the value
of the net assets of the Portfolio by the total number of Portfolio shares
outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by each Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
9
<PAGE>
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
9
<PAGE>
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolios and of each of the other portfolios have equal
voting rights, except that only shares of a particular portfolio will be
entitled to vote on matters concerning only that portfolio. Each issued and
outstanding share of a Portfolio is entitled to one vote and to participate
equally in dividends and distributions declared by that Portfolio and, upon
liquidation or dissolution, to participate equally in the net assets of such
Portfolio remaining after satisfaction of outstanding liabilities. The shares
of each Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of a Portfolio's total
return or yield in connection with the total return for the appropriate
Separate Account in advertisements, sales literature or reports to
Policyholders or to prospective investors. Total return and yield quotations
for a Portfolio reflect only the performance of a hypothetical investment in
the Portfolio during the particular time period shown as calculated based on
the historical performance of the Portfolio during that period. Such
quotations do not in any way indicate or project future performance.
Quotations of total return and yield will not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant, the prospectuses for the Policies
and the Annuity Contracts contain additional performance information.
The total return of a Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When a
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations for a Portfolio are expressed as average annual compound rates of
return for each of the periods quoted, reflect the deduction of a
proportionate share of a Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for a Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Fund may also, from time to time, compare performance information for
a Portfolio in advertisements, sales literature and reports to Policyholders
or to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, a
portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
10
<PAGE>
Yield quotation for a Portfolio refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolios' performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Policyholders, at least semi-annually,
reports showing the Portfolios'
10
<PAGE>
composition and other information. An annual report, containing financial
statements audited by the Fund's independent accountants, will be sent to
Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolios'
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
11
<PAGE>
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
BALANCED PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
AEGON USA Investment Management, Inc.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES OR
ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00017-05/96
12
<PAGE>
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
BALANCED PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Short-to-Intermediate Government and Balanced Portfolios of the WRL Series
Fund, Inc. (the "Fund"). A copy of the Prospectus may be obtained from the
Fund by writing the Fund at 201 Highland Avenue, Largo, Florida 34640 or by
calling the Fund at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
AEGON USA INVESTMENT MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00034-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objectives and Policies 1 2
Investment Restrictions 1 7
Lending of Portfolio Securities 4 6
Non-Investment Grade Debt Securities 4 3
Borrowing 4 6
Foreign Securities 5 4
Zero Coupon and Step Coupon Securities 5 3
Repurchase and Reverse Repurchase Agreements 6 3
Management of the Fund 6 7
Directors and Officers 6 7
The Investment Adviser 8 7
The Sub-Adviser 9 8
Portfolio Transactions and Brokerage 10 8
Portfolio Turnover 10 7
Placement of Portfolio Brokerage 11 8
Purchase and Redemption of Shares 12 9
Determination of Offering Price 12 9
Net Asset Valuation 12 9
Investment Experience Information 13 10
Calculation of Performance Related Information 13 10
Total Return 13 10
Yield Quotations for the Short-to-Intermediate
Government Portfolio 14 10
Taxes 14 8
Capital Stock of the Fund 16 9
Registration Statement 16 N/A
Financial Statements 16 11
Appendix A - Description of Portfolio Securities A-1 3
Appendix B - Description of Selected Corporate
Bond and Commercial Paper Ratings B-1 3
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Short-to-Intermediate Government
Portfolio and Balanced Portfolio (collectively, the "Portfolios") of the Fund
are described in the Portfolios' Prospectus. Shares of the Portfolios are
sold only to the separate accounts of Western Reserve Life Assurance Co. of
Ohio ("WRL") and to separate accounts of its affiliated life insurance
companies (collectively, the "Separate Accounts") to fund the benefits under
certain variable life insurance policies (the "Policies") and variable
annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, each Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of a
Portfolio may result in that Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
As indicated in the Prospectus, the Portfolios are subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of
that Portfolio. "Majority" for this purpose and under the Investment Company
Act of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. A
complete statement of all such fundamental policies for the Portfolios are
set forth below.
INVESTMENT RESTRICTIONS
The Short-to-Intermediate Government Portfolio may not, as a matter of
fundamental policy:
1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of
any one issuer if immediately thereafter, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; or (b) with
respect to 100% of the Portfolio's assets, own more than either (i) 10% in
principal amount of the outstanding debt securities of an issuer, or (ii) 10%
of the outstanding voting securities of an issuer, except that such
restrictions shall not apply to Government securities, bank money market
instruments or bank repurchase agreements.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).
5. Lend any security or make any other loan if, as a result, more than 30%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Short-to-Intermediate Government Portfolio has adopted
the following non-fundamental investment restrictions which may be changed
by the Board of Directors of the Fund without shareholder or Policyholder
approval:
1
<PAGE>
(A) The Portfolio's investment in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements.
(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements.
(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 10% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities," p. 5.
The Balanced Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
2
<PAGE>
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options, futures, swaps and forward
contracts or from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Balanced Portfolio has adopted the following
non-fundamental investment restrictions which may be changed by the Board of
Directors of the Fund without shareholder or Policyholder approval:
(A) The Portfolio's investment in warrants valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.
(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in excess of 25% of the value of
the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation.
(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
3
<PAGE>
(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 25% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities", p. 5.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of that
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolios'
investments in foreign securities to meet additional diversification and
other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5. above the Portfolios from time to
time may lend securities from their portfolio to brokers, dealers and
financial institutions and receive as collateral cash or U.S. Treasury
securities which at all times while the loan is outstanding will be
maintained in amounts equal to at least 100% of the current market value of
the loaned securities. Any cash collateral will be invested in short-term
securities, which will likely increase the current income of that Portfolio.
Such loans may not have terms longer than 30 days and will be terminable at
any time. The Portfolios may also pay reasonable fees to persons unaffiliated
with the Portfolios for services in arranging such loans.
NON-INVESTMENT GRADE DEBT SECURITIES (BALANCED PORTFOLIO ONLY)
The Balanced Portfolio may, but does not currently invest, or intend to
invest, more than 5% of its assets in debt securities below the four highest
grades ("lower grade debt securities", commonly referred to as junk bonds) as
determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or Standard &
Poor's (BBB). Before investing in any lower-grade debt securities, the
Sub-Adviser will determine that such investments meet the Balanced
Portfolio's investment objective and that the lower-grade debt securities'
ratings are supported by an internal credit review, which the Sub-Adviser
will conduct in each such instance. Lower-grade debt securities usually have
moderate to poor protection of principal and interest payments, have certain
speculative characteristics (see Appendix B for a description of the
ratings), and involve greater risk of default or price declines due to
changes in the issuer's creditworthiness than investment-grade debt
securities. Because the market for lower-grade debt securities may be
thinner and less active than for investment-grade debt securities, there may
be market price volatility for these securities and limited liquidity in the
resale market. Market prices for lower-grade debt securities may decline
significantly in periods of general economic difficulty or rising interest
rates. Through portfolio diversification and credit analysis, investment risk
can be reduced, although there can be no assurance that losses will not
occur.
The quality limitation set forth in the Balanced Portfolio's investment
policies is determined immediately after the Balanced Portfolio's acquisition
of a given security. Accordingly, any later change in ratings will not be
considered when determining whether an investment complies with the Balanced
Portfolio's investment policies.
BORROWING
Any such loans or borrowings are expected to be short-term in nature and
used for temporary or emergency purposes, such as to provide cash for
redemptions, and will not exceed 25% of the Short-to-Intermediate Government
Portfolio's net assets, including the amount borrowed, at the time the loan
or borrowing is made. To secure borrowings, the Short-to-Intermediate
Government Portfolio may not mortgage or pledge its securities in amounts
that exceed 15% of its net assets, except in connection with reverse
repurchase agreements. The Short-to-Intermediate Government Portfolio may
also borrow money from or lend money to other funds that permit such
transactions and are advised by the Sub-Adviser if the Short-to-Intermediate
Government Portfolio seeks and obtains permission to do so from the
Securities and Exchange Commission ("SEC"). There is no assurance that such
permission would be granted. The Short-to-Intermediate Government Portfolio
may also borrow money only for temporary or emergency purposes (not for
leveraging or investment).
4
<PAGE>
The Balanced Portfolio may also borrow money from banks. Any such
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of the Portfolio's net assets at the time the borrowing is made.
Additional limitations on borrowing that are imposed by state law and
regulations may apply.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Balanced Portfolio may
purchase certain foreign securities and American Depositary Receipts,
although the Balanced Portfolio may not hold more than 25% of its total
assets in such securities. The Short-to-Intermediate Government Portfolio may
purchase up to 10% of its total assets on foreign securities. American
Depositary Receipts (ADRs) are dollar-denominated receipts issued generally
by domestic banks and represent the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign
securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It is possible that market quotations for foreign securities will
not be readily available. In such event, these securities shall be valued at
fair market value as determined in good faith by the Sub-Adviser under the
supervision of the Board of Directors. If it should become necessary, the
Portfolios could encounter greater difficulties in invoking legal processes
abroad than would be the case in the United States. Transaction costs with
respect to foreign securities may be higher. The Investment Adviser and the
Sub-Adviser will consider these and other factors before investing in foreign
securities. The Balanced Portfolio may concentrate its investments in ADRs in
securities of issuers of one or more foreign countries.
To the extent a Portfolio invests directly in foreign securities, that
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that a Portfolio is subject to
the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
ZERO COUPON AND STEP COUPON SECURITIES
The Portfolios may invest in zero coupon and step coupon securities. Zero
coupon and step coupon bonds are issued and traded at a discount from their
face amounts. They do not entitle the holder to any periodic payment of
interest prior to maturity or prior to a specified date when the securities
begin paying current interest. The discount from the face amount or par value
depends on the time remaining until cash payments begin, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue
discount on such securities that accrues that year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal
Revenue Code, a Portfolio must distribute its investment company taxable
income, including the original issue discount accrued on zero coupon or step
coupon bonds. Because a Portfolio will not receive cash payments on a current
basis in respect of accrued original issue discount on zero coupon bonds or
step coupon bonds during
5
<PAGE>
the period before interest payments begin, in some years the Portfolio may
have to distribute cash obtained from other sources in order to satisfy the
distribution requirements under the Code. A Portfolio might obtain such cash
from selling other portfolio holdings. These actions are likely to reduce the
assets to which the Portfolio's expenses could be allocated and to reduce the
rate of return for the Portfolio. In some circumstances, such sales might be
necessary in order to satisfy cash distribution requirements even though
investment considerations might otherwise make it undesirable for the
Portfolio to sell the securities at the time.
Generally, the market prices of zero coupon and step coupon securities are
more volatile than the prices of securities that pay interest periodically
and in cash and are likely to respond to changes in interest rates to a
greater degree than other types of debt securities having similar maturities
and credit quality.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS (SHORT-TO-INTERMEDIATE
GOVERNMENT PORTFOLIO ONLY)
In a repurchase agreement, the Short-to-Intermediate Government Portfolio
purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale
price reflects the purchase price plus an agreed upon incremental amount
which is unrelated to the coupon rate or maturity of the purchased security.
A repurchase agreement involves the obligation of the seller to pay the
agreed upon price, which obligation is in effect secured by the value (at
least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security. The Short-to-Intermediate
Government Portfolio may engage in a repurchase agreement with respect to any
security in which it is authorized to invest. While it does not presently
appear possible to eliminate all risks from these transactions (particularly
the possibility of a decline in the market value of the underlying
securities, as well as delays and costs to the Short-to-Intermediate
Government Portfolio in connection with bankruptcy proceedings), it is the
policy of the Short-to-Intermediate Government Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by the Sub-Adviser.
In a reverse repurchase agreement, the Short-to-Intermediate Government
Portfolio sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time. While a reverse repurchase agreement is
outstanding, the Short-to-Intermediate Government Portfolio will maintain
cash and appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Short-to-Intermediate Government
Portfolio will enter into reverse repurchase agreements only with parties
that the Sub-Adviser deems creditworthy.
The Short-to-Intermediate Government Portfolio does not intend to invest
more than 15% of its assets in repurchase agreements or 15% of its assets in
reverse repurchase agreements.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustees of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
6
<PAGE>
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater, FL
34616. Retired (1988 - present); Senior Vice-President, Treasurer (1966
-1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western
Corporation; Vice President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 -present), Chief Executive
Officer (1982 -present), President (1978 - 1987 and December, 1992
- present), Director (1978 - present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President (1988 - 1989), Director (1976 to February, 1991),
Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 - present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 -present), Chairman
(December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 to February, 1991), Pioneer
Western Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 to present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present)
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991) University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present) Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment
- --------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
7
<PAGE>
Adviser or the Sub-Adviser ("disinterested Director"). Each Director also
receives $500, plus expenses, per each regular and special board meeting
attended. For the fiscal year ended December 31, 1995, the
Short-to-Intermediate Government and Balanced Portfolios' share of the fees
and expenses paid by the Fund were $242 and $521, respectively.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund--The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Short-to-Intermediate Government
Portfolio pursuant to an Investment Advisory Agreement dated July 13, 1992
with the Fund and the Balanced Portfolio pursuant to an Investment Advisory
Agreement dated December 7, 1993 with the Fund. The Investment Adviser is a
wholly-owned subsidiary of First AUSA Life Insurance Company ("First AUSA"),
a stock life insurance company which is wholly-owned by AEGON USA, Inc.
("AEGON"). AEGON is a financial services holding company whose primary
emphasis is on life and health insurance and annuity and investment products.
AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group.
The Investment Advisory Agreements were most recently approved by the
Fund's Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 18,
1996. The Investment Advisory Agreements provide that they will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolios, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreements
may be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of that Portfolio and
terminates automatically in the event of its assignment (within the meaning
of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreements
provide that the Investment Adviser, subject to review by
8
<PAGE>
the Board of Directors, is responsible for the actual management of the Fund
and has responsibility for making decisions to buy, sell or hold any
particular security. The Investment Adviser also is obligated to provide all
the office space, facilities, equipment and personnel necessary to perform
its duties under the Agreements. For further information about the management
of the Portfolios, see "The Sub-Adviser", p. 9.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1995, 1994 and
1993, the Investment Adviser was paid fees for its services with respect to
the Short-to-Intermediate Government Portfolio in the amounts of $126,134
$133,919 and $72,622, respectively. For the Balanced Portfolio for the year
ended December 31, 1995 and for the period from March 1, 1994 (commencement
of operations) to December 31, 1994 the Investment Adviser was paid fees in
the amount of $195,339 and $67,043, respectively.
Payment of Expenses. Under the terms of the Investment Advisory
Agreements, the Investment Adviser provides investment advisory services and
pays all compensation of and furnishes office space for officers and
employees of the Investment Adviser connected with investment management of
the Portfolios, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolios by the Investment Adviser. The Portfolios pay all
other expenses incurred in its operation and all of the Portfolios' general
administrative expenses.
Expenses that are borne directly by the Portfolios include redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of
the custodian, fees and expenses of Fund directors who are not "interested
persons" of the Fund, legal expenses, state franchise taxes, cost of auditing
services, costs of printing proxies, SEC fees, advisory fees, certain
insurance premiums, costs of corporate meetings, costs of maintenance of
corporate existence, investor services (including allocable telephone and
personnel expenses), extraordinary expenses, and other expenses properly
payable by that Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be borne by each Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolios' Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolios to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, on an annual basis 1% of each Portfolio's average daily net assets.
For the fiscal year ended December 31, 1993, the investment adviser paid
expenses on behalf of the Short-to-Intermediate Government Portfolio in the
amount of $2,226. There were no expenses paid by the Investment Adviser on
behalf of the Short-to-Intermediate Government Portfolio for the fiscal years
ended December 31, 1995 and 1994, inasmuch as the normal operating expenses
of this Portfolio did not exceed the limitations as described above. For the
fiscal year ended December 31, 1995, there were no expenses paid by the
Investment Adviser on behalf of the Balanced Portfolio and for the period
from March 1, 1994 (commencement of operations) to December 31, 1994, the
Investment Adviser paid expenses on behalf of the Balanced Portfolio in the
amount of $28,629.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund--The Sub-Adviser" in the
Prospectus.
AEGON USA Investment Management, Inc. (the "Sub-Adviser") serves as the
Sub-Adviser for the Short-to-Intermediate Government Portfolio pursuant to a
Sub-Advisory Agreement dated July 13,
9
<PAGE>
1992, and for the Balanced Portfolio pursuant to a Sub-Advisory Agreement
dated December 7, 1993. The Sub-Advisory Agreements were most recently
approved by the Board of Directors of the Fund, including a majority of the
Directors who were not "interested persons," of the Fund (as defined in the
1940 Act) on March 18, 1996. The Sub-Advisory Agreements provide that they
will continue in effect from year to year if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding shares of
that Portfolio, and (b) by a majority of the Directors who are not parties to
such Agreement or "interested persons" (as defined in the 1940 Act) of any
such party. The Sub-Advisory Agreements may be terminated without penalty on
60 days' written notice at the option of either party or by the vote of the
shareholders of that Portfolio and terminates automatically in the event of
its assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreements.
Pursuant to the Sub-Advisory Agreements, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolios. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolios and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolios. The Sub-Adviser bears
all of its expenses in connection with the performance of its services under
the Sub-Advisory Agreements, such as compensating and furnishing office
space for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolios. The method of
computing the Sub-Adviser's fee is set forth in the Prospectus. For the
fiscal years ended December 31, 1995, 1994 and 1993, sub-advisory fees were
paid in the amount of $63,067, $66,959 and $36,310, respectively, for the
Short-to-Intermediate Government Portfolio. For the fiscal year ended
December 31, 1995 and for the period from March 1, 1994 to December 31, 1994,
sub-advisory fees were paid in the amount of $94,669 and $19,275,
respectively for the Balanced Portfolio.
The Sub-Adviser, located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499, is a wholly-owned subsidiary of AEGON USA, Inc. ("AEGON") and thus is
an affiliate of the Investment Adviser. The Sub-Adviser also serves as
sub-adviser to the two bond portfolios of IDEX II Series Fund. The
Sub-Adviser also manages the general account investment portfolios of the
life insurance subsidiaries of AEGON and had in excess of $22.6 billion under
management as of January 1, 1996.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Short-to-Intermediate Government
Portfolio and the Balanced Portfolio and The Fund--Portfolio Turnover" in the
Prospectus. In computing the portfolio turnover rate for the Portfolios,
securities whose maturities or expiration dates at the time of acquisition
are one year or less are excluded. Subject to this exclusion, the turnover
rate for each Portfolio is calculated by dividing (a) the lesser of purchases
or sales of portfolio securities for the fiscal year by (b) the monthly
average of portfolio securities owned by that Portfolio during the fiscal
year. The Short-to-Intermediate Government Portfolio's turnover rate for the
fiscal years ended December 31, 1995, 1994 and 1993 were 51.82%, 93.70% and
28.64%, respectively. The Balanced Portfolio's turnover rate for the fiscal
year ended December 31, 1995 and for the period from March 1, 1994
(commencement of operations) to December 31, 1994 were 98.55% and 57.73%,
respectively. The future annual turnover rates cannot be precisely predicted,
although an annual turnover rate in excess of 100% is not presently
anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic policies and objective of the Portfolios may be disposed
of when they are no longer deemed suitable.
10
<PAGE>
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolios'
securities transactions. In placing orders, it is the policy of the
Portfolios to obtain the most favorable net results, taking into account
various factors, including price, dealer spread or commissions, if any, size
of the transaction and difficulty of execution. While the Sub-Adviser
generally will seek reasonably competitive spreads or commissions, the
Portfolios will not necessarily be paying the lowest spread or commission
available. The Portfolios do not have any obligation to deal with any broker,
dealer or group of brokers or dealers in the execution of transactions in
portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolios and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolios. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolios.
When the Portfolios purchase or sell a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolios may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolios or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all.
11
<PAGE>
To the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolios
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolios with those to be sold
or purchased for such other accounts or companies in order to obtain
favorable execution and lower brokerage commissions. In that event,
allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Sub-Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to the Portfolios and to such other accounts or companies. In some cases this
procedure may adversely affect the size of the position obtainable for the
Portfolios.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolios, and
reviews the prices and commissions, if any, paid by the Portfolios to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the individual and group life insurance policies and
variable annuity contracts issued by WRL by a broker-dealer as a factor in
the selection of broker-dealers to execute the Portfolios' transactions. In
addition, the Sub-Adviser may occasionally place portfolio business with the
affiliated brokers of the Investment Adviser or the Sub-Adviser, including
InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida 34618- 5068, and
AEGON USA Securities, Inc., P.O. Box 1449, Cedar Rapids, Iowa 52499. As
stated above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
For the years ended December 31, 1995, 1994 and 1993, the
Short-to-Intermediate Government Portfolio did not pay any commissions. For
the fiscal year ended December 31, 1995 and for the period March 1, 1994
(commencement of operations) to December 31, 1994 the Balanced Portfolio paid
aggregate commissions in the amount of $90,724 and $43,311, respectively. For
the same period, the Balanced Portfolio paid commissions to AEGON USA
Securities, Inc. in the amount of $1,040 and $8,700, respectively, which
represents 1.15% and 20.09%, respectively, of the Balanced Portfolio's
aggregate commissions. The percentage of the Balanced Portfolio's aggregate
dollar amount of transactions involving the payment of commissions effected
through AEGON USA Securities, Inc. for the fiscal year ended December 31,
1995 was 9.63% and for the period March 1, 1994 to December 31, 1994 was
38.06%.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolios are sold and redeemed at
their respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of the Portfolios' shares
are ordinarily determined, once daily, as of the close of the regular session
of business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolios
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<PAGE>
are determined by dividing the total value of the securities and other
assets, less liabilities, by the total number of shares outstanding. In
determining asset value, securities listed on the national securities
exchanges and traded on the NASDAQ National Market are valued at the closing
prices on such markets, or if such a price is lacking for the trading period
immediately preceding the time of determination, such securities are valued
at their current bid price. Foreign securities and currencies are converted
to U.S. dollars using the exchange rate in effect at the close of the
Exchange. Other securities which are traded on the over-the-counter market
are valued at bid price. Other securities for which quotations are not
readily available are valued at fair values as determined in good faith by
the Sub-Adviser under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days or less are valued on the
amortized cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios. It does not represent or project future
investment performance.
The Short-to-Intermediate Government Portfolio commenced operations on
December 3, 1992. The Balanced Portfolio commenced operations on March 1,
1994. The rates of return indicated below depict the actual investment
experience of the Portfolios for the periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rates of return are based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rates are average annual compounded rates of return for the periods ended on
December 31, 1995. The Short-to-Intermediate Government Portfolio's rate of
return for the fiscal years ended December 31, 1995, 1994 and 1993, the
Short-to-Intermediate Government Portfolio's rate of return was 13.54%,
(0.43%) and 4.58%, respectively. The Balanced Portfolio's rate of return for
the period March 1, 1994 (commencement of operations) to December 31, 1994
was (5.73)% and for the fiscal year ended December 31, 1995, the Balanced
Portfolio's rate of return was 19.80%.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period)
The total return quotation calculations reflect the deduction of a
proportionate share of each Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional information regarding the investment performance of the
Portfolios appear in the Prospectus.
13
<PAGE>
YIELD QUOTATIONS FOR THE SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the
Portfolio.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield of the Short-to-Intermediate Government Portfolio as computed
above for the thirty day period ended December 31, 1995 was 5.58%.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolios must distribute to their Policyholders for each taxable year at
least 90% of their investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from
certain foreign currency transactions) ("Distribution Requirement") and must
meet several additional requirements. These requirements include the
following: (1) the Portfolio must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options, futures
or forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months--options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the Portfolio's
principal business of investing in securities (or options and futures with
respect thereto) ("Short-Short Limitation"); (3) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs, and other securities that, with respect
to any one issuer, do not exceed 5% of the value of the Portfolio's total
assets and that do not represent more than 10% of the outstanding voting
securities of the issuer; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of each Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by
14
<PAGE>
the same issuer. For information concerning the consequences of failure to
meet the requirements of section 817(h), see the respective prospectuses for
the Policies or the Annuity Contracts.
The Portfolios will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolios with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held
for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign
currencies, that are not directly related to the Portfolio's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are
held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Portfolio
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
Limitation. The Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent a Portfolio does
not qualify for this treatment, it may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would
be advantageous to do so, in order for that Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC Income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
15
<PAGE>
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Balanced Portfolio, Utility Portfolio,
Aggressive Growth Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, Janus Balanced Portfolio, Leisure Portfolio, International Equity
Portfolio, Value Equity Portfolio, Meridian/INVESCO Global Sector Portfolio,
Meridian/INVESCO US Sector and Meridian/INVESCO Foreign Sector Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolios or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report and are
incorporated herein by reference to such report.
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<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Asset-Backed Securities. The Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. The Portfolio will only purchase an asset-backed
security if it is rated at least "A" by Standard & Poor's or Moody's.
9. Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral is passed through to the security holder. Mortgage-backed
bonds are general obligations of their issuers, payable out of the issuers'
general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities exhibit characteristics of both
pass-through and mortgage-backed bonds. Mortgage-backed securities also
include other debt obligations secured by mortgages on commercial real estate
or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.
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<PAGE>
10. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
11. Stripped Mortgage-Backed Securities. Stripped mortgage backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security receives interest payments from
the same underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the
prices of stripped mortgage-backed securities can be significantly affected
by changes in interest rates as well. As interest rates fall, prepayment
rates tend to increase, which in turn tends to reduce prices of
"interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.
12. Financing Corporation Securities. (FICOs) are debt obligations issued
by the Financing Corporation. The Financing Corporation was originally
created to recapitalize the Federal Savings and Loan Insurance Corporation
(FSLIC) and now functions as a financing vehicle for the FSLIC Resolution
Fund, which received substantially all of FSLIC's assets and liabilities.
13. Zero Coupon Bonds. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the
principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financing Corporation (FICO) also can be stripped in this
fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells the
coupon payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities (CATS), Treasury Investment Growth Receipts (TIGRS), and generic
Treasury Receipts (TRs), are stripped U.S. Treasury securities separated into
their component parts through custodial arrangements established by their
broker sponsors. FICO bonds have been stripped in this fashion. The Portfolio
has been advised that the staff of the Division of Investment Management of
the SEC does not consider such privately stripped obligations to be U.S.
Government securities, as defined by the 1940 Act. Therefore, the Portfolio
will not treat such obligations as U.S. Government securities for purposes of
the 65% portfolio composition ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds are
originated in the form of a zero coupon bond and are not created by stripping
an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond
does not pay current income, its price can be very volatile when interest
rates change. In calculating its dividends, the Portfolio takes into account
as income a portion of the difference between a zero coupon bond's purchase
price and its face value.
A-2
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14. Bond Warrants. A warrant is a type of security that entitles the
holder to buy a proportionate amount of a bond at a specified price, usually
higher than the market price at the time of issuance, for a period of years
or to perpetuity. Warrants generally trade in the open market and may be sold
rather than exercised.
15. Obligations of Supranational Entities. Obligations of supranational
entities include those of international organizations designated or supported
by governmental entities to promote economic reconstruction or development
and of international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development
(the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. There is no assurance
that foreign governments will be able or willing to honor their commitments.
16. Equipment Lease and Trust Certificates. The Portfolio may invest in
equipment lease and trust certificates, which are debt securities that are
secured by direct or indirect interests in specified equipment or equipment
leases (including, but not limited to, railroad rolling stock, planes,
trucking or shipping fleets, or other personal property).
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
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 on 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 or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
UNRATED - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
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CORPORATE BONDS - STANDARD & POOR'S CORPORATION ("S&P")
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 AND 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
PLUS (+) OR MINUS (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
UNRATED - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER - MOODY'S
"PRIME-1" - Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term obligations.
"PRIME-2" - Issuers in the Commercial Paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and
value of current assets as well as cash generation in sound relationship to
current indebtedness. They are rated lower than the best commercial paper
issuers because margins of protection may not be as large or because
fluctuations of protective elements over the near or immediate term may be of
greater amplitude. Temporary increases in relative short and overall debt
load may occur. Alternative means of financing remain assured.
COMMERCIAL PAPER -S&P
"A" - Issues assigned this highest rate 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 overwhelming as for
issues designated "A-1".
"A-3" - Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
B-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO] [VAN KAMPEN LOGO]
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Emerging Growth Portfolio of the Fund.
The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation. The Emerging Growth Portfolio seeks to achieve its
objective by investing primarily in common stocks of small and medium sized
companies. There can be, of course, no assurance that the Emerging Growth
Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Van Kampen American Capital Asset Management, Inc. serve as the
investment adviser (the "Investment Adviser") and the sub-adviser (the
"Sub-Adviser"), respectively, to the Emerging Growth Portfolio. See "The
Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Emerging
Growth Portfolio that prospective investors ought to know before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund, the Emerging Growth Portfolio and
the other portfolios of the Fund has been filed with the Securities and
Exchange Commission and is available upon request without charge by calling
or writing the Fund. The Statement of Additional Information pertaining to
the Emerging Growth Portfolio bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights .......................... 1
The Emerging Growth Portfolio and the Fund ... 1
Management of the Fund ........................ 4
Dividends and Other Distributions ............. 5
Taxes ......................................... 5
Purchase and Redemption of Shares ............. 6
Valuation of Shares ........................... 6
The Fund and Its Shares ....................... 6
Performance Information ....................... 7
General Information ........................... 7
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the Emerging Growth Portfolio for the period March 1, 1993
(commencement of operations) through December 31, 1993 and for the years
ended December 31, 1995 and 1994, is taken from the Portfolio's audited
financial statements incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for the Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM
ENDED ENDED 3/1/93 TO
12/31/95 12/31/94 12/31/93
----------- ----------- --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period .................... $ 11.55 $ 12.47 $ 10.00
Income From Investment
Operations
Net Investment Income (Loss) .01 .01 (.04)
Net Gains or Losses on
Securities (both realized
and unrealized) ........... 5.42 (.92) 2.51
----------- ----------- --------------
Total Income (Loss) From
Investment Operations ..... 5.43 (.91) 2.47
----------- ----------- --------------
Less Distributions
Dividends (from net
investment income) ......... .00 (.01) .00
Distributions
(from capital gains) ....... (.73) .00 .00
----------- ----------- --------------
Total Distributions ......... (.73) (.01) .00
----------- ----------- --------------
Net Asset Value, End of Period $ 16.25 $ 11.55 $ 12.47
=========== =========== ==============
Total Return* .................. 46.79% (7.36%) 24.71%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ................ $288,519 $182,650 $102,472
Ratio of Expenses to Average
Net Assets** ................. .91% .92% 1.00%
Ratio of Net Investment Income
to Average Net Assets ........ .03% .06% (.30%)
Portfolio Turnover Rate ........ 124.13% 72.62% 12.79%
</TABLE>
* The total return shown for 1993 is for the ten month period ended December
31, 1993, and is not annualized. The total return of the Portfolio
reflects the advisory fee and all other Portfolio expenses and includes
reinvestment of dividends and capital gains; it does not reflect the
charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized and is net of advisory fee waiver for the period
ended December 31, 1993 for which period the annualized ratio of
expenses to average net assets would have been 1.16% absent the
advisory fee waiver by WRL.
THE EMERGING GROWTH PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Emerging Growth Portfolio is a series of the Fund. The Fund
consists of several series, or separate investment portfolios, which offer
shares for investment by the Separate Accounts. This Prospectus describes
only the Emerging Growth Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Emerging Growth Portfolio (the
"Portfolio") is to seek capital appreciation. The Portfolio seeks to achieve
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<PAGE>
its objective by investing primarily in common stocks of small and medium
sized companies. Under normal conditions, at least 65% of the Portfolio's
total assets will be invested in common stocks of small and medium sized
companies, both domestic and foreign, in the early stages of their life
cycle, that the Sub-Adviser believes have the potential to become major
enterprises. Investments in such companies may offer greater opportunities
for growth of capital than larger, more established companies, but also
involves certain special risks. Emerging growth companies often have limited
product lines, markets, or financial resources, and they may be dependent
upon one or a few key people for management. The securities of such companies
may be subject to more abrupt or erratic market movements than securities of
larger, more established companies or the market averages in general.
There can, of course, be no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
The Portfolio does not limit its investments to any single group or type
of security. The Portfolio does not intend to invest more than 5% of its net
assets in unseasoned companies or special situations involving new
management, special products and techniques, unusual developments, mergers or
1
<PAGE>
liquidations. Investments in unseasoned companies and special situations
often involve much greater risks than are inherent in ordinary investments,
because securities of such companies may be more likely to experience
unexpected fluctuations in price.
The Portfolio's primary approach is to seek what the Sub-Adviser believes
to be unusually attractive growth investments on an individual company basis.
The Portfolio may invest in securities that have above average volatility of
price movement. Because prices of common stocks and other securities
fluctuate, the value of an investment in the Portfolio will vary based upon
the Portfolio's investment performance. The Portfolio attempts to reduce
overall exposure to risk from declines in securities prices by spreading its
investments over many different companies in a variety of industries.
TYPES OF SECURITIES AND RISK FACTORS
While the Portfolio invests primarily in common stocks, it may invest to a
limited extent in other securities such as preferred stocks, convertible
securities and warrants. The Portfolio may invest up to 15% of its net assets
in illiquid securities. The Portfolio also may enter into repurchase
agreements with domestic banks and broker-dealers which involve certain
risks. The Portfolio does not presently expect to commit as much as 5% of its
total assets to investments in either warrants or restricted securities. The
risks involved in investments in such securities are described under
"Investment Objective and Policies - Warrants" and "Investment Objective and
Policies - Restricted Securities" in the Statement of Additional Information.
The Portfolio may invest up to 20% of its assets in securities of foreign
issuers, including American Depositary Receipts (ADRs), which are
dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer.
ADRs are publicly traded on exchanges or over-the-counter in the United
States. Foreign securities may be subject to foreign government taxes which
would reduce the income yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade
patterns, fluctuating exchange rates and the possibility of imposition of
exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations or of the U.S.
Government. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
There is generally less government regulation of stock exchanges, brokers and
listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect
investment in those countries. Finally, in the event of a default on any such
foreign securities, it may be more difficult for the Portfolio to obtain or
to enforce a judgment against the issuers of such securities.
Although the Portfolio's assets will be invested primarily in equity
securities at most times, the Portfolio's assets may be invested up to 100%
in U.S. Government securities, high grade commercial paper, cash, high
quality money market instruments, corporate bonds and debentures, preferred
stocks or certificates of deposit of commercial banks when, in the judgment
of the Sub-Adviser, a temporary defensive position is warranted, or so that
the Portfolio may receive a return on its idle cash. (See Appendix A of the
Statement of Additional Information for a more detailed description of
certain of these instruments.) While the Portfolio maintains a temporary
defensive position, investment income will increase and may constitute a
larger portion of the return on the Portfolio, and the Portfolio may not
participate in market advances or declines to the extent it would if the
Portfolio were fully invested. (See "Distribution and Taxes.") Additional
information about these defensive investments is set forth in Appendix A to
the Statement of Additional Information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio
expects to utilize options on securities, futures contracts and options
thereon in several different ways, depending upon the status of the
Portfolio's investment portfolio and the Sub-Adviser's expectations
concerning the securities markets; however, the Portfolio may engage in
futures contracts and options thereon solely for bona fide hedging purposes,
or such other purposes as may be permitted under applicable rules pursuant to
which the Portfolio would remain exempt from the definition of a "commodity
pool operator" under rules of the Commodity Futures Trading Commission
("CFTC").
In times of stable or rising stock prices, the Portfolio generally seeks
to obtain maximum exposure to the stock market, i.e., to be "fully invested."
Nevertheless, even when the Portfolio is fully invested, the Sub-Adviser
believes that prudent management may require that at least a small portfolio
of assets be available as cash to honor redemption requests and for other
short term needs. The Portfolio may also have cash on hand that has not yet
been invested. The portion of the Portfolio's assets that is invested in cash
equivalents does not fluctuate with stock market prices, so that, in times of
2
<PAGE>
rising market prices, the Portfolio may underperform the market in proportion
to the amount of cash equivalents in its portfolio. By purchasing stock index
futures contracts, stock index call options, or call options on stock index
futures contracts, however, the Portfolio can "equitize" the cash portion of
its assets and obtain equivalent performance to investing 100% of its assets
in equity securities.
If the Sub-Adviser forecasts a market decline, the Portfolio may take a
defensive position, reducing its exposure to the stock market by increasing
its cash position. By selling stock index futures contracts instead of
portfolio securities, a similar result can be achieved to the extent that the
performance of the stock index futures contracts correlates to the
performance of the Portfolio's investment portfolio securities.
2
<PAGE>
The sale of futures contracts could frequently be accomplished more rapidly
and at less cost than the actual sale of securities. Once the desired hedge
position has been effected, the Portfolio could then liquidate securities in
a more deliberate manner, reducing its futures position simultaneously to
maintain the desired balance, or it could maintain the hedged position.
As an alternative to selling stock index futures contracts, the Portfolio
may purchase stock index puts (or stock index futures puts) to attempt to
hedge the Portfolio's risk in a declining market. Because the value of a put
increases as the index declines below a specified level, the Portfolio's
value is protected against a market decline to the degree the performance of
the index correlates with the performance of the Portfolio's investment
portfolio. If the market remains stable or advances, the Portfolio can
refrain from exercising the put and its investment portfolio will participate
in the advance, having incurred only the premium cost for the put.
In certain cases the options and futures markets provide investment or
risk management opportunities that are not available from direct investments
in securities. In addition, some strategies can be performed with greater
ease and at lower costs by utilizing the options and futures markets rather
than purchasing or selling portfolio securities.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The purchase and sale of options, futures contracts, and options
on futures contracts involve risks different from those involved with direct
investments in securities. While utilization of options, futures contracts
and options on futures contracts may be advantageous to the Portfolio, if the
Sub-Adviser is not successful in employing such instruments in managing the
Portfolio's investments, the Portfolio's performance will be worse than if
the Portfolio did not make such investments. In addition, the Portfolio pays
commissions and other costs in connection with such investments, which may
increase the Portfolio's expenses and reduce its return. The loss from
investing in futures is potentially unlimited. The Portfolio may also write
or purchase options in privately negotiated transactions ("OTC Options") as
well as listed options. OTC Options can be closed out only by agreement with
the other party to the transaction. Any OTC Option purchased by the Portfolio
is considered an illiquid security. Any OTC Option written by the Portfolio
will be entered into with a qualified dealer pursuant to an agreement under
which the Portfolio may repurchase the option at a formula price. Such
options are considered illiquid to the extent that the formula price exceeds
the intrinsic value of the option. The Portfolio may not invest more than 15%
of its net assets in illiquid securities, which also include repurchase
agreements not terminable within seven days. A more complete discussion of
the potential risks involved in transactions in options, futures contracts
and options on futures contracts is contained in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend securities or make any other loan up to 25% of its
total assets, although this limitation does not apply to purchases of
commercial paper, debt securities or to repurchase agreements. Securities
lending may involve some credit risk to the Portfolio if the borrower
defaults and the Portfolio is delayed or prevented from recovering the
collateral for the loan or is otherwise required to cover a transaction in
the security loaned. If a material event is to be voted upon affecting the
Portfolio's investment in securities which are on loan, the Portfolio will
take such action as may be appropriate in order to vote its shares. The
Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. (See the Statement of Additional
Information for further information on securities loans.)
BORROWING
The Portfolio may borrow only for temporary or emergency purposes (not for
leveraging or investments) in an amount not to exceed 25% of its total
assets, including the amount borrowed. To secure borrowings, the Portfolio
may not mortgage or pledge its securities in amounts that exceed 15% of its
net assets, at the time the loan or borrowing is made. In addition, the
Portfolio may borrow money from or lend money to other funds that permit such
transactions and are also advised by the Sub-Adviser if the Portfolio seeks
and obtains permission to do so from the Securities and Exchange Commission.
There is no assurance that such permission would be granted. In accordance
with the requirements of current California insurance regulations, the
Portfolio will restrict borrowings to no more than 10% of total assets,
except that the Portfolio may temporarily borrow amounts equal to as much as
25% of total assets if such borrowing is necessary to meet redemptions. If
California's insurance regulations are changed at some future time to permit
borrowings in excess of 10% but less than 25% of total assets, the Portfolio
may conduct borrowings in accordance with such revised limits.
BANK OBLIGATIONS
Because the Portfolio may invest (up to 100%) of its assets in bank
obligations, an investment in the Portfolio should be made with an
3
<PAGE>
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
3
<PAGE>
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio may invest in repurchase agreements although it is the
current policy of the Portfolio not to invest at the time of purchase more
than 25% of its total assets in securities subject to repurchase agreements,
nor more than 15% of its net assets in securities subject to repurchase
agreements not terminable within seven days. See the Statement of Additional
Information for a more detailed discussion of Repurchase Agreements together
with other illiquid investments.
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. See
"Financial Highlights" on page 1 for more information on historical turnover
rates. The Portfolio may engage in short-term trading. The Portfolio's annual
turnover rate may exceed 100%, which is higher than that of many other
companies. A 100% turnover rate occurs, for example, if all the Portfolio's
securities are replaced during one year. High turnover and short-term
trading involve correspondingly higher transaction costs for the Portfolio
which are ultimately borne by the shareholders and Policyholders. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and Van Kampen American Capital Asset Management, Inc. as
Sub-Adviser, the Fund requires no employees other than its executive
officers, none of whom devotes full time to the affairs of the Fund. These
officers are employees of WRL and receive no compensation from the Fund. The
Statement of Additional Information contains the names of and general
background information regarding each Director and executive officer of the
Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
4
<PAGE>
for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets. For the fiscal year
ended December 31, 1995, the actual expenses as a percentage of average daily
net assets were 0.91%.
THE SUB-ADVISER
Van Kampen American Capital Asset Management, Inc. located at One Parkview
Plaza, Oakbrook Terrace, IL 60181, serves as the Sub-Adviser to the
Portfolio. The Sub-Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. ("VKAC"). VKAC is a diversified asset management
company with more than two million retail investor accounts, substantial
capabilities for managing institutional portfolios, and more than $50 billion
under management or supervision. VKAC's more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are distributed
by
4
<PAGE>
financial advisers nationwide. VKAC is a wholly-owned subsidiary of VK/AC
Holding, Inc. ("VK/AC Holding"). VK/AC Holding is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc., a New York based private investment firm. The general partner of
C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J.
Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of VKAC own, in the aggregate, not more
than 7% of the common stock of VK/AC Holding and have the right to acquire,
upon the exercise of options, approximately an additional 13% of the common
stock of VK/AC Holding.
Gary M. Lewis has served as portfolio manager for the Portfolio since its
inception. Mr. Lewis has also served as portfolio manager at American Capital
Asset Management, Inc., a predecessor firm of Van Kampen American Capital
Asset Management, Inc. for over six years and portfolio manager for the Van
Kampen American Capital Emerging Growth Fund, Inc. since April, 1989.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio, less 50% of
the amount of any excess expenses paid by the Investment Adviser on behalf of
the Portfolio pursuant to the expense limitation described above. (See "The
Investment Adviser," above.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. The
Sub-Adviser may occasionally place portfolio business with the affiliated
brokers of the Investment Adviser or the Sub-Adviser. In placing portfolio
business with all dealers, the Sub-Adviser seeks best execution of each
transaction and all brokerage placement must be consistent with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. The
Sub-Adviser is authorized to pay higher commissions to brokerage firms that
provide it with investment and research information than to firms which do
not provide such services, if the Sub-Adviser determines that such
commissions are reasonable in relation to the overall services provided and
the Sub-Adviser receives best execution. The information received may be used
by the Sub-Adviser in managing the assets of other advisory and sub-advisory
accounts, as well as in the management of the assets of the Portfolio.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
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<PAGE>
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute substantially all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the
5
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Code, no tax is imposed on an insurance company with respect to income of a
qualifying separate account properly allocable to the value of eligible
variable annuity or variable life insurance contracts. For a discussion of
the taxation of life insurance companies and the Separate Accounts, as well
as the tax treatment of the Policies and Annuity Contracts and the holders
thereof, see "Federal Tax Matters" included in the respective prospectuses
for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
6
<PAGE>
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
6
<PAGE>
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield do not reflect charges or deductions against the Separate Accounts
or charges and deductions against the Policies or the Annuity Contracts.
Where relevant, the prospectuses for the Policies and the Annuity Contracts
contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses, and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc. ("Lipper"), Variable Annuity Research & Data Service ("VARDS")
and Morningstar, Inc. ("Morningstar") or reported by other services,
companies, individuals or other industry or financial publications of general
interest, such as Forbes, Money, The Wall Street Journal, Business Week,
Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or rate
mutual funds by overall performance or other criteria; and (3) the Consumer
Price Index. Lipper, VARDS and Morningstar are widely quoted independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets. Unmanaged indices may assume the reinvestment of
dividends but usually do not reflect any "deduction" for the expense of
operating or managing a fund. In connection with a ranking, a Portfolio will
also provide additional information with respect to the ranking, including
the particular category to which it relates, the number of funds in the
category, the period and criteria on which the ranking is based, and the
effect of fee waivers and/or expense reimbursements.
7
<PAGE>
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's
7
<PAGE>
composition and other information. An annual report, containing financial
statements audited by the Fund's independent accountants, will be sent to
Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00037-05/96
9
<PAGE>
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Emerging Growth Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy
of the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1996.
WRL00038 -05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 3
Lending of Portfolio Securities 3 3
Borrowing 3 3
Foreign Securities 3 2
Warrants 4 2
Restricted Securities 4 2
Repurchase Agreements 4 2
Options, Futures Contracts and Options on
Futures Contracts 5 2
Management of the Fund 10 4
Directors and Officers 10 4
The Investment Adviser 12 4
The Sub-Adviser 13 4
Portfolio Transactions and Brokerage 14 5
Portfolio Turnover 14 4
Placement of Portfolio Brokerage 14 5
Purchase and Redemption of Shares 15 6
Determination of Offering Price 15 6
Net Asset Valuation 16 6
Investment Experience Information 16 7
Calculation of Performance Related Information 16 7
Total Return 16 7
Yield Quotations 17 7
Taxes 17 5
Capital Stock of the Fund 19 6
Registration Statement 19 N/A
Financial Statements 19 7
Appendix A - Description of Portfolio Securities A-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Emerging Growth Portfolio (the
"Portfolio") of the Fund is described in the Portfolio's Prospectus. Shares
of the Portfolio are sold only to the separate accounts of Western Reserve
Life Assurance Co. of Ohio ("WRL") and separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or repurchase
agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
1
<PAGE>
(A) The Portfolio's investment in warrants (options on securities), valued
at the lower of cost or market, may not exceed 5% of the value of its total
assets. Included within that amount, but not to exceed 2% of the value of the
Portfolio's net assets, may be warrants that are not listed on the New York
or American Stock Exchange. Warrants acquired by the Portfolio in units or
attached to securities shall be deemed to be without value.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, provided that margin payments and other deposits in connection
with transactions in options, futures contracts and options on futures
contracts shall not be deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions and that margin payments and other deposits in
connection with transactions in options, futures contracts and options on
futures contracts shall not be deemed to constitute purchasing securities on
margin.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to provide margin or guarantee positions in options,
futures contracts and options on futures contracts or the segregation of
assets in connection with such contracts.
(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in total
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements.
(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 20% of the Portfolio's total assets
would be invested in such securities.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
2
<PAGE>
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5. above, the Portfolio from time to
time may lend securities from its portfolio to brokers, dealers and financial
organizations. The Portfolio will not lend securities to the Sub-Adviser or
its affiliates. By lending its securities, the Portfolio can increase its
income by continuing to receive interest or dividends on the loaned
securities as well as by either investing the cash collateral in short-term
securities or by earning income in the form of interest paid by the borrower
when U.S. government securities are used as collateral. The Portfolio will
adhere to the following conditions whenever its securities are loaned: (a)
the Portfolio must receive at least 100% cash collateral or equivalent
securities from the borrower; (b) the borrower must increase this collateral
whenever the market value of the securities including accrued interest
exceeds the value of the collateral; (c) the Portfolio must be able to
terminate the loan at any time; (d) the Portfolio must receive reasonable
interest on the loan, as well as dividends, interest or other distributions
on the loaned securities and any increase in market value; (e) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and (f)
voting rights on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the investment occurs,
the Fund's Board of Directors must terminate the loan and regain the right to
vote the securities. The Portfolio bears a risk of loss in the event that the
other party to a stock loan transaction defaults on its obligations and the
Portfolio is delayed in or prevented from exercising its rights to dispose of
the collateral including the risk of a possible decline in the value of the
collateral securities during the period in which the Portfolio seeks to
assert these rights, the risk of incurring expenses associated with asserting
these rights and the risk of losing all or a part of the income from the
transaction.
BORROWING
The Portfolio may borrow money from or lend money to other funds that
permit such transactions and are also advised by the Sub-Adviser and if the
Portfolio seeks and obtains permission to do so from the Securities and
Exchange Commission ("SEC"). There is no assurance that such permission would
be granted. The Portfolio may also borrow money only for temporary or
emergency purposes (not for leveraging or investment). Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of the Portfolio's net assets, including the amount borrowed, at
the time the loan or borrowing is made. Additional limitations on borrowing
that are imposed by state law and regulations may apply.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities and American Depositary Receipts, although the
Portfolio does not intend to hold more than 20% of its total assets in such
securities. American Depositary Receipts (ADRs) are dollar-denominated
receipts issued generally by domestic banks and represent the deposit with
the bank of a security of a foreign issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investing in domestic
issuers. These considerations include changes in currency rates, currency
exchange control regulations, the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It is possible that market quotations
for foreign securities will not be readily available. In such event, these
securities shall be valued at a fair market value as determined in good faith
by Van Kampen American Capital Asset Management, Inc. under the supervision
of the Board of Directors. If it should become necessary, the Portfolio could
encounter greater difficulties in invoking legal processes abroad than would
be the case in the United States. Transaction costs with respect to foreign
securities may be higher. WRL and Van Kampen American Capital Asset
Management, Inc. will consider these and other factors before investing in
foreign securities. The Portfolio will not concentrate its investments in any
particular foreign country.
3
<PAGE>
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
WARRANTS
Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price
of the warrant plus the exercise price of the warrant, thus giving him a
profit. Of course, because the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than exercised.
Warrants are sometimes sold in unit form with other securities of an issuer.
Units of warrants and common stock may be employed in financing young
unseasoned companies. The purchase price of a warrant varies with the
exercise price of the warrant, the current market value of the underlying
security, the life of the warrant and various other investment factors. No
more than 5% of the total assets of the Portfolio at the time of purchase
will be invested in warrants.
RESTRICTED SECURITIES
The Portfolio may invest up to 5% of the value of its net assets in
restricted securities (i.e., securities which may not be sold without
registration under the Securities Act of 1933). Restricted securities are
generally purchased at a discount from the market price of unrestricted
securities of the same issuer. Investments in restricted securities are not
readily marketable without some time delay. Investments in securities which
have no readily available market value are valued at fair value as determined
in good faith by the Fund's Board of Directors. Ordinarily, the Portfolio
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to the Portfolio.
However, registration and underwriting expenses (which may range from 7% to
15% of the gross proceeds of the securities sold) may be paid by the
Portfolio. A Portfolio position in restricted securities might adversely
affect the liquidity and marketability of such securities, and the Portfolio
might not be able to dispose of its holdings in such securities at reasonable
price levels. No more than 5% of the total assets of the Portfolio at the
time of purchase will be invested in restricted securities.
REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs
4
<PAGE>
to the Portfolio in connection with bankruptcy proceedings), it is the policy
of the Portfolio to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by the Sub-Adviser.
The Portfolio does not intend to invest more than 25% of its assets in
repurchase agreements. As of the date of this Statement of Additional
Information, the Portfolio does not intend to invest in reverse repurchase
agreements.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
WRITING CALL AND PUT OPTIONS ON SECURITIES
Purpose. The principal reason for writing options is to seek to obtain,
through receipt of premiums, a greater current return than would be realized
on the underlying securities alone. Such current return could be expected to
fluctuate because premiums earned from an option writing program and dividend
or interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities is likely to
result in a higher portfolio turnover rate.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from
the writer at a specified price during a certain period. The Portfolio may
write call options only on a covered basis, which means that, at all times
during the option period, the Portfolio would own or have the right to
acquire securities of the type that it would be obligated to deliver if any
outstanding options were exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Portfolio may write put options
only on a secured basis, which means that, at all times during the option
period, the Portfolio will maintain with its Custodian segregated assets such
as cash, cash equivalents or U.S. Government securities in an amount of not
less than the exercise price of the option, or would hold a put on the same
underlying securities at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Portfolio may
enter into a "closing purchase transaction," which is the purchase of a call
(put) on the same underlying security and having the same exercise price and
expiration date as the call (put) previously written by the Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in
the closing purchase transaction is less (greater) than the premium it
received on the sale of the option. The Portfolio would also realize a gain
if an option it has written lapses unexercised.
The Portfolio may write options that are listed on an exchange as well as
options that are privately negotiated in over-the-counter transactions. The
Portfolio could close out its position as a writer of a listed option only if
a liquid secondary market exists for options of that series, but there is no
assurance that such a market will exist. Over-the-counter options can be
closed out only with the consent of the other party to the transaction.
However, the Portfolio may purchase an offsetting option; this would not
close out the option the Portfolio has written, but would provide an asset of
equal value to the Portfolio's obligation under the option written. If the
Portfolio is not able to enter into a closing purchase transaction or to
purchase an offsetting option with respect to an option it has written, it
will be required to maintain the securities subject to the call or the
collateral underlying the put until a closing purchase transaction can be
entered into (or the option is exercised or expires), even though it might
not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Portfolio loses
the potential for gain on the underlying security above the exercise price
while the option is outstanding; by writing a put option a Portfolio might
become obligated to purchase the underlying security at an exercise price
that exceeds the then current market price.
PURCHASING CALL AND PUT OPTIONS
The Portfolio may purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, the Portfolio may purchase call options for capital
5
<PAGE>
appreciation. Because the premium paid for a call option is typically a small
fraction of the price of the underlying security, a given amount of funds
will purchase call options covering a much larger quantity of such security
than could be purchased directly. By purchasing call options, the Portfolio
seeks to benefit from any significant increase in the price of the underlying
security to a greater extent than had it invested the same amount in the
security directly. However, because of the very high volatility of option
premiums, the Portfolio would bear a significant risk of losing the entire
premium if the price of the underlying security falls or does not rise
sufficiently before the option expires.
Conversely, put options may be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio
securities or of the Portfolio's assets generally. Alternatively, put options
may be purchased for capital appreciation in anticipation of a price decline
in the underlying security and a corresponding increase in the value of the
put option. The purchase of put options for capital appreciation involves a
significant risk of loss, similar to that described above for call options if
the price of the underlying security rises or does not fall before the option
expires.
In any case, the purchase of options for capital appreciation would
increase the Portfolio's volatility by increasing the impact of changes in
the market price of the underlying securities on the Portfolio's net asset
value.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the holder of the option the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive an amount of cash upon
exercise of the option. Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than (in the case of a call) or less than (in the case of a put) the exercise
price of the option. The amount of cash received will be the difference
between the closing price of the index and the exercise price of the option,
multiplied by a specified dollar multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's Index of 500 Common Stocks or the New York Stock Exchange
Composite Index, or a narrower index such as the Standard & Poor's 100.
Indexes are also based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Stock index options are currently traded on The Chicago Board Options
Exchange, the American Stock Exchange and other exchanges.
Gain or loss to the Portfolio on transactions in stock index options will
depend on price movements in the stock market generally (or in a particular
industry or segment of the market) rather than price movements of individual
securities. As with stock options, the Portfolio may offset its position in
stock index options prior to expiration by entering into a closing
transaction on an exchange, or it may let the option expire unexercised.
FUTURES CONTRACTS
The Portfolio may engage in transactions involving stock index and
interest rate futures contracts and options on such futures contracts in
accordance with the rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Portfolio is exempt from
registration as a "commodity pool operator."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount
times the difference between the stock index value at a specified time and
the price at which the futures contract is originally struck. No physical
delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange
6
<PAGE>
Composite Index on the New York Futures Exchange and the Value Line Stock
Index on the Kansas City Board of Trade. Differences in the stocks included
in the indexes may result in differences in correlation of the futures
contracts with movements in the value of the securities being hedged.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded
on the Osaka Exchange, Financial Times Stock Exchange Index of the 100
largest stocks on the London Stock Exchange, the All Ordinaries Share Price
Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33
stocks on the Hong Kong Stock Exchange, Barclays Share Price Index of 40
stocks on the New Zealand Stock Exchange and Toronto Index of 35 stocks on
the Toronto Stock Exchange, Futures and futures options on the Nikkei Index
are traded on the CME and United States commodity exchanges may develop
futures and futures options on other indices of foreign securities. Futures
and options on United States devised index of foreign stocks are also being
developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
An interest rate futures contract is an agreement pursuant to which a
party agrees to take or make delivery of a specified debt security (such as
U.S. Treasury bonds or notes) at a specified future time and at a specified
price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Portfolio is required to deposit with its Custodian
in an account in the broker's name an amount of cash, cash equivalents or
liquid high grade debt securities equal to a percentage of the contract
amount. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing
of funds by the customer to finance the transaction. Rather, the initial
margin is in the nature of a performance bond or good faith deposit on the
contract, which is returned to the Portfolio upon termination of the futures
contract and satisfaction of its contractual obligation. Subsequent payments
to and from the broker, called variation margin, are made on a daily basis as
the price of the underlying securities or index fluctuates, making the long
and short position in the futures contract more or less valuable, a process
known as marking-to-market.
For example, when the Portfolio purchases a futures contract and the price
of the underlying security or index rises, that position increases in value,
and the Portfolio will receive from the broker variation margin payment equal
to that increase in value. Conversely, where the Portfolio has purchased a
futures contract and the value of the underlying security or index declines,
the position is less valuable, and the Portfolio would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contracts, the Portfolio
may elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required
to be paid by or released to the Portfolio, and the Portfolio realizes a loss
or a gain.
Futures Strategies. When the Portfolio anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Portfolio is not
fully invested ("anticipatory hedge"). Such purchase of a futures contract
serves as a temporary substitute for the purchase of individual securities,
which may be purchased in an orderly fashion once the market has stabilized.
As individual securities are purchased, an equivalent amount of futures could
be terminated by offsetting sales.
The Portfolio may sell futures contracts in anticipation of or in a
general market or market sector decline that may adversely affect the market
value of the Portfolio's securities ("defensive hedge"). To
7
<PAGE>
the extent that the Portfolio's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures
contracts substantially reduces the risk to the Portfolio of a market decline
and, by so doing, provides an alternative to the liquidation of securities
positions in the Portfolio with attendant transaction costs.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of
the futures contracts and the underlying securities or index, the risk of
market distortion, the illiquidity risk and the risk of error in anticipating
price movement.
There may be an imperfect correlation (or no correlation) between
movements in the price of the futures contracts and of the securities being
hedged. The risk of imperfect correlation increases as the composition of the
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective.
To compensate for the imperfect correlation, the Portfolio could buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater than the historical volatility of the securities underlying
the futures contract. Conversely, the Portfolio could buy or sell futures
contracts in a lesser dollar amount than the dollar amount of securities
being hedged if the historical volatility of the securities being hedged is
less than the historical volatility of the securities underlying the futures
contract. It is also possible that the value of a futures contract held by
the Portfolio could decline at the same time as portfolio securities being
hedged; if this occurred, the Portfolio would lose money on the futures
contract in addition to suffering a decline in value in the portfolio
securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meet additional margin deposit requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point
of view of speculators, the deposit requirements in the futures market are
less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in
the futures markets and because of the imperfect correlation between
movements in futures contracts and movements in the securities underlying
them, a correct forecast of general market trends by the Sub-Adviser may
still not result in a successful hedging transaction.
There is also the risk that futures markets may not be sufficiently
liquid. Futures contracts may be closed out only on an exchange or board of
trade that provides a market for such futures contracts. Although the
Portfolio intends to purchase or sell futures only on exchanges and boards of
trade where there appears to be an active secondary market, there can be no
assurance that an active secondary market will exist for any particular
contract or at any particular time. In the event of such illiquidity, it
might not be possible to close a futures position and, in the event of
adverse price movement, the Portfolio would continue to be required to make
daily payments of variation margin. Because the securities being hedged would
not be sold until the related futures contract is sold, an increase, if any,
in the price of the securities may to some extent offset losses on the
related futures contract. In such event, the Portfolio would lose the benefit
of the appreciation in value of the securities.
Successful use of futures is also subject to the Sub-Adviser's ability to
correctly predict the direction of movements in the market. For example, if
the Portfolio hedges against a decline in the market, and market prices
instead advance, the Portfolio will lose part or all of the benefit of the
increase in value of its securities holdings because it will have offsetting
losses in futures contracts. In such cases, if the Portfolio has insufficient
cash, it may have to sell portfolio securities at a time when it is
disadvantageous to do so in order to meet the daily variation margin.
8
<PAGE>
The Portfolio intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator," with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. Such guidelines currently require that, to the extent that
the Portfolio enters into futures contracts or options on a futures position
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.
OPTIONS ON FUTURES CONTRACTS
The Portfolio may also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the option period. As a writer of
an option on a futures contract, the Portfolio would be subject to initial
margin and maintenance requirements similar to those applicable to futures
contracts. In addition, net option premiums received by the Portfolio are
required to be included as initial margin deposits. When an option on a
futures contract is exercised, delivery of the futures position is
accompanied by cash representing the difference between the current market
price of the futures contract and the exercise price of the option. The
Portfolio could purchase put options on futures contracts in lieu of, and for
the same purpose as, it could sell a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to
offset part of the cost of the strategy to the Portfolio. The purchase of
call options on futures contracts would be intended to serve the same purpose
as the actual purchase of the futures contracts.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are
several special risks relating to options on futures. The Sub-Adviser will
not purchase options on futures contracts on any exchange unless in the Sub-
Adviser's opinion, a liquid secondary exchange market for such options
exists. Compared to the use of futures contracts, the purchase of options on
futures involves less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances, such as when there is no movement in the
level of the index or in the price of the underlying security, when the use
of an option on a futures contract would result in a loss to the Portfolio
when the use of a future would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Each of the exchanges and boards of trade has established limitations
governing the maximum number of call or put options on the same underlying
security or futures contract (whether or not covered) which may be written by
a single investor, whether acting alone or in concert with others (regardless
of whether such options are written on the same or different exchanges or
boards of trade or are held or written on one or more accounts or through one
or more brokers). Option positions for all investment companies advised by
the Sub-Adviser are combined for purposes of these limitations. An exchange
or board of trade may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options that the
Portfolio may write.
Most U.S. futures exchange and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may
be made that day at a price beyond that limit. It is possible that futures
contract prices would move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
In such event, and in the event of adverse price movements, the Portfolio
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price
of these
9
<PAGE>
securities being hedged will, in fact, correlate with the price movements in
a futures contract and thus provide an offset to losses on the futures
contract.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in options, futures or options on futures contracts,
the Portfolio could experience delays and/or losses in liquidating open
positions purchased and/or incur a loss of all or part of its margin deposits
with the broker. Transactions are entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by the Sub-Adviser.
The Portfolio may need to defer closing out certain options, futures
contracts and options thereon in order to continue to qualify for the
beneficial tax treatment afforded to "regulated investment companies" under
the Internal Revenue Code. See "Taxes," page 16.
COVER
Futures contracts and options on futures contracts that the Portfolio
writes expose the Portfolio to obligations to another party. The Portfolio
will not enter into any such transactions unless it owns either (a) an
offsetting ("covered") position in securities or other futures contracts or
options on futures contracts, or (b) cash, receivables or short-term debt
securities with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (a) above. The Portfolio
will comply with SEC guidelines regarding cover for hedging transactions and
will, if the guidelines so require, segregate assets by setting aside cash,
U.S. Government securities or other liquid, high-grade debt securities with
its Custodian in the prescribed amount as determined daily on a
marked-to-market basis.
Assets used as cover or segregated cannot be sold while the position in
the corresponding futures contract or written option on a futures contract is
open, unless they are replaced with similar assets. As a result, the
segregation of a large portion of the Portfolio's assets used to cover could
impede the Portfolio's investment management and/or the Portfolio's ability
to meet redemption requests or other current obligations.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
10
<PAGE>
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President (1978 - 1987 and December,
1992 - present), Director (1978 -present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 - February, 1991), President (1988 - 1989), Director (1976 -February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 -present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English, (August, 1990 - July, 1991) University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person
of the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular or special Board meeting attended. For the fiscal
year ended December 31, 1995, the Portfolio's share of Directors' fees and
expenses paid by the Fund were $4,959. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II
11
<PAGE>
Series Fund, and/or IDEX Fund 3 to a disinterested Director or Trustee on a
current basis for services rendered as director. Deferred compensation
amounts will accumulate based on the value of Class A shares of a portfolio
of IDEX II Series Fund (without imposition of sales charge), as elected by
the directors. It is not anticipated that the Plan will have any impact on
the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated November 19, 1992 with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 18,
1996. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolio and
terminates automatically in the event of its assignment (within the meaning
of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser," page 12.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1995 and 1994
and for the period of March 1, 1993 to December 31, 1993, the Investment
Adviser was paid fees for its services to the Portfolio in the amounts of
$1,838,573, $1,262,170 and $240,611, respectively.
Payment of Expenses. Under the terms of the Advisory Agreement, the
Investment Adviser is responsible for providing investment advisory services
and pays all compensation of and furnishes office space for officers and
employees of the Investment Adviser connected with investment management of
the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Portfolio pays all
other expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of
the
12
<PAGE>
custodian, fees and expenses of Fund directors who are not "interested
persons" of the Fund, legal expenses, state franchise taxes, cost of auditing
services, costs of printing proxies, Securities and Exchange Commission fees,
advisory fees, certain insurance premiums, costs of corporate meetings, costs
of maintenance of corporate existence, investor services (including allocable
telephone and personnel expenses), extraordinary expenses, and other expenses
properly payable by the Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the years ended December 31, 1995 and 1994. For the period from
March 1, 1993 through December 31, 1993, the Investment Adviser paid expenses
on behalf of the Portfolio in the amount of $51,181.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Van Kampen American Capital Asset Management, Inc. (the "Sub-Adviser")
serves as the Sub-Adviser for the Portfolio pursuant to a Sub-Advisory
Agreement dated December 20, 1994. The Sub-Advisory Agreement was most
recently approved by the Board of Directors of the Fund, including a majority
of the Directors who were not "interested persons" of the Fund (as defined in
the 1940 Act) on March 18, 1996. The Sub-Advisory Agreement provides that it
will continue in effect from year to year if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding shares of
the Portfolio, and (b) by a majority of the Directors who are not parties to
such Agreement or "interested persons" of any such party. The Sub-Advisory
Agreement may be terminated without penalty on 60 days' written notice at the
option of either party or by the vote of the shareholders of the Portfolio
and terminates automatically in the event of its assignment (within the
meaning of the 1940 Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. For the years ended
December 31, 1995 and 1994 and for the period from March 1, 1993 to December
31, 1993, the Sub-Adviser was paid fees in the amounts of $919,287, $630,629
and $120,306, respectively.
The Sub-Adviser, located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181, is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which is a wholly-owned subsidiary of VK/AC Holding, Inc. ("VK/AC Holding").
VK/AC Holding is controlled, through the ownership of a substantial majority
of its common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private
investment firm. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates
13
<PAGE>
L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto
Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe, and Andrall
E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of VKAC own, in the
aggregate, not more than 7% of the common stock of VK/AC Holding and have the
right to acquire, upon the exercise of options, approximately an additional
13% of the common stock of VK/AC Holding.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Emerging Growth Portfolio and The
Fund - Portfolio Turnover" in the Prospectus. In computing the portfolio
turnover rate for the Portfolio, securities whose maturities or expiration
dates at the time of acquisition are one year or less are excluded. Subject
to this exclusion, the turnover rate for the Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year. The Portfolio's turnover rate for the
fiscal years ended December 31, 1995 and 1994 and for the period from March
1, 1993 (commencement of operations) to December 31, 1993 was 124.13%, 72.62%
and 12.79%, respectively.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and
14
<PAGE>
services in servicing other accounts in addition to the Portfolio. If the
Sub-Adviser determines that any research product or service has a mixed use,
such that it also serves functions that do not assist in the investment
decision-making process, the Sub-Adviser will allocate the costs of such
service or product accordingly. The portion of the product or service that a
Sub-Adviser determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Such allocation may
create a conflict of interest for the Sub-Adviser. Conversely, such
supplemental information obtained by the placement of business for the
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
In addition, the Sub-Adviser may occasionally place portfolio business with
the affiliated brokers of the Investment Adviser or the Sub-Adviser,
including InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida
34618-5068. As stated above, any such placement of portfolio business will be
subject to the ability of the broker-dealer to provide best execution and to
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
The Portfolio paid aggregate commissions for the fiscal years ended
December 31, 1995 and 1994 and for the period March 1, 1993 to December 31,
1993 in the amounts of $542,420, $317,287 and $74,070, respectively.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other
15
<PAGE>
insurance company separate accounts. The Separate Accounts invest in shares
of the Portfolio in accordance with the allocation instructions received from
holders of the Policies and the Annuity Contracts. Such allocation rights are
further described in the prospectuses and disclosure documents for the
Policies and the Annuity Contracts. Shares of the Portfolio are sold and
redeemed at their respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining net asset value, securities
listed on the national securities exchanges and traded on the NASDAQ National
Market are valued at the closing prices on such markets, or if such a price
is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities which are
traded on the over-the-counter market are valued at bid price. Other
securities for which quotations are not readily available are valued at fair
values as determined in good faith by the Investment Adviser and the
Sub-Adviser under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on March 1, 1993. The rate of return
indicated below depicts the actual investment experience of the Portfolio for
the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rate is an average annual compounded rate of return for the period ended on
December 31, 1995. The Portfolio's rate of return for the period from March
1, 1993 to December 31, 1993 was 24.71%. For the fiscal years ended December
31, 1995 and 1994, the Portfolio's rate of return was 46.79% and (7.36%),
respectively.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period).
</TABLE>
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital
16
<PAGE>
gains during the period are reinvested in the Portfolio when made. The
calculations also assume a complete redemption as of the end of the
particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional information regarding the investment performance of the
Portfolio appears in the Prospectus.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ (cd + 1 )(6) -- 1]
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement).
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio has qualified and expects to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, the Portfolio must distribute to its Policyholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months - options,
futures or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Portfolio's principal business of investing
in securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. Government securities, securities of other RICs,
and other securities that, with respect to any one issuer, do not exceed 5%
of the value of the Portfolio's total assets and that do not represent more
than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
17
<PAGE>
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
18
<PAGE>
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Equity-Income
Portfolio; Emerging Growth Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; Leisure Portfolio; International Equity
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/INVESCO US Sector Portfolio; and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995, and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report, and are
incorporated herein by reference to such report.
19
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolios will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. U.S. Government Securities. U.S. Government securities are securities
issued by or guaranteed by the U.S. Government or its agencies or
instrumentalities. U.S. Government securities have varying degrees of
government backing. They may be backed by the credit of the U.S. Government
as a whole or only by the issuing agency or instrumentality. For example,
securities issued by the Financing Corporation are supported only by the
credit of the Financing Corporation, and not by the U.S. Government.
Securities issued by the Federal Home Loan Banks and the Federal National
Mortgage Association (FNMA) are supported by the agency's right to borrow
money from the U.S. Treasury under certain circumstances. U.S. Treasury
bonds, notes, and bills, and some agency securities, such as those issued by
the Government National Mortgage Association (GNMA), are backed by the full
faith and credit of the U.S. Government as to payment of principal and
interest and are the highest quality U.S. Government securities. The
Portfolio itself, and its share price and yield, are not guaranteed by the
U.S. Government.
9. Corporate Bonds and Debentures. Corporate debt securities in which the
Portfolio may invest will have a rating within the four highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, or
Baa) or Standard & Poor's Corporation ("S&P") (AAA, AA, A, or BBB). Bonds
rated Baa by Moody's or BBB by S&P are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security for such bonds appear adequate for the present, but
certain protective elements may be lacking or may be
A-1
<PAGE>
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics. In the event that ratings decline after the Portfolio's
investment in securities, the Sub-Adviser will consider all such factors as
it deems relevant to the advisability of retaining such securities. To the
extent that the Portfolio invests in fixed-income debt securities, regardless
of investment grade, investment income may increase and may constitute a
larger portion of the return on the Portfolio's investments, and the
Portfolio may not participate in stock market advances or declines to the
extent that it would if it were fully invested in equity securities.
A-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO]
Telephone: (800) 851-9777
[LKCM LOGO]
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Equity-Income Portfolio of the Fund.
The investment objective of the Equity-Income Portfolio is to provide
current income, long-term growth of income and capital appreciation. The
Equity-Income Portfolio seeks to achieve its objective by investing primarily
in common stocks offering above-average dividend yields, income producing
securities convertible into common stock, and fixed-income securities. There
can be, of course, no assurance that the Equity-Income Portfolio will achieve
its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Luther King Capital Management Corporation serve as the investment
adviser (the "Investment Adviser") and the sub-adviser (the "Sub-Adviser"),
respectively, to the Equity-Income Portfolio. See "The Investment Adviser"
and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the
Equity-Income Portfolio that prospective investors ought to know before
investing. Investors should read this Prospectus and retain it for future
reference.
Additional information about the Fund, the Equity-Income Portfolio and the
other portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the
Equity-Income Portfolio bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights ......................... 1
The Equity-Income Portfolio and the Fund .... 1
Management of the Fund ....................... 3
Dividends and Other Distributions ............ 5
Taxes ........................................ 5
Purchase and Redemption of Shares ............ 5
Valuation of Shares .......................... 5
The Fund and Its Shares ...................... 6
Performance Information ...................... 6
General Information .......................... 7
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the Equity-Income Portfolio for the period March 1, 1993
(commencement of operations) through December 31, 1993, and for the years
ended December 31, 1995 and 1994, is taken from the Portfolio's audited
financial statements incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for the Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED 3/1/93 TO
12/31/95 12/31/94 12/31/93
------------- ------------- --------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ........ $ 10.90 $ 11.23 $ 10.00
Income From Investment
Operations
Net Investment Income .. .37 .31 .19
Net Gains or Losses on
Securities (both realized
and unrealized) .......... 2.33 (.33) 1.33
------------- ------------- --------------
Total Income (Loss) From
Investment Operations ... 2.70 (.02) 1.52
------------- ------------- --------------
Less Distributions
Dividends (from net
investment income) ... (.37) (.31) (.19)
Distributions (from
capital gains) ........... (.37) .00 (.10)
------------- ------------- --------------
Total Distributions ....... (.74) (.31) (.29)
------------- ------------- --------------
Net Asset Value,
End of Period .............. $ 12.86 $ 10.90 $ 11.23
============= ============= ==============
Total Return* ................ 24.66% (.53%) 13.49%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) .............. $256,806 $183,867 $90,560
Ratio of Expenses to Average
Net Assets** ............... .87% .89% 1.00%
Ratio of Net Investment
Income to Average Net Assets 3.07% 2.78% 1.70%
Portfolio Turnover Rate ..... 52.59% 53.50% 27.41%
</TABLE>
* The total return shown for 1993 is for the ten month period ended December
31, 1993 and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the
applicable Policy or Annuity Contract.
** Ratio is annualized and is net of advisory fee waiver for the period ended
December 31, 1993 for which period the annualized ratio of expenses to
average net assets would have been 1.12% absent the advisory fee waiver by
Western Reserve Life (see note 2 to the financial statements).
THE EQUITY-INCOME PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Equity-Income Portfolio is a series of the Fund. The Fund consists
of several series, or separate investment portfolios, which offer shares for
investment by the Separate Accounts. This Prospectus describes only the
Equity-Income Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Equity-Income Portfolio (the "Portfolio")
is to provide current income, long-term growth of income and capital
appreciation. The Portfolio seeks to achieve its objective by investing
primarily in common stocks, income producing securities convertible into
common stock, and fixed-income securities. In seeking current income and
growth opportunities, the Portfolio will primarily select companies with
established operating histories and potential for dividend growth. The
Portfolio seeks to achieve an income yield in excess of the dividend income
yield of the Standard & Poor's Index of 500 Common Stocks.
1
<PAGE>
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
In selecting equity securities and securities convertible into equity
securities for the Portfolio the Sub-Adviser typically seeks companies which
exhibit strong fundamental characteristics and considers fundamental factors
such as balance sheet quality, cash flow generation, earnings and dividend
growth record and outlook, and profitability levels. The Sub-Adviser
presently intends to consider these and other fundamental characteristics in
determining attractive investment opportunities. However, the Sub-Adviser may
select securities based on factors other than those described above. Shares
of companies with undervalued assets may also be owned by the Portfolio; the
Sub-Adviser's objective in investing in such undervalued companies is to
purchase shares of these companies at a discount to net asset value and have
the investment accrue to that value over time.
TYPES OF SECURITIES AND RISK FACTORS
The Portfolio seeks to invest its assets primarily in income producing
common or preferred stock when the Sub-Adviser believes that the relevant
market environment favors profitable investing in those securities. The
remainder of the Portfolio will ordinarily be invested in debt obligations,
typically many of which will be convertible into common stock,
1
<PAGE>
and other fixed-income securities. However, the Portfolio may increase its
cash position when the Sub-Adviser determines that investment opportunities
with desirable risk/reward characteristics are unavailable. The Portfolio
does not presently intend to invest more than 20% of its total assets in
equity securities which do not pay a dividend. It is anticipated that a
majority of the equity securities in which the Portfolio invests will be
listed on a national securities exchange or traded on NASDAQ or in the U.S.
over-the-counter market.
The Portfolio may invest up to 10% of its assets in foreign securities not
publicly traded in the United States. In addition, the Portfolio may invest
in American Depositary Receipts (ADRs), which are dollar-denominated receipts
issued generally by domestic banks and represent the deposit with the bank of
a security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States.
The Portfolio may invest in U.S. and foreign government securities,
corporate bonds and debentures, high-grade commercial paper, preferred
stocks, certificates of deposit or other securities of U.S. issuers when the
Sub-Adviser perceives attractive opportunities from such securities, or so
that the Portfolio may receive a competitive return on its uninvested cash.
The Portfolio may invest in debt securities of U.S. and foreign issuers.
U.S. Government securities are securities issued by or guaranteed by the
U.S. Government or its agencies or instrumentalities. U.S. Government
securities have varying degrees of government backing. They may be backed by
the credit of the U.S. Government as a whole or only by the issuing agency or
instrumentality. For example, securities issued by the Financing Corporation
are supported only by the credit of the Financing Corporation, and not by the
U.S. Government. Securities issued by the Federal Home Loan Banks and the
Federal National Mortgage Association (FNMA) are supported by the agency's
right to borrow money from the U.S. Treasury under certain circumstances.
U.S. Treasury bonds, notes, and bills, and some agency securities, such as
those issued by the Government National Mortgage Association (GNMA), are
backed by the full faith and credit of the U.S. Government as to payment of
principal and interest and are the highest quality U.S. Government
securities. The Portfolio itself, and its share price and yield, are not
guaranteed by the U.S. Government.
Corporate debt securities in which the Portfolio invests will generally
have a rating within the four highest grades as determined by Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa, A, or Baa) or Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB). The Portfolio does not currently
intend to invest more than 5% of its assets in debt securities rated less
than investment grade - i.e., below the four highest grades as determined by
Moody's or S&P (commonly known as junk bonds), or in unrated securities
deemed by the Sub-Adviser to be of comparable quality. See the Statement of
Additional Information for further information concerning such securities and
bond ratings. When the Portfolio invests in fixed-income debt securities,
regardless of investment grade, investment income may increase and may
constitute a larger portion of the return on the Portfolio's investments, and
the Portfolio may not participate in stock market advances or declines to the
extent that it would if it were fully invested in equity securities.
Investments in commercial paper are limited to obligations rated Prime-1
by Moody's or A-1 by S&P. See the Appendix in the Statement of Additional
Information for further information concerning bond and commercial paper
ratings.
Although the Portfolio may invest in restricted securities, it does not
presently intend to do so. Restricted securities are securities subject to
legal or contractual restrictions on their resale, such as private
placements. Such restrictions might prevent the sale of restricted securities
at a time when sale would otherwise be desirable.
Foreign securities may be subject to foreign government taxes which would
reduce the income yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade
patterns, fluctuating exchange rates and the possibility of imposition of
exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations or of the U.S.
Government. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
There is generally less government regulation of stock exchanges, brokers and
listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect
investment in those countries. Finally, in the event of a default on any such
foreign securities, it may be more difficult for the Portfolio to obtain or
to enforce a judgment against the issuers of such securities.
The Portfolio may engage in hedging strategies involving options on
securities, futures contracts and related options, forward currency
2
<PAGE>
contracts, and interest rate swaps, caps and floors. The Portfolio does not
currently intend to purchase or sell any options on securities, futures
contracts or related options or engage in interest rate swaps, caps and
floors, but may do so in the future. Prior to the Portfolio engaging in the
purchase or sale of options on securities, futures contracts or options
thereon, disclosure will be added to the Prospectus and Statement of
Additional Information.
BORROWING
The Portfolio may borrow only for temporary or emergency purposes (not for
leveraging or investments) in an amount not to exceed 25% of its total
assets, including the amount borrowed. To secure borrowings, the Portfolio
may not mortgage or pledge its securities in amounts that exceed 15% of its
net assets, at the time the loan or borrowing is
2
<PAGE>
made. In addition, the Portfolio may borrow money from or lend money to other
funds that permit such transactions which are also advised by the
Sub-Adviser, providing the Portfolio seeks and obtains permission to do so
from the Securities and Exchange Commission. There is no assurance that such
permission would be granted.
In accordance with the requirements of current California insurance
regulations, the Portfolio will restrict borrowings to no more than 10% of
total assets, except that the Portfolio may temporarily borrow amounts equal
to as much as 25% of total assets if such borrowing is necessary to meet
redemptions. If California's insurance regulations are changed at some future
time to permit borrowings in excess of 10% but less than 25% of total assets,
the Portfolio may conduct borrowings in accordance with such revised limits.
LENDING OF PORTFOLIO SECURITIES
In order to generate income and to offset expenses, the Portfolio may lend
securities to brokers, dealers and financial institutions. Loans by the
Portfolio, if and when made, may not exceed 25% of its total assets and will
be collateralized by cash or U.S. Treasury securities, which at all times
while the loan is outstanding will be maintained in amounts equal to at least
100% of the current market value of the loaned securities. Securities lending
may involve some credit risk to the Portfolio if the borrower defaults and
the Portfolio is delayed or prevented from recovering the collateral for the
loan or is otherwise required to cover a transaction in the security loaned.
This limitation does not apply to purchases of commercial paper or debt
securities. If a material event is to be voted upon affecting the Portfolio's
investment in securities which are on loan, the Portfolio will take such
action as may be appropriate in order to vote its shares. The Portfolio does
not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if it were considered important with respect to
the investment. (See the Statement of Additional Information for further
information on securities loans.)
FIXED-INCOME INVESTING
The performance of the debt component of the Portfolio depends primarily
on interest rate changes, the average weighted maturity of that Portfolio and
the quality of securities held. The debt component of the Portfolio will tend
to decrease in value when interest rates rise and increase when interest
rates fall. The Portfolio may vary the average maturities of its portfolio of
debt securities based on the portfolio manager's analysis of interest rate
trends and other factors. Generally, shorter term securities are less
sensitive to interest rate changes, but longer term securities offer higher
yields. The Portfolio's share price and yield will also depend, in part, on
the quality of its investments in debt securities. For example, while U.S.
Government securities generally are of high quality, government securities
that are not backed by the full faith and credit of the United States and
other debt securities, including those of foreign governments, may be
affected by changes in the creditworthiness of the issuer of the security.
The extent that such changes are reflected in the Portfolio's share price
will depend upon the extent of the Portfolio's investment in such securities.
BANK OBLIGATIONS
Because the Portfolio may invest (up to 100%) of its assets in bank
obligations, an investment in the Portfolio should be made with an
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The
Portfolio's annual portfolio turnover rate is not expected to exceed 100%,
although the rate of portfolio turnover is not expected to be a limiting
factor when changes are deemed appropriate. High turnover and short-term
3
<PAGE>
trading involve correspondingly higher transaction costs for the Portfolio
which are ultimately borne by the shareholders and Policyholders. The
Portfolio may engage in short-term trading but does not expect to do so
frequently. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and Luther King Capital Management Corporation as Sub-Adviser, the
Fund requires no employees other than its executive officers, none of whom
devotes full time to the affairs of the Fund. These officers are employees of
WRL and receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
3
<PAGE>
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio. For the fiscal year ended December 31,
1995, the Portfolio paid the Investment Adviser advisory fees of 0.80% of its
average daily net assets.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets. For the fiscal year
ended December 31, 1995, the actual expenses as a percentage of average daily
net assets were 0.87%.
THE SUB-ADVISER
Luther King Capital Management Corporation, located at 301 Commerce
Street, Suite 1600, Fort Worth, Texas 76102, serves as the Sub-Adviser to the
Portfolio. Ultimate control of the Sub-Adviser is exercised by J. Luther
King, Jr. The Sub-Adviser is a registered investment adviser and provides
investment management services to accounts of individual investors, mutual
funds and other institutional investors. See "Management of the Fund - The
Sub-Adviser" in the Statement of Additional Information for a more detailed
description of the previous experience of Luther King Capital Management
Corporation as an investment adviser.
Luther King, Jr., Scot C. Hollmann and John Patrick Clegg have served as
portfolio managers of the Portfolio since its inception. Mr. King has been
President of Luther King Capital Management Corporation since 1979. Mr.
Hollmann has also served as Vice President of Luther King Capital Management
Corporation since 1983 and Mr. Clegg has also served as Vice President of
Luther King Capital Management Corporation since 1991. From 1986 to 1991, Mr.
Clegg served as Assistant Portfolio Manager to various investment companies
advised by American Capital Management & Research, Inc.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
4
<PAGE>
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics
4
<PAGE>
and Insider Trading Policy ("Ethics Policy") that has been adopted by the
Board of Directors of the Fund. Access Persons are required to follow the
guidelines established by this Ethics Policy in connection with all personal
securities transactions and are subject to certain prohibitions on personal
trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other applicable
laws, and pursuant to the terms of the Ethics Policy, must adopt and enforce
their own Code of Ethics and Insider Trading Policies appropriate to their
operations. Each Sub-Adviser is required to report to the Board of Directors
on a quarterly basis with respect to the administration and enforcement of
such Ethics Policy, including any violations thereof which may potentially
affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
5
<PAGE>
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in
5
<PAGE>
good faith by the Advisers under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and, in such event, holders of the remaining shares would not be able to
elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield regarding the Portfolio do not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant, the prospectuses for the Policies
and the Annuity Contracts contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
6
<PAGE>
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors
6
<PAGE>
to: (1) the Standard & Poor's Index of 500 Common Stocks, the Dow Jones
Industrial Average or other widely recognized indices; (2) other mutual funds
whose performance is reported by Lipper Analytical Services, Inc.,
("Lipper"), Variable Annuity Research & Data Service ("VARDS") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
Kiplinger's Personal Finance and Fortune, which rank and/or rate mutual funds
by overall performance or other criteria; and (3) the Consumer Price Index.
Lipper, VARDS and Morningstar are widely quoted independent research firms
which rank mutual funds by overall performance, investment objectives, and
assets. Unmanaged indices may assume the reinvestment of dividends but
usually do not reflect any "deduction" for the expense of operating or
managing a fund. In connection with a ranking, a Portfolio will also provide
additional information with respect to the ranking, including the particular
category to which it relates, the number of funds in the category, the period
and criteria on which the ranking is based, and the effect of fee waivers
and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
7
<PAGE>
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Luther King Capital Management Corporation
301 Commerce Street
Suite 1600
Fort Worth, TX 76102
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00035-05/96
8
<PAGE>
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Equity-Income Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of
the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
LUTHER KING CAPITAL MANAGEMENT CORPORATION
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00036-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 3
Lending of Portfolio Securities 2 3
Borrowing 3 2
Foreign Securities 3 2
Management of the Fund 3 3
Directors and Officers 3 3
The Investment Adviser 5 4
The Sub-Adviser 6 4
Portfolio Transactions and Brokerage 7 4
Portfolio Turnover 7 3
Placement of Portfolio Brokerage 7 4
Purchase and Redemption of Shares 9 5
Determination of Offering Price 9 5
Net Asset Valuation 9 5
Investment Experience Information 9 6
Calculation of Performance Related Information 9 6
Total Return 9 6
Yield Quotations 10 7
Taxes 10 5
Capital Stock of the Fund 12 5
Registration Statement 12 N/A
Financial Statements 12 7
Appendix - Description of Selected Corporate Bond
and Commercial Paper Ratings A-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Equity-Income Portfolio (the "Portfolio")
of the Fund is described in the Portfolio's Prospectus. Shares of the
Portfolio are sold only to the separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
physical commodities).
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio's investment in warrants valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the
1
<PAGE>
Portfolio's net assets, may be warrants that are not listed on the New York
or American Stock Exchange. Warrants acquired by the Portfolio in units or
attached to securities shall be deemed to be without value.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that margin payments and other deposits in
connection with transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and that margin payments and other deposits in
connection with transactions in options, futures, swaps and forward contracts
shall not be deemed to constitute purchasing securities on margin.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply in the
case of assets deposited to margin or guarantee positions in options, futures
contracts and options on futures contracts or placed in a segregated account
in connection with such contracts.
(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(G) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation.
(H) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(I) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(J) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(K) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 10% of the Portfolio's total assets
would be invested in such securities.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5. above, the Portfolio from time to
time may lend securities from its portfolio to brokers, dealers and financial
institutions and receive as collateral cash or U.S. Treasury
2
<PAGE>
securities which at all times while the loan is outstanding will be
maintained in amounts equal to at least 100% of the current market value of
the loaned securities. By lending its securities, the Portfolio can increase
its income by continuing to receive interest or dividends on the loaned
securities as well as by investing the cash collateral in short-term
securities. Such loans, which may not have terms longer than 30 days, will be
terminable at any time. The Portfolio may also pay reasonable fees to persons
unaffiliated with the Portfolio for services in arranging such loans.
BORROWING
The Portfolio may borrow money from or lend money to other funds that
permit such transactions and are also advised by the Sub-Adviser if the
Portfolio seeks and obtains permission to do so from the SEC. There is no
assurance that such permission would be granted. The Portfolio may also
borrow money only for temporary or emergency purposes (not for leveraging or
investment). Any such loans or borrowings are expected to be short-term in
nature and used for temporary or emergency purposes, such as to provide cash
for redemptions, and will not exceed 25% of the Portfolio's net assets,
including the amount borrowed, at the time the loan or borrowing is made.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities and American Depositary Receipts, although the
Portfolio may not hold more than 10% of its assets in such securities.
American Depositary Receipts (ADRs) are dollar-denominated receipts issued
generally by domestic banks and represent the deposit with the bank of a
security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations which
are not ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It is possible that market quotations for foreign
securities will not be readily available. In such event, these securities
shall be valued at fair market value as determined in good faith by Luther
King Capital Management Corporation under the supervision of the Board of
Directors. If it should become necessary, the Portfolio could encounter
greater difficulties in invoking legal processes abroad than would be the
case in the United States. Transaction costs with respect to foreign
securities may be higher. WRL and Luther King Capital Management Corporation
will consider these and other factors before investing in foreign securities.
The Portfolio will not concentrate its investments in any particular foreign
country.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
3
<PAGE>
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 -
present); Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3;
Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President,
Treasurer (1966 -1988), Western Reserve Life Assurance Co. of Ohio; Vice
President, Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer
Western Corporation; Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB
9/12/48). Executive Vice President (June, 1993 - present), Chief
Operating Officer (March, 1994 - present), Western Reserve Life
Assurance Co. of Ohio; President and Chief Executive Officer (September,
1990 - present), Trustee (June, 1990 - present) and Executive Vice
President (June, 1988 - September, 1990) of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; President, Chief Executive Officer and Director of
InterSecurities, Inc. (May, 1988 - present); Assistant Vice President of
AEGON USA Managed Portfolios, Inc. (September, 1991 - August, 1992);
Vice President of Pioneer Western Corporation (May, 1988 - February,
1991).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(DOB 2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President, (1978 - 1987 and
December, 1992 - present) Director (1978 -present), Western Reserve Life
Assurance Co. of Ohio; Chairman of the Board of Directors and Chief
Executive Officer (1988 - February, 1991), President (1988 - 1989),
Director (1976 - February, 1991), Executive Vice President (1972 -
1988), Pioneer Western Corporation (financial services), Largo, Florida;
President and Director (1985 - September, 1990) and Director (December,
1990 - present); Idex Management, Inc. (investment adviser), Largo,
Florida; Trustee (1987 - present), Chairman (December, 1989 - September,
1990 and November, 1990 - present) and President and Chief Executive
Officer (November, 1986 - September, 1990), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice
President (1987 -present), Chief Financial Officer (1987 -December,
1995) and Treasurer (1988 - present), Western Reserve Life Assurance Co.
of Ohio; Senior Vice President and Treasurer (1988 - February, 1991),
Pioneer Western Corporation (financial services), Largo, Florida;
Treasurer (1988 - September, 1990 and November, 1990 - present), IDEX
Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all of
Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co.
of Ohio; Secretary and Assistant Vice President (March, 1994 -
September, 1995), Secretary, Vice President and Counsel (September, 1995
- present) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney
(September, 1992 - August, 1993), Hearne, Graziano, Nader & Buhr, P.A.;
Legal Writing Instructor (August, 1991 - June, 1992), Florida State
University College of Law; Teaching Assistant, English (August, 1990 -
July, 1991), University of South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer
(December, 1995 - present), Senior Vice President (1981 - June, 1993)
and Actuary (1972 - present), Western Reserve Life Assurance Co. of
Ohio.
------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
4
<PAGE>
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular and special Board meeting attended. For the year
ended December 31, 1995, the Portfolio's share of Directors' fees and
expenses paid by the Fund were $3,426. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated November 19, 1992 with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act) on March 18,
1996. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolio and
terminates automatically in the event of its assignment (within the meaning
of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to
5
<PAGE>
provide all the office space, facilities, equipment and personnel necessary
to perform its duties under the Agreement. For further information about the
management of the Portfolio, see "The Sub-Adviser", page 6.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1995 and 1994
and for the period from March 1, 1993 (commencement of operations) to
December 31, 1993 the Investment Adviser was paid fees for its services to
the Portfolio in the amount of $1,746,022, $1,180,759 and $224,748,
respectively.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Portfolio pays all
other expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of
the custodian, fees and expenses of Fund directors who are not "interested
persons" of the Fund, legal expenses, state franchise taxes, cost of auditing
services, costs of printing proxies, Securities and Exchange Commission fees,
advisory fees, certain insurance premiums, costs of corporate meetings, costs
of maintenance of corporate existence, investor services (including allocable
telephone and personnel expenses), extraordinary expenses, and other expenses
properly payable by the Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the years ended December 31, 1995 and 1994. For the period from
March 1, 1993 through December 31, 1993, the Investment Adviser paid expenses
on behalf of the Portfolio in the amount of $36,518.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Luther King Capital Management Corporation (the "Sub-Adviser") serves as
the Sub-Adviser for the Portfolio pursuant to a Sub-Advisory Agreement dated
November 19, 1992. The Sub-Advisory Agreement was most recently approved by
the Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 18, 1996. The Sub-Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreement may be terminated without penalty on 60 days' written
notice at the option of either party or by the vote of the shareholders of
the Portfolio and terminates automatically in the event of its assignment
(within the meaning of the 1940 Act) or termination of the Investment
Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio.
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<PAGE>
Subject to review by the Investment Adviser and the Board of Directors of the
Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security. The Sub-Adviser provides the portfolio managers for the Portfolio.
The Sub-Adviser bears all of its expenses in connection with the performance
of its services under the Sub-Advisory Agreement, such as compensating and
furnishing office space for its officers and employees connected with
investment and economic research, trading and investment management of the
Portfolio. The method of computing the Sub-Adviser's fee is set forth in the
Prospectus. For the years ended December 31, 1995 and 1994 and for the period
from March 1, 1993 to December 31, 1993, the Sub-Adviser was paid fees in the
amount of $873,011, $590,528 and $112,374, respectively.
The Sub-Adviser is located at 301 Commerce Street, Suite 1600, Fort Worth,
Texas 76102. Ultimate control of the Sub-Adviser is exercised by J. Luther
King, Jr. The Sub-Adviser is a registered investment adviser and provides
investment management services to accounts of individual investors, mutual
funds, and other institutional investors. The Sub-Adviser has served as an
investment adviser for approximately 17 years; as of March 1, 1996, the total
assets managed by the Sub-Adviser exceeded $4.5 billion.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Equity-Income Portfolio and The
Fund - Portfolio Turnover" in the Prospectus. In computing the portfolio
turnover rate for the Portfolio, securities whose maturities or expiration
dates at the time of acquisition are one year or less are excluded. Subject
to this exclusion, the turnover rate for the Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year. The Portfolio's turnover rate for the
fiscal years ended December 31, 1995 and 1994 and for the period from March
1, 1993 to December 31, 1993 was 52.59%, 53.50% and 27.41%, respectively. The
future annual turnover rate cannot be precisely predicted, although an annual
turnover rate in excess of 100% is not presently anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition
7
<PAGE>
of the firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolio. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
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<PAGE>
The Portfolio paid aggregate commissions for the fiscal years ended
December 31, 1995 and 1994 and for the period from March 1, 1993 to December
31, 1993 in the amount of $316,489, $354,400 and $113,996, respectively.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining asset value, securities listed
on the national securities exchanges and traded on the NASDAQ National Market
are valued at the closing prices on such markets, or if such a price is
lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities which are
traded on the over-the-counter market are valued at bid price. Other
securities for which quotations are not readily available are valued at fair
values as determined in good faith by the Investment Adviser and the
Sub-Adviser under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on March 1, 1993. The rates of return
indicated below depict the actual investment experience of the Portfolio for
the periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rate is an average annual compounded rate of return for the period from March
1, 1993 through December 31, 1993 and for the fiscal years ended December 31,
1994 and 1995. The Portfolio's rate of return for the period from March 1,
1993 (commencement of operations) to December 31, 1993 was 13.49%. For the
fiscal year ended December 31, 1994 and 1995, the Portfolio's rate of return
was (0.53%) and 24.66%, respectively.
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<PAGE>
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period).
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional Information regarding the investment performance of the
Portfolio appears in the Prospectus.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- cd + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the
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Portfolio must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following,
that were held for less than three months - options, futures or forward
contracts (other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly related
to the Portfolio's principal business of investing in securities (or options
and futures with respect thereto) ("Short-Short Limitation"); (3) at the
close of each quarter of the Portfolio's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs, and other securities that,
with respect to any one issuer, do not exceed 5% of the value of the
Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of
its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities.
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<PAGE>
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Balanced Portfolio, Utility Portfolio,
Aggressive Growth Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, Value Equity Portfolio, Janus Balanced Portfolio, International
Equity Portfolio, Leisure Portfolio, Meridian/INVESCO Global Sector
Portfolio, Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign
Sector Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report and are
incorporated herein by reference to such report.
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APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 or 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
safe-guarded during both 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
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CORPORATE BONDS - STANDARD & POOR'S CORPORATION
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER - MOODY'S INVESTORS SERVICE, INC.
"Prime-1" - Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term obligations.
"Prime-2" - Issuers in the Commercial Paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and
value of current assets as well as cash generation in sound relationship to
current indebtedness. They are rated lower than the best commercial paper
issuers because margins of protection may not be as large or because
fluctuations of protective elements over the near or immediate term may be of
greater amplitude. Temporary increases in relative short and overall debt
load may occur. Alternative means of financing remain assured.
COMMERCIAL PAPER - STANDARD & POOR'S CORPORATION
"A" - Issues assigned this highest rate 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 overwhelming as for
issues designated "A-1".
"A-3" - Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
A-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
[WRL LOGO]
[FAM LOGO]
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Aggressive Growth Portfolio of the Fund.
The investment objective of the Aggressive Growth Portfolio is to seek
long-term capital appreciation. The Aggressive Growth Portfolio seeks to
achieve its objective by investing in a diversified, actively managed
portfolio of equity securities. There can be, of course, no assurance that
the Aggressive Growth Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts of Western
Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life Insurance Company
("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA") (WRL, PFL, and AUSA
together, the "Life Companies") to fund the benefits under certain individual
variable life insurance policies (the "Policies") and individual and group
variable annuity contracts (the "Annuity Contracts"). The Life Companies are
affiliates. The Separate Accounts, which may or may not be registered with
the Securities and Exchange Commission, invest in shares of one or more of
the portfolios in accordance with the allocation instructions received from
holders of the Policies and the Annuity Contracts (collectively, the
"Policyholders"). Such allocation rights are further described in the
prospectuses or disclosure documents for the Policies and the Annuity
Contracts.
WRL and Fred Alger Management, Inc. serve as the investment adviser (the
"Investment Adviser") and the sub-adviser (the "Sub-Adviser"), respectively,
to the Aggressive Growth Portfolio. See "The Investment Adviser" and "The
Sub-Adviser."
This Prospectus sets forth concisely the information about the Aggressive
Growth Portfolio that prospective investors ought to know before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund, the Aggressive Growth Portfolio and
the other portfolios of the Fund has been filed with the Securities and
Exchange Commission and is available upon request without charge by calling
or writing the Fund. The Statement of Additional Information pertaining to
the Aggressive Growth Portfolio bears the same date as this Prospectus and is
incorporated by reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights ............................. 1
The Aggressive Growth Portfolio and the Fund .... 1
Management of the Fund ........................... 5
Dividends and Other Distributions ................ 7
Taxes ............................................ 7
Purchase and Redemption of Shares ................ 7
Valuation of Shares .............................. 7
The Fund and Its Shares .......................... 8
Performance Information .......................... 8
General Information .............................. 9
</TABLE>
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FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
of the Aggressive Growth Portfolio outstanding for the year ended December
31, 1995 and for the period March 1, 1994 (commencement of operations)
through December 31, 1994, is taken from the Portfolio's audited financial
statements as incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for this Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED 3/1/94 TO
12/31/95 12/31/94
------------- --------------
<S> <C> <C>
Net Asset Value,
Beginning of Period ....... $ 9.86 $ 10.00
Income From Investment
Operations
Net Investment
Income (Loss) ....... (.06) .02
Net Gains or Losses on
Securities (both realized
and unrealized) ......... 3.96 (.14)
------------- --------------
Total Income (Loss) From
Investment Operations .. 3.90 (.12)
------------- --------------
Less Distributions
Dividends (from net
investment income) ... .00 (.02)
Distributions (from
capital gains) .......... (.51) .00
------------- --------------
Total Distributions ..... (.51) (.02)
------------- --------------
Net Asset Value, End
of Period ................. $ 13.25 $ 9.86
============= ==============
Total Return* ............... 38.02% (1.26%)
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ............. $158,534 $38,826
Ratio of Expenses to Average
Net Assets** .............. 1.07% 1.00%
Ratio of Net Investment
Income to Average
Net Assets ................ (.48%) 0.20%
Portfolio Turnover Rate .... 108.04% 89.73%
</TABLE>
* The total return shown for 1994 is for the ten month period ended December
31, 1994, and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the
applicable Policy or Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the period ended
December 31, 1994, for which period the annualized ratio of expenses to
average net assets would have been 1.18% absent the advisory fee waiver by
Western Reserve Life.
THE AGGRESSIVE GROWTH PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Aggressive Growth Portfolio is a series of the Fund. The Fund
consists of several series, or separate investment portfolios, which offer
shares for investment by the Separate Accounts. This Prospectus describes
only the Aggressive Growth Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Aggressive Growth Portfolio (the
"Portfolio") is to seek long-term capital appreciation. The Portfolio seeks
to achieve its objective by investing in a diversified, actively managed
portfolio of equity securities, such as common or preferred stocks, or
securities convertible into or exchangeable for equity securities, including
warrants and rights. The Portfolio may engage in leveraging and options and
futures transactions, which are deemed to be speculative and which may
1
<PAGE>
increase fluctuations in the Portfolio's net asset value.
There can, of course, be no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
Except during temporary defensive periods, the Portfolio invests at least
85% of its net assets in equity securities of companies of any size. It is
anticipated that the Portfolio will invest primarily in companies whose
securities are traded on domestic stock exchanges or in the over-the-counter
market. These companies may still be in the developmental stage, may be older
companies that appear to be entering a new stage of growth progress owing to
factors such as management changes or development of new technology, products
or markets or may be companies providing products or services with a high
unit volume growth rate. In order to afford the Portfolio the flexibility to
take advantage of new opportunities for investments in accordance with its
investment objective, the Portfolio may hold up to 15% of its net assets in
money market instruments and repurchase agreements and in
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<PAGE>
excess of that amount (up to 100% of its assets) during temporary defensive
periods. This amount may be higher than that maintained by other funds with
similar investment objectives. When the Portfolio increases its cash or debt
investment position, its income may increase while its ability decreases to
participate in stock market declines or advances. The Portfolio will only
invest in convertible debt securities rated in one of the three highest
rating categories by any nationally recognized statistical rating
organization. See Appendix A to the Statement of Additional Information.
The Portfolio may purchase put and call options and sell (write) covered
call and put options on securities and securities indexes to increase gain
and to hedge against the risk of unfavorable price movements, and may enter
into futures contracts on securities indexes and purchase and sell call and
put options on these futures contracts. The Portfolio may also borrow money
for the purchase of additional securities. The Portfolio may borrow only from
banks and may not borrow in excess of one-third of the market value of its
assets, less liabilities other than such borrowing. Funds that leverage
through borrowing offer an opportunity for greater capital appreciation, but
at the same time increase exposure to capital risk.
TYPES OF SECURITIES AND RISK FACTORS
SHORT SALES. The Portfolio may sell securities "short against the box."
While a short sale is the sale of a security the Portfolio does not own, it
is "against the box" if at all times when the short position is open the
Portfolio owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the
same issue as the securities sold short.
RESTRICTED SECURITIES. The Portfolio may invest in restricted securities,
which are securities subject to legal or contractual restrictions on their
resale. These restrictions might prevent the sale of the securities at a time
when a sale would otherwise be desirable. In order to sell securities that
are not registered under the Federal securities laws it may be necessary for
the Portfolio to bear the expense of registration. Currently, the Portfolio
does not intend to acquire restricted securities if the acquisition would
cause the aggregate value of all illiquid securities to exceed 15% of the
Portfolio's net assets.
The Portfolio may invest in restricted securities issued under Rule 144A.
In adopting Rule 144A, the Securities and Exchange Commission specifically
stated that restricted securities traded under Rule 144A may be treated as
liquid for purposes of investment limitations if the Board of Directors (or
the fund's adviser acting subject to the Board's supervision) determines that
the securities are in fact liquid. Examples of factors that the Fund's Board
of Directors will take into account in evaluating the liquidity of a Rule
144A security, both with respect to the initial purchase and on an ongoing
basis, will include, among others: (1) the frequency of trades and quotes for
the security; (2) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). In accordance with Rule 144A, the Board of Directors has
delegated its responsibility to the Sub-Adviser to determine the liquidity
of each restricted security purchased by the Portfolio pursuant to the Rule,
subject to the Board's oversight and review. Because institutional trading in
restricted securities is relatively new, it is not possible to predict how
institutional markets will develop. If institutional trading in restricted
securities were to decline to limited levels, the liquidity of the Portfolio
could be adversely affected.
OPTIONS TRANSACTIONS. The Portfolio may purchase or sell (that is, write)
listed options on securities as a means of achieving additional return or of
hedging the value of its portfolio. The Portfolio may write covered call
options on common stocks that it owns or has an immediate right to acquire
through conversion or exchange of other securities in an amount not to exceed
25% of total assets. The Portfolio does not intend to write any put options.
The Portfolio may only buy options that are listed on a national securities
exchange.
A call option is a contract that gives the holder of the option the right
to buy from the writer (seller) of the call option, in return for a premium
paid, the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation upon exercise of the option to deliver the underlying security
upon payment of the exercise price during the option period.
A put option is a contract that, in return for the premium, gives the
holder of the option the right to sell to the writer (seller) the underlying
security at a specified price during the term of the option. The writer of
the put, who receives the premium, has the obligation to buy the underlying
security upon exercise, at the exercise price during the option period.
If the Portfolio has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
2
<PAGE>
an option of the same series as the option previously written. There can be
no assurance that a closing purchase transaction can be effected when the
Portfolio so desires.
An option may be closed out only on an exchange that provides a secondary
market for an option of the same series. Although the Portfolio will
generally purchase or write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option. The Portfolio
will not purchase options if, as a result, the aggregate cost of all
outstanding options exceeds 10% of the Portfolio's total assets, although no
more than 5% will be committed to transactions entered into for non-hedging
purposes.
The Portfolio may write put and call options on stock indexes for the
purpose of increasing its gross income and to protect its portfolio against
declines in the value of the securities it owns or increases in the value of
securities to be
2
<PAGE>
acquired. In addition, the Portfolio may purchase the put and call options on
stock indexes in order to hedge its investments against a decline in value or
to attempt to reduce the risk of missing a market or industry segment
advance. Options on stock indexes are similar to options on specific
securities. However, because options on stock indexes do not involve the
delivery of an underlying security, the option represents the holder's right
to obtain from the writer, cash in an amount equal to a fixed multiple of the
amount by which the exercise price exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying stock index
on the exercise date. Therefore, while one purpose of writing such options is
to generate additional income for the Portfolio, the Portfolio recognizes
that it may be required to deliver an amount of cash in excess of the market
value of a stock index at such time as an option written by the Portfolio is
exercised by the holder. The writing and purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
successful use of protective puts for hedging purposes depends in part on the
Sub-Adviser's ability to predict future price fluctuations and the degree of
correlation between the options and securities markets.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES. The Portfolio may
purchase and sell stock index futures contracts and options on stock index
futures contracts. These investments may be made solely for hedging or other
permissible risk-management purposes, such as protecting the price of a
security the Portfolio intends to buy, but not for purposes of speculation.
Aggregate initial margins and premiums on such investments may not constitute
more than 5% of the Portfolio's assets. Hedging and other risk-management
transactions are undertaken to reduce or eliminate any of several kinds of
price fluctuation risk. For example, put options on futures might be
purchased to protect against declines in the market values of securities
occasioned by a decline in stock prices and securities index futures might be
sold to protect against a general decline in the value of securities of the
type that comprise the index.
A stock index future obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is
made. No physical delivery of the underlying stocks in the index is made.
With respect to stock indexes that are permitted investments, the Portfolio
intends to purchase and sell futures contracts on the stock index for which
it can obtain the best price with considerations also given to liquidity.
While incidental to its securities activities, the Portfolio for risk
management purposes may use index futures as a substitute for a comparable
market position in the underlying securities.
There can be no assurance of the Portfolio's successful use of stock index
futures as a hedging device. Due to the risk of an imperfect correlation
between securities in the Portfolio that are the subject of a hedging
transaction and the futures contract used as a hedging device, it is possible
that the hedge will not be fully effective in that, for example, losses on
the portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. The risk of imperfect
correlation increases as the composition of the Portfolio varies from the
composition of the stock index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the stock index futures, the Portfolio may buy or
sell stock index futures contracts in a greater or lesser dollar amount of
the securities being hedged if the historical volatility of the stock index
futures has been less or greater than that of the securities. Such "over
hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge
is established.
An option on a stock index futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for
the premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the
option. The Portfolio will sell options on stock index futures contracts only
as part of closing purchase transactions to terminate its options positions.
No assurance can be given that such closing transactions can be effected or
that there will be a correlation between price movements in the options on
stock index futures and price movements in the Portfolio's securities which
are the subject of the hedge. In addition, the Portfolio's purchase of such
options will be based upon predictions as to anticipated market trends, which
could prove to be inaccurate.
While utilization of futures contracts and options on futures contracts
may be advantageous to the Portfolio, if the Sub-Adviser is not successful in
employing such instruments in managing the Portfolio's investment, the
Portfolio's performance will be worse than if the Portfolio did not make such
investments. In addition, the Portfolio pays commissions and other costs in
connection with such investments, which may increase the Portfolio's expenses
and reduce its return.
3
<PAGE>
LEVERAGE THROUGH BORROWING. The Portfolio may borrow from banks for
investment purposes. This borrowing is known as leveraging. The 1940 Act
requires the Portfolio to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If such asset coverage should decline to below
300% as a result of market fluctuations or other reasons, the Portfolio may
be required to sell some of the portfolio holdings within three days to
reduce the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that
time. Leveraging may exaggerate the effect on net asset value of any increase
or decrease in the market value of the Portfolio's securities. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased; in
3
<PAGE>
certain cases, interest costs may exceed the return received on the
securities purchased. The Portfolio also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate. In accordance
with the requirements of current California insurance regulations, the
Portfolio will restrict borrowings to no more than 10% of total assets,
except that the Portfolio may temporarily borrow amounts equal to as much as
25% of total assets if such borrowing is necessary to meet redemptions. If
California's insurance regulations are changed at some future time to permit
borrowings in excess of 10% of total assets. The Portfolio may conduct
borrowings in accordance with such revised limits.
U.S. GOVERNMENT SECURITIES. The Portfolio may invest in obligations issued
or guaranteed by the U.S. government or by its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. government,
such as those of the Government National Mortgage Association (the "GNMA"),
are supported by the "full faith and credit" of the U.S. government; others,
such as those of the Export-Import Bank of the U.S., are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as those
of the Federal National Mortgage Association (the "FNMA"), are supported by
the discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial
support to U.S. government-sponsored instrumentalities if it is not obligated
to do so by law. Investors should be aware that the value of the U.S.
government securities held by the Portfolio will fluctuate with changes in
interest rates, with a decrease in interest rates generally resulting in an
increase in the value of the securities and an increase in interest rates
having the opposite effect. In addition, certain obligations, such as
long-term obligations issued by the GNMA and the FNMA, represent ownership
interest in pools of mortgages that may be subject to significant unscheduled
prepayments as a result of a decline in mortgage interest rates. Because
these prepayments must be reinvested, possibly in pools including mortgages
bearing lower interest rates, these obligations may have less potential for
capital appreciation during periods of declining interest rates than other
investments of comparable maturity, while having a comparable risk of decline
during periods of rising interest rates.
FOREIGN BANK OBLIGATIONS. Investments by the Portfolio in foreign bank
obligations and obligations of foreign branches of domestic banks present
certain risks, including the impact of future political and economic
developments, the possible imposition of withholding taxes on interest
income, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls and/or the addition of other
foreign governmental restrictions that might affect adversely the payment of
principal and interest on these obligations. In addition, there may be less
publicly available and reliable information about a foreign bank than about
domestic banks owing to different accounting, auditing, reporting and
recordkeeping standards. In view of these risks, the Sub-Adviser will
carefully evaluate these investments on a case-by-case basis. See the
Statement of Additional Information for further information regarding risks
associated with these obligations.
VARIABLE RATE MASTER DEMAND NOTES. The Portfolio may also invest in
variable rate master demand notes, which are unsecured commercial paper
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate. Because variable rate master
demand notes are direct lending arrangements between the Portfolio and the
issuer, they are not normally traded. Although no active secondary market may
exist for these notes, the Portfolio may demand payment of principal and
accrued interest at any time or may resell the note to a third party. While
the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy the Sub-Adviser that the
ratings are within the two highest ratings of commercial paper (see Appendix
A to the Portfolio's Statement of Additional Information). In addition, when
purchasing variable rate master demand notes, the Sub-Adviser will consider
the earning power, cash flows and other liquidity ratios of the issuers of
the notes and will continuously monitor their financial status and ability to
meet payment on demand. In the event an issuer of a variable rate master
demand note defaulted on its payment obligations, the Portfolio might be
unable to dispose of the note because of the absence of a secondary market
and could, for this or other reasons, suffer a loss to the extent of the
default.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with banks, registered broker-dealers and government securities
dealers approved by the Fund's Board of Directors. Under the terms of a
repurchase agreement, the Portfolio would acquire a high quality money market
instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the instrument at an agreed upon price (including accrued interest)
and time, thereby determining the yield during the Portfolio's holding
period. Thus, repurchase agreements may be seen to be loans by the Portfolio
collateralized by the underlying instrument. This arrangement results in a
4
<PAGE>
fixed rate of return that is not subject to market fluctuations during the
Portfolio's holding period and not necessarily related to the rate of return
on the underlying instrument. The value of the underlying securities,
including accrued interest, will be at least equal at all times to the total
amount of the repurchase obligation, including interest. The Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed in or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during
the period in which the Portfolio
4
<PAGE>
seeks to assert these rights, the risk of incurring expenses associated with
asserting these rights and the risk of losing all or a part of the income
from the agreement. The Sub-Adviser, acting under the supervision of the
Fund's Board of Directors, reviews the creditworthiness of those banks and
dealers with which the Portfolio enters into repurchase agreements to
evaluate these risks and monitors on an ongoing basis the value of the
securities subject to repurchase agreements to ensure that the value is
maintained at the required level.
LENDING OF PORTFOLIO SECURITIES
In order to generate income and to offset expenses, the Portfolio may lend
portfolio securities to brokers, dealers and other financial organizations.
Loans of securities by the Portfolio, if and when made, may not exceed 20% of
the Portfolio's total assets and will be collateralized by cash, letters of
credit or U.S. government securities that are maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. Cash collateral will be invested in short-term money market
instruments or repurchase agreements. Securities lending may involve some
credit risk to the Portfolio if the borrower defaults and the Portfolio is
delayed or prevented from recovering the collateral for the loan or is
otherwise required to cover a transaction in the security loaned. The
Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The Portfolio
may engage in short-term trading. The Portfolio will not normally engage in
the trading of securities for the purpose of realizing short-term profits,
but will adjust its holdings as considered advisable in view of prevailing or
anticipated market conditions, and turnover will not be a limiting factor
should the Sub-Adviser deem it advisable to purchase or sell securities.
In the Sub-Adviser's view, companies are organic entities that
continuously undergo changes in response to, among other things, economic,
market, environmental, technological, political and managerial factors.
Generally, securities will be purchased for the Portfolio for capital
appreciation and not for short-term trading profits. However, the Portfolio
may dispose of securities without regard to the time they have been held when
such action, for defensive or other purposes, appears advisable. Moreover, it
is the Sub-Adviser's philosophy to pursue the Portfolio's investment
objective of capital appreciation by managing the Portfolio actively, which
may result in high portfolio turnover. While it is not possible to predict
future market conditions or turnover rates with certainty, the Sub-Adviser
anticipates that under normal market conditions the annual turnover rate for
the Portfolio should not exceed 100%. A 100% turnover rate occurs, for
example, if all the Portfolio's securities are replaced during one year.
Increased portfolio turnover will have the effect of increasing the
Portfolio's brokerage and custodial expenses. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and Fred Alger Management, Inc. as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund. These officers are employees of WRL and
receive compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
5
<PAGE>
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio. For the fiscal year ended December 31,
1995, the Portfolio paid the Investment Adviser advisory fees of 0.80% of its
average daily net assets.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The
5
<PAGE>
Investment Adviser also assists the Portfolio in maintaining communications
and relations with the shareholders of the Portfolio, including assisting in
the preparation of reports to shareholders. The Investment Adviser may incur
and will pay certain additional expenses, including legal and accounting
fees, in connection with the formation and maintenance of the Portfolio,
including the preparation and filing, when appropriate, of all documents,
including registration statements, post-effective amendments and any
qualification under state securities laws required in connection with the
Portfolio's offering of shares. The Investment Adviser will also pay all
reasonable compensation and related expenses of the officers and Directors of
the Fund, except for such Directors who are not interested persons (as that
term is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are also
provided for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment management fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets. For the fiscal year
ended December 31, 1995, the actual expenses of the Portfolio as a percentage
of average daily net assets were 1.07%. Of these expenses, 0.15% were
attributable to interest paid by the Portfolio resulting from borrowing
activities; as noted above, such interest is not subject to the voluntary
expense limitation. Therefore, the expenses of the Portfolio to which the
expense limitation was applicable were 0.92%; and no expenses were paid by
the Investment Adviser on behalf of the Portfolio for the fiscal year ended
December 31, 1995.
THE SUB-ADVISER
Fred Alger Management, Inc. ("Alger Management") located at 75 Maiden
Lane, New York, NY 10038, serves as the Sub-Adviser to the Portfolio. The
Sub-Adviser is a wholly-owned subsidiary of Fred Alger & Company,
Incorporated ("Alger, Inc."), which in turn is a wholly-owned subsidiary of
Alger Associates, Inc., a financial services holding company controlled by
Fred M. Alger and David D. Alger. As of February 29, 1996, Alger Management
has approximately $5.4 billion in assets under management for investment
companies and private accounts.
David D. Alger, Seilai Khoo and Ronald Tartaro are primarily responsible
for the day-to-day management of the Portfolio. Mr. Alger has been employed
by the Sub-Adviser as Executive Vice President and Director of Research since
1971 and as President since 1995. Ms. Khoo has been employed by the
Sub-Adviser as a senior research analyst since 1989 and as a Senior Vice
President since 1995. Mr. Tartaro has been employed by the Sub-Adviser as a
senior research analyst since 1990 and as a Senior Vice President since 1995.
Mr. David Alger has served as Portfolio Manager of the Portfolio since its
inception. Ms. Khoo and Mr. Tartaro have each served as Portfolio Co-Managers
of the Portfolio since May 1, 1996. Mr. Alger, Ms. Khoo and Mr. Tartaro also
serve as portfolio managers for other mutual funds and investment accounts
managed by the Sub-Adviser.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio. (See
"Investment Adviser," page 5.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. The Sub-Adviser is authorized to pay higher commissions to brokerage
firms that provide it with investment and research information than to firms
which do not provide such services, if the Sub-Adviser determines that such
commissions are reasonable in relation to the overall services provided and
the Sub-Adviser receives best execution. The information received may be used
by the Sub-Adviser in managing the assets of other advisory and sub-advisory
accounts, as well as in the management of the assets of the Portfolio. It is
anticipated that Alger, Inc., an affiliate of the Sub-Adviser, will serve as
the Portfolio's broker in effecting substantially all of the Portfolio's
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<PAGE>
transactions on securities exchanges and will retain commissions in
accordance with certain regulations of the Securities and Exchange
Commission.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
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<PAGE>
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute substantially all such income and gains.
Portfolio shares are offered only to WRL and the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
7
<PAGE>
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
7
<PAGE>
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield do not reflect charges or deductions against the Separate Accounts
or charges and deductions against the Policies or the Annuity Contracts.
Where relevant, the prospectuses for the Policies and the Annuity Contracts
contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
8
<PAGE>
Portfolio's investment advisory fee and Portfolio expenses, and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc. ("Lipper"), Variable
8
<PAGE>
Annuity Research & Data Service ("VARDS") and Morningstar, Inc.
("Morningstar") or reported by other services, companies, individuals or
other industry or financial publications of general interest, such as Forbes,
Money, The Wall Street Journal, Business Week, Barron's, Kiplinger's Personal
Finance and Fortune, which rank and/or rate mutual funds by overall
performance or other criteria; and (3) the Consumer Price Index. Lipper,
VARDS and Morningstar are widely quoted independent research firms which rank
mutual funds by overall performance, investment objectives, and assets.
Unmanaged indices may assume the reinvestment of dividends but usually do not
reflect any "deduction" for the expense of operating or managing a fund. In
connection with a ranking, a Portfolio will also provide additional
information with respect to the ranking, including the particular category to
which it relates, the number of funds in the category, the period and
criteria on which the ranking is based, and the effect of fee waivers and/or
expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
9
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Fred Alger Management, Inc.
75 Maiden Lane
New York, NY 10038
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00063-05/96
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<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Aggressive Growth Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy
of the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
FRED ALGER MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1996.
WRL00064 -05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 5
Lending of Portfolio Securities 2 5
Bank and Thrift Obligations 3 4
Warrants and Rights 4 1
U.S. Government Securities 4 4
Repurchase Agreements 4 4
Options 4 2
Stock Index Futures and Options on
Stock Index Futures 6 3
Management of the Fund 6 5
Directors and Officers 6 5
The Investment Adviser 8 5
The Sub-Adviser 9 6
Portfolio Transactions and Brokerage 10 6
Portfolio Turnover 10 5
Placement of Portfolio Brokerage 10 6
Purchase and Redemption of Shares 12 7
Determination of Offering Price 12 7
Net Asset Valuation 12 7
Investment Experience Information 12 8
Calculation of Performance Related Information 13 8
Total Return 13 8
Yield Quotations 13 9
Taxes 13 7
Capital Stock of the Fund 15 8
Registration Statement 16 N/A
Financial Statements 16 9
Appendix A - Description of Selected Bond and
Commercial Paper Ratings A-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Aggressive Growth Portfolio (the
"Portfolio") of the Fund is described in the Portfolio's Prospectus. Shares
of the Portfolio are sold only to the separate accounts of Western Reserve
Life Assurance Co. of Ohio ("WRL") and separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio s total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.
2. Purchase any securities that would cause more than 25% of the value of
the Portfolio's total assets to be invested in the securities of issuers
conducting their principal business activities in the same industry; provided
that there shall be no limit on the purchase of U.S. government securities.
3. Invest in commodities except that the Portfolio may purchase or sell
stock index futures contracts and related options thereon if thereafter no
more than 5% of its total assets are invested in aggregate initial margin and
premiums.
4. Purchase or sell real estate or real estate limited partnerships,
except that the Portfolio may purchase and sell securities secured by real
estate, mortgages or interests therein and securities that are issued by
companies that invest or deal in real estate.
5. Make loans to others, except through purchasing qualified debt
obligations, lending portfolio securities or entering into repurchase
agreements.
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not invest in warrants, except that the Portfolio
may invest in warrants if, as a result, the investments (valued at the lower
of cost or market) would not exceed 5% of the value of the Portfolio's net
assets, of which not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on a recognized domestic stock exchange.
Warrants acquired by the Portfolio as part of a unit or attached to
securities at the time of acquisition are not subject to this limitation.
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<PAGE>
(B) The Portfolio may not sell securities short or purchase securities on
margin, except that the Portfolio may obtain any short-term credit necessary
for the clearance of purchases and sales of securities. These restrictions
shall not apply to transactions involving selling securities "short against
the box."
(C) The Portfolio may not invest in securities of other investment
companies, except as it may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or offer of exchange.
(D) The Portfolio may not pledge, hypothecate, mortgage or otherwise
encumber more than 10% of the value of the Portfolio's total assets except as
noted in (G) below. These restrictions shall not apply to transactions
involving reverse repurchase agreements or the purchase of securities subject
to firm commitment agreements or on a when-issued basis.
(E) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(F) The Portfolio may not borrow money, except that the Portfolio may
borrow from banks for investment purposes as set forth in the Prospectus.
Immediately after any borrowing, including reverse repurchase agreements, the
Portfolio will maintain asset coverage of not less than 300% with respect to
all borrowings.
(G) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act.
(H) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(I) The Portfolio may not issue senior securities, except that the
Portfolio may borrow from banks for investment purposes so long as the
Portfolio maintains the required coverage.
(J) The Portfolio may not purchase or retain the securities of any issuer
if, to the knowledge of the Portfolio, any of the officers or directors of
the Portfolio or Investment Adviser individually owns more than 0.5% of the
outstanding securities of the issuer and together they own beneficially more
the 5% of the securities.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend securities to brokers, dealers and
other financial organizations. The Portfolio will not lend securities to the
Sub-Adviser or its affiliates. By lending its securities, the Portfolio can
increase its income by continuing to receive interest or dividends on the
loaned securities as well as by either investing the cash collateral in
short-term securities or by earning income in the form of interest paid by
the borrower when U.S. government securities are used as collateral. The
Portfolio will adhere to the following conditions whenever its securities are
loaned: (a) the Portfolio must receive at least 100% cash collateral or
equivalent securities from the borrower; (b) the borrower must increase this
collateral whenever the market value of the securities including accrued
interest exceeds the value of the collateral; (c) the Portfolio must be able
to terminate the loan at any time; (d) the Portfolio must receive reasonable
interest on the loan, as well as dividends, interest or other distributions
on the loaned securities and any increase in market value; (e) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and (f)
voting rights on the loaned
2
<PAGE>
securities may pass to the borrower; provided, however, that if a material
event adversely affecting the investment occurs, the Fund's Board of
Directors must terminate the loan and regain the right to vote the
securities. The Portfolio bears a risk of loss in the event that the other
party to a stock loan transaction defaults on its obligations and the
Portfolio is delayed in or prevented from exercising its rights to dispose of
the collateral including the risk of a possible decline in the value of the
collateral securities during the period in which the Portfolio seeks to
assert these rights, the risk of incurring expenses associated with asserting
these rights and the risk of losing all or a part of the income from the
transaction.
BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which the Portfolio may invest are limited
to dollar-denominated certificates of deposit, time deposits and bankers'
acceptances issued by bank or thrift institutions. Certificates of deposit
are short-term, unsecured, negotiable obligations of commercial banks and
thrift institutions. Time deposits are non-negotiable deposits maintained in
bank or thrift institutions for specified periods of time at stated interest
rates. Bankers' acceptances are negotiable time drafts drawn on commercial
banks usually in connection with international transactions.
Bank and thrift obligations in which the Portfolio invests may be, but are
not required to be, issued by institutions that are insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Bank and thrift institutions
organized under Federal law are supervised and examined by Federal
authorities and are required to be insured by the FDIC. Institutions
organized under state law are supervised and examined by state banking
authorities but are insured by the FDIC only if they so elect. State
institutions insured by the FDIC are subject to Federal examination and to a
substantial body of Federal law regulation. As a result of Federal and state
laws and regulations, federally insured bank and thrift institutions are,
among other things, generally required to maintain specified levels of
reserves and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of domestic banks and of United Kingdom
branches of foreign banks may be general obligations of the parent bank in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks or domestic branches of
foreign banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of domestic banks and United Kingdom branches of foreign banks are
not necessarily subject to the same or similar regulatory requirements that
apply to domestic banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial recordkeeping
requirements. In addition, less information may be publicly available about a
foreign branch of a domestic bank or about a foreign bank than about a
domestic bank. Certificates of deposit issued by wholly-owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal
and interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental regulation
as well as governmental action in the country in which the foreign bank has
its head office. A domestic branch of a foreign bank with assets in excess of
$1 billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed by that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (i) pledge to the regulator, by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (ii) maintain assets within
the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank
3
<PAGE>
payable at or through all of its agencies or branches within the state. The
deposits of State Branches may not necessarily be insured by the FDIC.
The Portfolio may purchase obligations, or all or a portion of a package
of obligations, of smaller institutions that are Federally insured, provided
the obligation of any single institution does not exceed the Federal
insurance coverage of the obligation, presently $100,000.
WARRANTS AND RIGHTS
The Portfolio may invest in warrants and rights. A warrant is a type of
security that entitles the holder to buy a proportionate amount of common
stock at a specified price, usually higher than the market price at the time
of issuance, for a period of years or to perpetuity. In contrast, rights,
which also represent the right to buy common shares, normally have a
subscription price lower than the current market value of the common stock
and a life of two to four weeks. Warrants in which the Portfolio may invest
are freely transferrable and are traded on the major securities exchanges.
U.S. GOVERNMENT SECURITIES
Examples of the types of U.S. government securities that the Portfolio may
hold include, in addition to those described in the Prospectus and direct
obligations of the U.S. Treasury, the obligations of the Federal Housing
Administration, Farmers Home Administration, Small Business Administration,
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Banks,
Federal Land Banks and Maritime Administration. U.S. government securities
may be supported by the full faith and credit of the U.S. government (such as
securities of the Small Business Administration); by the right of the issuer
to borrow from the Treasury (such as securities of the Federal Home Loan
Bank); by the discretionary authority of the U.S. government to purchase the
agency's obligations (such as securities of the Federal National Mortgage
Association); or only by the credit of the issuing agency.
REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to the Portfolio in connection with bankruptcy
proceedings), it is the policy of the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by the Sub-Adviser.
The Portfolio does not intend to invest more than 25% of its assets in
repurchase agreements. At this time, the Portfolio does not intend to invest
in reverse repurchase agreements.
OPTIONS
A call option is "covered" if the Portfolio owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or has segregated additional
cash consideration with its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the
Portfolio holds a call on the same security as the call written where the
exercise price of the call held is (1) equal to or less than the exercise
price of the call written or (2) greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, U.S.
government securities or other high grade short-term obligations in a
segregated account held with its custodian. A put option is "covered" if the
Portfolio
4
<PAGE>
maintains cash or other high grade short-term obligations with a value equal
to the exercise price in a segregated account held with its custodian, or
else holds a put on the same security as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the
put written.
If the Portfolio has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Portfolio has been assigned an exercise notice, the Portfolio will be
unable to effect a closing purchase transaction. Similarly, if the Portfolio
is the holder of an option, it may liquidate its position by effecting a
closing sale transaction. This is accomplished by selling an option of the
same series as the option previously purchased. There can be no assurance
that either a closing purchase or sale transaction can be effected when the
Portfolio so desires.
The Portfolio will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Portfolio
will realize a loss from a closing transaction if the price of the
transaction is less than the premium paid to purchase the option. Since call
option prices generally reflect increases in the price of the underlying
security, any loss resulting from the repurchase of a call option may also be
wholly or partially offset by unrealized appreciation of the underlying
security. Other principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current market
price and price volatility of the underlying security and the time remaining
until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Portfolio
will generally purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option. In such
event it might not be possible to effect closing transactions in particular
options, so that the Portfolio would have to exercise its option in order to
realize any profit and would incur brokerage commissions upon the exercise of
the options. If the Portfolio, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise or otherwise covers the position.
In addition to options on securities, the Portfolio may also purchase and
sell call and put options on securities indexes. A stock index reflects in a
single number the market value of many different stocks. Relative values are
assigned to the stocks included in an index and the index fluctuates with
changes in the market values of the stocks. The options give the holder the
right to receive a cash settlement during the term of the option based on the
difference between the exercise price and the value of the index. By writing
a put or call option on a securities index, the Portfolio is obligated, in
return for the premium received, to make delivery of this amount. The
Portfolio may offset its position in stock index options prior to expiration
by entering into a closing transaction on an exchange or it may let the
option expire unexercised.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase these options unless
the Sub-Adviser is satisfied with the development, depth and liquidity of the
market and the Sub-Adviser believes the options can be closed out.
Price movements in the Portfolio's securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of the Sub-Adviser to predict correctly movements in the direction of
the stock market generally or of a particular industry. Because options on
securities indexes require settlement in cash, the Sub-Adviser may be forced
to liquidate portfolio securities to meet settlement obligations.
The Portfolio has qualified and intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code. One
requirement for such qualification is that the Portfolio must
5
<PAGE>
derive less than 30% of its gross income from gains from the sale or other
disposition of securities held for less than three months. Therefore, the
Portfolio may be limited in its ability to engage in options transactions.
Although the Sub-Adviser will attempt to take appropriate measures to
minimize the risks relating to the Portfolio's writing of put and call
options, there can be no assurance that the Portfolio will succeed in any
option-writing program it undertakes.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES
The Portfolio may enter into stock index futures contracts or purchase or
sell put and call options on such futures as a hedge against anticipated
market changes and for risk management purposes. Futures are generally bought
and sold on the commodities exchanges where they are listed with payment of
initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Portfolio, as seller, to deliver to
the buyer the net cash amount called for in the contract at a specific future
time. Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Portfolio's use of stock index futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and
will be entered into only for bona fide hedging or risk management purposes.
Typically, maintaining a futures contract or selling an option thereon
requires the Portfolio to deposit with a financial intermediary as security
for its obligations an amount of cash or other specified assets (initial
margin) which initially is typically 1% to 10% of the face amount of the
contract (but may be higher in some circumstances). Additional cash or assets
(variation margin) may be required to be deposited thereafter on a daily
basis as the mark-to-market value of the contract fluctuates. The purchase of
an option on stock index futures involves payment of a premium for the option
without any further obligation on the part of the Portfolio. If the Portfolio
exercises an option on a futures contract, it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would be for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset
prior to settlement at an advantageous price, nor that delivery will occur.
The Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the Portfolio's total assets (taken at
current value); however, in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 to December, 1990).
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<PAGE>
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President 1978 - 1987 and December, 1992
- present), Director (1978 -present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988
to February, 1991), President (1988 - 1989), Director (1976 - February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 - present), Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 to February, 1991), Pioneer
Western Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 -June, 1992), Florida State University College of
Law; Teaching Assistant, English, (August, 1990 - July, 1991), University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular or special Board meeting attended. For the fiscal
year ended December 31, 1995, the Portfolio's share of Directors' fees and
expenses paid by the Fund were $2,251. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the director. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - Investment
Adviser" in the Prospectus.
WRL (the "Investment Adviser") serves as the investment adviser to the
Portfolio pursuant to an Investment Advisory Agreement dated December 7, 1993
with the Fund. The Investment Adviser is a wholly-owned subsidiary of First
AUSA Life Insurance Company ("First AUSA"), a stock life insurance company
which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial
services holding company whose primary emphasis is on life and health
insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, on March 18,
1996. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolio and
terminates automatically in the event of its assignment (within the meaning
of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser," page 9.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. For the year ended December 31, 1995 and for the
period from March 1, 1994 to December 31, 1994, the Investment Adviser was
paid fees for its services to the Portfolio in the amount of $849,097 and
$125,449, respectively.
8
<PAGE>
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Portfolio pays all
other expenses incurred in its operation and all of the Portfolio s general
administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of
the custodian, fees and expenses of Fund directors who are not "interested
persons" of the Fund, legal expenses, state franchise taxes, cost of auditing
services, costs of printing proxies, Securities and Exchange Commission
("SEC") fees, advisory fees, certain insurance premiums, costs of corporate
meetings, costs of maintenance of corporate existence, investor services
(including allocable telephone and personnel expenses), extraordinary
expenses, and other expenses properly payable by the Portfolio. Depending
upon the nature of the lawsuit, litigation costs may be borne by the
Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the year ended December 31, 1995. For the period March 1, 1994
to December 31, 1994, the Investment Adviser paid expenses on behalf of the
Portfolio in the amount of $28,885.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Fred Alger Management, Inc. (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolio pursuant to a Sub-Advisory Agreement dated December 7,
1993. The Sub-Advisory Agreement was most recently approved by the Board of
Directors of the Fund, including a majority of the Directors who were not
"interested persons" (as defined in the 1940 Act) of the Fund on March 18,
1996. The Sub-Advisory Agreement provides that it will continue in effect
from year to year if approved annually (a) by the Board of Directors of the
Fund or by a majority of the outstanding shares of the Portfolio, and (b) by
a majority of the Directors who are not parties to such Agreement or
"interested persons" of any such party. The Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of its assignment (within the meaning of the 1940
Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. For the year
9
<PAGE>
ended December 31, 1995 and for the period March 1, 1994 to December 31,
1994, the Sub-Adviser was paid fees in the amount of $424,549 and $62,724,
respectively.
The Sub-Adviser, located at 75 Maiden Lane, New York, New York 10038, is a
wholly-owned subsidiary of Fred Alger & Company, Incorporated, which in turn
is a wholly-owned subsidiary of Alger Associates, Inc., a financial services
holding company. The Sub-Adviser is generally engaged in the business of
rendering investment advisory services to institutions and, to a lesser
extent, individuals. The Sub-Adviser has been engaged in the business of
rendering investment advisory services since 1964 and has approximately $5.4
billion under management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Aggressive Growth Portfolio and The
Fund -Portfolio Turnover" in the Prospectus. In computing the portfolio
turnover rate for the Portfolio, securities whose maturities or expiration
dates at the time of acquisition are one year or less are excluded. Subject
to this exclusion, the turnover rate for the Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year. The Portfolio's turnover rate for the
fiscal year ended December 31, 1995 and for the period March 1, 1994 to
December 31, 1994 was 108.04% and 89.73%, respectively. The future annual
turnover rate cannot be precisely predicted, although an annual turnover rate
in excess of 100% is not presently anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories)
10
<PAGE>
that assist the Sub-Adviser in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. The Sub-Adviser
may use such research products and services in servicing other accounts in
addition to the Portfolio. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that
do not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that a Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the
Sub-Adviser. Conversely, such supplemental information obtained by the
placement of business for the Sub-Adviser will be considered by and may be
useful to the Sub-Adviser in carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC thereunder, as well as other
regulatory requirements, the Fund's Board of Directors anticipate that
portfolio transactions will be executed through Fred Alger & Company,
Incorporated ("Alger Inc.") if, in the judgment of the Sub-Adviser, the use
of Alger Inc. is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers and if, in particular
transactions, Alger Inc. charges the Portfolio a rate consistent with that
charged to comparable unaffiliated customers in similar transactions. Such
transactions will be fair and reasonable to the Portfolio's shareholders. Any
such placement of portfolio business will also be subject to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
Over-the-counter purchases and sales are transacted directly with principal
market makers except in those cases in
11
<PAGE>
which better prices and executions may be obtained elsewhere. Principal
transactions are not entered into with affiliates of the Fund except pursuant
to exemptive rules or orders adopted by the SEC.
In selecting brokers or dealers to execute portfolio transactions on
behalf of the Portfolio, the Sub-Adviser seeks the best overall terms
available. In assessing the best overall terms available for any transaction,
the Sub-Adviser will consider the factors it deems relevant, including the
breadth of the market in the investment, the price of the investment, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, the Sub-Adviser is authorized, in selecting
parties to execute a particular transaction and in evaluating the best
overall terms available, to consider the brokerage and research services, as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, provided to the Portfolio, and/or other accounts over which the
Sub-Adviser or its affiliates exercise investment discretion. The Fund's
Board of Directors will periodically review the commissions paid by the
Portfolio to determine if the commissions paid over representative periods of
time are reasonable in relation to the benefits inuring to the Portfolio.
The Portfolio paid aggregate commissions for the fiscal year ended
December 31, 1995 and for the period from March 1, 1994 to December 31, 1994
in the amount of $240,067 and $76,028, respectively. For the same periods,
the Portfolio paid commissions to Alger Inc. in the amount of $240,067 and
$75,128, respectively, which represents 100% and 98.82%, respectively, of the
Portfolio's aggregate commissions. The percentage of the Portfolio's
aggregate dollar amount of transactions involving the payment of commissions
effected through Alger Inc. for the fiscal year ended December 31, 1995 and
for the period March 1, 1994 through December 31, 1994 was $100% and 99.89%,
respectively.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining net asset value, securities
listed on the national securities exchanges and the NASDAQ National Market
are valued at the closing prices on such markets, or if such a price is
lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities which are
traded on the over-the-counter market are valued at bid price. Other
securities for which quotations are not readily available are valued at fair
values as determined in good faith by the Investment Adviser and the
Sub-Adviser under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
12
<PAGE>
The Portfolio commenced operations on March 1, 1994. The rate of return
indicated below depicts the actual investment experience of the Portfolio for
the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rate is an average annual compounded rate of return for the period March 1,
1994 (commencement of operations) through December 31, 1994. The Portfolio's
rate of return for the fiscal year ended December 31, 1995 and for the period
from March 1, 1994 to December 31, 1994 was 38.02% and (1.26%), respectively.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period).
</TABLE>
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursement).
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
13
<PAGE>
The Portfolio has qualified and intends to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, the Portfolio must distribute to its Policyholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months - options,
futures or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Portfolio's principal business of investing
in securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. Government securities, securities of other RICs,
and other securities that, with respect to any one issuer, do not exceed 5%
of the value of the Portfolio's total assets and that do not represent more
than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by Section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of Section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of Section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
14
<PAGE>
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Porfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Equity-Income
Portfolio; Emerging Growth Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; International Equity Portfolio; Leisure Portfolio; Janus Balanced
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
15
<PAGE>
REGISTRATION STATEMENT
There has been filed with the SEC, Washington, D.C. a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
securities to which this Statement of Additional Information relates. If
further information is desired with respect to the Portfolio or such
securities, reference is made to the Registration Statement and the exhibits
filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report, and are
incorporated herein by reference to such report.
16
<PAGE>
APPENDIX A
Description of the highest commercial paper, bond and other short-and
long-term rating categories assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors
Service, Inc. ("Fitch") and Duff and Phelps, Inc. ("Duff").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign
(+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment
of short-term promissory obligations and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return
of funds employed, conservative capitalization structures with moderate
reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well established access to a range of financial markets and assured sources
of alternative liquidity. Issues rated Prime-2 (P-2) have a strong capacity
for repayment of short-term promissory obligations. This ordinarily will be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade)
is the second highest commercial paper rating assigned by Fitch which
reflects an assurance of timely payment only slightly less in degree than the
strongest issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of a timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BOND AND LONG-TERM RATINGS
Bonds rated AA by S&P are judged by S&P to be high-grade obligations and
in the majority of instances differ only in small degree from issues rated
AAA (S&P's highest rating). Bonds rated AAA are considered by S&P to be the
highest grade obligations and possess the ultimate degree of protection as to
principal and interest. With AA bonds, as with AAA bonds, prices move with
the long-term money market. Bonds rated A by S&P 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.
S&P's BBB rated bonds, or medium-grade category bonds, are borderline
between definitely sound obligations and those where the speculative elements
begin to predominate. These bonds have adequate asset coverage and normally
are protected by satisfactory earnings. Their susceptibility to changing
conditions, particularly to depressions, necessitates constant watching.
These bonds generally are more responsive to business and trade conditions
than to interest rates. This group is the lowest that qualifies for
commercial bank investment.
Bonds rated Aa by Moody's are judged to be of high quality by all
standards. Together with bonds rated Aaa (Moody's highest rating) they
comprise what are generally known as high-grade bonds. Aa
A-1
<PAGE>
bonds are rated lower than Aaa bonds because margins of protection may not be
as large as those of Aaa bonds, or fluctuation of protective elements may be
of greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger than those applicable to Aaa
securities. Bonds that are rated A by Moody's 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 that suggest a susceptibility to
impairment in the future.
Moody's Baa rated bonds 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.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judged by
Fitch to be of safety virtually beyond question and are readily salable,
whose merits are not unlike those of the AAA class, but whose margin of
safety is less strikingly broad. The issue may be the obligation of a small
company, strongly secured but influenced as to rating by the lesser financial
power of the enterprise and more local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt.
Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality
with strong protection factors. Risk is modest but may vary slightly from
time to time because of economic conditions.
A-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO]
Telephone: (800) 851-9777
(813) 585-6565
[DEAN LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Tactical Asset Allocation Portfolio of
the Fund.
The investment objective of the Tactical Asset Allocation Portfolio is
preservation of capital and competitive investment returns. There can be, of
course, no assurance that the Tactical Asset Allocation Portfolio will
achieve its objective. The Tactical Asset Allocation Portfolio seeks to
achieve its objective by investing primarily in stocks, United States
Treasury bonds, notes and bills, and money market funds. The Tactical Asset
Allocation Portfolio's approach seeks positive investment performance during
advancing markets, and maintenance of positive investment performance in
declining markets. For this purpose, the Sub-Adviser utilizes forecasting
models which evaluate risk versus reward relationships of different asset
classes. These models assist the Sub-Adviser in determining when to
"tactically" adjust the asset allocation through a gradual shifting of assets
among stocks, U.S. Treasury notes and bonds, and money market instruments.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Dean Investment Associates, a Division of C.H. Dean and
Associates, Inc. serve as the investment adviser (the "Investment Adviser")
and the sub-adviser (the "Sub-Adviser"), respectively, to the Tactical Asset
Allocation Portfolio. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Tactical
Asset Allocation Portfolio that prospective investors ought to know before
investing. Investors should read this Prospectus and retain it for future
reference.
Additional information about the Fund, the Tactical Asset Allocation
Portfolio and the other portfolios of the Fund has been filed with the
Securities and Exchange Commission and is available upon request without
charge by calling or writing the Fund. The Statement of Additional
Information pertaining to the Tactical Asset Allocation Portfolio bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Financial Highlights .................................... 1
The Tactical Asset Allocation Portfolio and the Fund ... 1
Management of the Fund .................................. 4
Dividends and Other Distributions ....................... 5
Taxes ................................................... 5
Purchase and Redemption of Shares ....................... 6
Valuation of Shares ..................................... 6
The Fund and Its Shares ................................. 6
Performance Information ................................. 7
General Information ..................................... 7
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the Tactical Asset Allocation Portfolio for the period January
3, 1995 (commencement of operations) through December 31, 1995, is taken from
the Portfolio's audited financial statements as incorporated by reference in
the Statement of Additional Information. The Fund's Annual Report contains
additional performance information for this Portfolio. A copy of the
Statement of Additional Information and Annual Report may be obtained without
charge upon request.
<TABLE>
<CAPTION>
PERIOD FROM
1/3/95 TO
12/31/95
--------------
<S> <C>
Net Asset Value, Beginning of Period ... $ 10.00
Income From Investment Operations
Net Investment Income ................. .41
Net Gains or Losses on Securities
(both realized and unrealized) ...... 1.93
--------------
Total Income From
Investment Operations .............. 2.34
Less Distributions
Dividends (from net
investment income) ............... (.41)
Distributions (from capital gains) ... (.44)
--------------
Total Distributions .................. (.85)
Net Asset Value, End of Period .......... $ 11.49
==============
Total Return* ........................... 20.09%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $120,531
Ratio of Expenses to Average Net Assets .93%
Ratio of Net Investment Income
to Average Net Assets ................. 3.76%
Portfolio Turnover Rate ................. 38.68%
</TABLE>
* The total return shown for 1995 is for the period from January 3, 1995 to
December 31, 1995, and is not annualized. The total return of the Portfolio
reflects the advisory fee and all other Portfolio expenses and includes
reinvestment of dividends and capital gains; it does not reflect the charges
against the corresponding sub-accounts or the charges and deductions under
the applicable Policy or Annuity Contract.
THE TACTICAL ASSET ALLOCATION PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Tactical Asset Allocation Portfolio is a series of the Fund. The
Fund consists of several series, or separate investment portfolios, which
offer shares for investment by the Separate Accounts. This Prospectus
describes only the Tactical Asset Allocation Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Tactical Asset Allocation Portfolio (the
"Portfolio") is preservation of capital and competitive investment returns.
The Portfolio will strive to maintain positive performance in market declines
through a reduction in equity exposure. In market advances, the Sub-Adviser
attempts to enhance the value of the Portfolio by overweighting the amount of
equity exposure as a percentage to the total assets. The Portfolio seeks to
achieve its objective by investing primarily in stocks, United States
Treasury bonds, notes and bills, and money market funds. The Portfolio will
seek to achieve income yield in excess of the dividend income yield of the
Standard & Poor's Index of 500 Common Stocks.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
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<PAGE>
The principles by which the Sub-Adviser makes its stock selection are
based on value investing - combining safety of principal with above average
returns. A company is attractive if it is reasonably priced and the
Sub-Adviser believes it will perform better than the current expectations for
earnings/cash flow over the next several years.
The Sub-Adviser's focus is on primarily high quality, liquid, large
capitalization stocks. The selection process starts with a "bottom-up"
screening of the market to identify stocks that are statistically undervalued
based on financial characteristics such as Price to Cash Flow, Price to
Sales, Price to Earnings, Dividend Yield, and Return on Equity relative to
the stock's historical norms. The Sub-Adviser seeks to preserve a "margin of
safety" which is critical to the preservation of capital. However, the
Sub-Adviser believes that investors' expectations and the company's operating
performance ultimately determine which statistically "undervalued" stocks
make good investments. Finally, undervalued stocks, by definition, are out of
favor with most investors. Therefore, the analysis of the Sub-Adviser
includes a thorough fundamental and technical evaluation of stocks to
determine their likely prospects for positive investment performance. The
Sub-Adviser's goal is to choose stocks which the market has undervalued based
on "overreaction" to perceived risks.
1
<PAGE>
A stock's fundamentals dominate the selection process. However, technical
analysis is used to improve the timeliness of the Sub-Adviser's trading
decisions.
The Sub-Adviser utilizes a series of linear statistical models that
attempt to forecast total stock market returns for both short (12 to 18
months) and long (36 to 60 months) run time periods. These time series models
assist the Sub-Adviser in comparing the risks and rewards of holding stocks
versus treasury notes and money market funds, and assist the Sub-Adviser in
determining when to "tactically" adjust the asset allocation through a
gradual shifting of assets among stocks, U.S. Treasury bonds and notes, and
money market funds. A combination of fundamental, technical, subjective and
monetary variables are used in the forecasting models.
TYPES OF SECURITIES AND RISK FACTORS
The Portfolio seeks to invest its assets primarily in income producing
common or preferred stock when the Sub-Adviser believes that the relevant
market environment favors profitable investing in those securities. The
remainder of the Portfolio will ordinarily be invested in debt obligations,
typically some of which will be convertible into common stock. However, the
Portfolio may increase its cash position when the Sub-Adviser determines that
investment opportunities with desirable risk/reward characteristics are
unavailable. The Portfolio does not presently intend to invest more than 20%
of its total assets in equity securities which do not pay a dividend. It is
anticipated that almost all of the equity securities in which the Portfolio
invests will be listed on a national securities exchange or on NASDAQ or will
be traded in the U.S. over-the-counter market.
The Portfolio may invest up to 25% of its total assets in equity
securities of foreign issuers. It is anticipated that most of the Portfolio's
investments in securities of foreign issuers will be American Depositary
Receipts (ADRs). ADRs are dollar-denominated receipts issued generally by
domestic banks and represent the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States. The Portfolio may also invest in American Depositary
Shares. Foreign securities may be subject to foreign government taxes which
would reduce the income yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade
patterns, fluctuating exchange rates and the possibility of imposition of
exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations or of the U.S.
Government. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
There is generally less government regulation of stock exchanges, brokers and
listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect
investment in those countries. Finally, in the event of a default on any such
foreign securities, it may be more difficult for the Portfolio to obtain or
to enforce a judgment against the issuers of such securities. See the
Statement of Additional Information regarding risk associated with foreign
securities.
The Portfolio may invest in U.S. Government securities, corporate bonds
and debentures, high-grade commercial paper, preferred stocks, certificates
of deposit or other securities of U.S. issuers when the Sub-Adviser perceives
attractive opportunities from such securities, or so that the Portfolio may
receive a competitive return on its uninvested cash. The Portfolio may only
invest in debt securities of U.S. issuers. U.S. Government securities are
securities issued by or guaranteed by the U.S. Government or its agencies or
instrumentalities. U.S. Government securities have varying degrees of
government backing. They may be backed by the credit of the U.S. Government
as a whole or only by the issuing agency or instrumentality. For example,
securities issued by the Financing Corporation are supported only by the
credit of the Financing Corporation, and not by the U.S. Government.
Securities issued by the Federal Home Loan Banks and the Federal National
Mortgage Association (FNMA) are supported by the agency's right to borrow
money from the U.S. Treasury under certain circumstances. U.S. Treasury
bonds, notes, and bills, and some agency securities, such as those issued by
the Government National Mortgage Association (GNMA), are backed by the full
faith and credit of the U.S. Government as to payment of principal and
interest and are the highest quality U.S. Government securities. The
Portfolio itself, and its share price and yield, are not guaranteed by the
U.S. Government. (See Appendix B in the Statement of Additional Information
for a further description of certain of the portfolio securities.)
The Portfolio may invest up to 10% of its total assets in money market
funds, within limits imposed by the 1940 Act upon investment by the Portfolio
in other investment companies. If the forecasting models predict a decline in
the stock market, the Sub-Adviser will reduce equity exposure which will
increase the Portfolio's cash position, including investment in money market
funds. (See "Other Investment Companies" on page 3 of the Statement of
2
<PAGE>
Additional Information.)
The Portfolio may also invest in zero coupon bonds or "strips". Zero
coupon bonds do not make regular interest payments; rather, they are sold at
a discount from face value. Principal and accreted discount (representing
interest accrued but not paid) are paid at maturity. "Strips" are debt
securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The issuers of all
zero coupon bonds, and the obligor of all "strips" purchased by the
Portfolio, will be the U.S. Government and its agencies or instrumentalities.
The market value of "strips" and zero coupon bonds generally fluctuates in
response to
2
<PAGE>
changes in interest rates to a greater degree than interest-paying
securities of comparable term and quality. The Portfolio may also invest in
step coupon securities. For a description of these securities, see "Zero
Coupon and Step Coupon Securities" in Appendix B to the Statement of
Additional Information.
Corporate debt securities in which the Portfolio may invest will have a
rating within the four highest grades as determined by Moody's Investors
Service, Inc. ("Moody's") (Aaa, Aa, A, or Baa) or Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB). Bonds rated Baa by Moody's or BBB
by S&P are considered medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security for
such bonds 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. In the event that ratings decline after the
Portfolio's investment in securities, the Sub-Adviser will consider all such
factors as it deems relevant to the advisability of retaining such
securities. To the extent that the Portfolio invests in fixed-income debt
securities, regardless of investment grade, investment income may increase
and may constitute a larger portion of the return on the Portfolio's
investments, and the Portfolio may not participate in stock market advances
or declines to the extent that it would if it were fully invested in equity
securities.
Investments in commercial paper are limited to obligations rated Prime-1
by Moody's or A-1 by S&P. See Appendix A in the Statement of Additional
Information for further information concerning bond and commercial paper
ratings.
The Portfolio may invest in convertible securities. Convertible securities
may include corporate notes or preferred stock, but ordinarily are a
long-term debt obligation of the issuer convertible 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. In evaluating investment in a convertible security,
primary emphasis will be given to the attractiveness of the underlying common
stock. The convertible debt securities in which the Portfolio may invest are
subject to the same rating criteria as the Portfolio's investment in
non-convertible debt securities.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend securities or make any other loan up to 25% of its
total assets, although this limitation does not apply to purchases of
commercial paper or debt securities. Securities lending may involve some
credit risk to the Portfolio if the borrower defaults and the Portfolio is
delayed or prevented from recovering the collateral for the loan or is
otherwise required to cover a transaction in the security loaned. If a
material event is to be voted upon affecting the Portfolio's investment in
securities which are on loan, the Portfolio will take such action as may be
appropriate in order to vote its shares. The Portfolio does not have the
right to vote securities on loan, but would terminate the loan and regain the
right to vote if it were considered important with respect to the investment.
(See the Statement of Additional Information for further information on
securities loans.)
FIXED-INCOME INVESTING
The performance of the debt component of the Portfolio depends primarily
on interest rate changes, the average weighted maturity of debt securities
held by the Portfolio and the quality of securities held. The debt components
of the Portfolio will tend to decrease in value when interest rates rise and
increase when interest rates fall. The Portfolio may vary the average
maturities of its portfolio of debt securities based on the portfolio
manager's analysis of interest rate trends and other factors. Generally,
shorter term securities are less sensitive to interest rate changes, but
longer term securities offer higher yields. The Portfolio's share price and
yield will also depend, in part, on the quality of its investments in debt
securities. For example, while U.S. Government securities generally are of
high quality, government securities that are not backed by the full faith and
credit of the United States and other debt securities, including those of
foreign governments, may be affected by changes in the creditworthiness of
3
<PAGE>
the issuer of the security. The extent that such changes are reflected in the
Portfolio's share price will depend upon the extent of the Portfolio's
investment in such securities.
BANK OBLIGATIONS
Because the Portfolio may invest (up to 100%) of its assets in bank
obligations, an investment in the Portfolio should be made with an
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses
3
<PAGE>
arising from possible financial difficulties of borrowers might affect a
bank's ability to meet its obligations.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The
Portfolio's annual portfolio turnover rate is not expected to exceed 100%,
although the rate of portfolio turnover is not expected to be a limiting
factor when changes are deemed appropriate. The annual portfolio turnover
rate of the common stock portion of the Portfolio's investments is also not
expected to exceed 100%. High turnover and short-term trading involve
correspondingly higher transaction costs for the Portfolio which are
ultimately borne by the shareholders and Policyholders. The Portfolio may
engage in short-term trading but does not expect to do so frequently. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and Dean Investment Associates as Sub-Adviser, the Fund requires no
employees other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of WRL and receive
no compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post- effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are also
provided for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
4
<PAGE>
exceed 1.00% of the Portfolio's average daily net assets. There were no
expenses paid by the Investment Adviser on behalf of the Portfolio for the
period January 3, 1995 (commencement of operations) to December 31, 1995,
because the Portfolio's expenses did not exceed the expense limitation.
THE SUB-ADVISER
Dean Investment Associates, a Division of C.H. Dean and Associates, Inc.,
located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, is a registered
investment adviser with the Securities and Exchange Commission. Dean
Investment Associates is wholly-owned by C.H. Dean and Associates, Inc.
Founded in 1972, Dean Investments manages portfolios for individuals and
institutional clients worldwide. Dean Investment Associates provides a full
range of investment advisory services and as of January 31, 1996 has over
$3.756 billion of assets under management.
The Portfolio is managed by a team of 10 senior investment professionals
(Central Investment Committee), with over 135 years of total investment
experience.
4
<PAGE>
John C. Riazzi, CFA, has served as the Senior Portfolio Manager of the
Portfolio and Arvind Sachdeva, CFA has served as Senior Equity Strategist of
the Portfolio since its inception. Mr. Riazzi joined the Sub-Adviser in March
of 1989. Before being promoted to Vice President and Director of Consulting
Services at the Sub-Adviser, Mr. Riazzi was responsible for client servicing,
portfolio execution and trading operations. Mr. Riazzi has been a member of
the Central Investment Committee and a Senior Institutional Portfolio Manager
for the past four years. He received a B.A. in Economics from Kenyon College
in 1985 and was awarded the Chartered Financial Analyst designation in 1993.
Mr. Sachdeva joined the Sub-Adviser in 1993. Prior to working at the
Sub-Adviser, he was the Senior Security Analyst and Equity Portfolio Manager
for Carillon Advisors, Inc., from January 1985 - September 1993. Carillon
Advisors, Inc. is an investment subsidiary of the Union Central Life
Insurance Co.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio, less 50% of
the amount of any excess expenses paid by the Investment Adviser on behalf of
the Portfolio pursuant to the expense limitation described above. (See "The
Investment Adviser," p. 4.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In addition,
the Sub-Adviser may occasionally place portfolio business with the affiliated
brokers of the Investment Adviser or the Sub-Adviser, including
InterSecurities, Inc., 201 Highland Avenue, Largo, Florida 34640. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
PERSONAL SECURITY TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
5
<PAGE>
Portfolio shares are offered only to WRL and the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because
5
<PAGE>
section 817(h) and the regulations thereunder treat the Portfolio's assets as
assets of the related separate account, these limitations also apply to the
Portfolio's assets that may be invested in securities of a single issuer.
Specifically, the regulations provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter, or within 30
days thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contract owners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
6
<PAGE>
insurance policyowners and those given by variable annuity contract owners.
If the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contract owners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of
6
<PAGE>
the directors of the Fund if they choose to do so and, in such event, holders
of the remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield regarding the Portfolio do not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant, the prospectuses for the Policies
and the Annuity Contracts contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, a
Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
7
<PAGE>
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
7
<PAGE>
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Dean Investment Associates
2480 Kettering Tower
Dayton, OH 45423-2480
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00065-05/96
8
<PAGE>
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Tactical Asset Allocation Portfolio of the WRL Series Fund, Inc. (the
"Fund"). A copy of the Prospectus may be obtained from the Fund by writing
the Fund at 201 Highland Avenue, Largo, Florida 34640 or by calling the Fund
at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
DEAN INVESTMENT ASSOCIATES
Sub-Adviser
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1996.
WRL00066-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
--------------------------- -----------------------
Investment Restrictions 1 4
Lending of Portfolio Securities 2 3
Foreign Securities 2 2
Other Investment Companies 3 2
Zero Coupon and Step Coupon Securities 3 2
Management of the Fund 4 4
Directors and Officers 4 4
The Investment Adviser 5 4
The Sub-Adviser 6 5
Portfolio Transactions and Brokerage 7 5
Portfolio Turnover 7 4
Placement of Portfolio Brokerage 7 5
Purchase and Redemption of Shares 9 6
Determination of Offering Price 9 6
Net Asset Valuation 9 6
Investment Experience Information 9 7
Calculation of Performance Related Information 9 7
Total Return 9 7
Yield Quotations 10 7
Taxes 10 5
Capital Stock of the Fund 12 6
Registration Statement 12 N/A
Financial Statements 12 7
Appendix A - Description of Selected Corporate Bond
and Commercial Paper Ratings A-1 3
Appendix B - Description of Portfolio Securities B-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Tactical Asset Allocation Portfolio (the
"Portfolio") of the Fund is described in the Portfolio's Prospectus. Shares
of the Portfolio are sold only to the separate accounts of Western Reserve
Life Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
4. Purchase or sell real estate (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate,
including mortgage-backed securities, or securities of companies engaged in
the real estate business).
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper or debt securities).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio's investment in warrants valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the
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<PAGE>
Portfolio's net assets, may be warrants that are not listed on the New York
or American Stock Exchange. Warrants acquired by the Portfolio in units or
attached to securities shall be deemed to be without value.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions.
(D) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets.
(F) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(G) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
(I) The Portfolio may not invest in securities of foreign issuers
denominated in foreign currency and not publicly traded in the United States
if at the time of acquisition more than 25% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities", below.
(J) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in excess of 25% of the value of
the Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation.
The Portfolio has no present intention of borrowing.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5. above, the Portfolio from time to
time may lend securities from its portfolio to brokers, dealers and financial
institutions and receive as collateral cash or U.S. Treasury securities which
at all times while the loan is outstanding will be maintained in amounts
equal to at least 100% of the current market value of the loaned securities.
Any cash collateral will be invested in short-term securities, which will
likely increase the current income of the Portfolio. Such loans may not have
terms longer than 30 days and will be terminable at any time. The Portfolio
may also pay reasonable fees to persons unaffiliated with the Portfolio for
services in arranging such loans.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities and American Depositary Receipts, although the
Portfolio may not hold more than 25% of its total assets in such securities.
American Depositary Receipts (ADRs) are dollar-denominated receipts issued
2
<PAGE>
generally by domestic banks and represent the deposit with the bank of a
security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. The Portfolio may also invest in
American Depositary Shares. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It is possible that market quotations for foreign
securities will not be readily available. In such event, these securities
shall be valued at fair market value as determined in good faith by Dean
Investment Associates under the supervision of the Board of Directors of the
Fund. If it should become necessary, the Portfolio could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs with respect to foreign securities may be
higher. WRL and Dean Investment Associates will consider these and other
factors before investing in foreign securities. The Portfolio may concentrate
its investments in ADRs in securities of issuers of one or more foreign
countries.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
OTHER INVESTMENT COMPANIES
The Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in the securities of money market funds, which are
investment companies. The Portfolio may not invest (i) more than 5% of its
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company. The
Portfolio will indirectly bear its proportionate share of any investment
advisory fees and expenses paid by the funds in which it invests, in addition
to the investment advisory fee and expenses paid by the Portfolio.
ZERO COUPON AND STEP COUPON SECURITIES
The Portfolio may invest in zero coupon and step coupon securities. Zero
coupon and step coupon bonds are issued and traded at a discount from their
face amounts. They do not entitle the holder to any periodic payment of
interest prior to maturity or prior to a specified date when the securities
begin paying current interest. The discount from the face amount or par value
depends on the time remaining until cash payments begin, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue
discount on such securities that accrues that year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal
Revenue Code, the Portfolio must distribute its investment company taxable
income, including the original issue discount accrued on zero coupon or step
coupon bonds. Because the Portfolio will not receive cash payments on a
current basis in respect of accrued original issue discount on zero coupon
bonds or step coupon bonds during the period before interest payments begin,
in some years the Portfolio may have to distribute cash obtained from other
sources in order to satisfy the distribution requirements under the Code. The
3
<PAGE>
Portfolio might obtain such cash from selling other portfolio holdings. These
actions are likely to reduce the assets to which the Portfolio's expenses
could be allocated and to reduce the rate of return for the Portfolio. In
some circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might
otherwise make it undesirable for the Portfolio to sell the securities at the
time.
Generally, the market prices of zero coupon and step coupon securities are
more volatile than the prices of securities that pay interest periodically
and in cash and are likely to respond to changes in interest rates to a
greater degree than other types of debt securities having similar maturities
and credit quality.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice President, Treasurer
(1966 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western
Corporation; Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 -present), Chief Executive
Officer (1982 -present), President (1978 - 1987 and December, 1992
-present), Director (1978 - present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President (1988-1989), Director (1976 - February, 1991),
Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; Trustee (1987 - present), Chairman
(December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 -September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 - February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
4
<PAGE>
REBECCA A. FERRELL (1, 2), SECRETARY, ASSISTANT VICE PRESIDENT AND COUNSEL
(DOB 12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991) University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular and special Board meeting attended. For the period
January 3, 1995 to December, 1995, the Portfolio's share of Director's fees
and expenses paid by the Fund were $396. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee currently consisting of Messrs.
Brown, Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated August 18, 1994 with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the 1940
5
<PAGE>
Act) of the Fund on March 18, 1996. The Investment Advisory Agreement
provides that it will continue in effect from year to year if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Portfolio, and (b) by a majority of the Directors
who are not parties to such contract or "interested persons" of any such
party. The Investment Advisory Agreement may be terminated without penalty on
60 days' written notice at the option of either party or by the vote of the
shareholders of the Portfolio and terminates automatically in the event of
its assignment (within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. For the period from January 3, 1995
(commencement of operations) to December 31, 1995 the Investment Adviser was
paid fees for its services to the Portfolio in the amount of $433,844.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
also provided for the Portfolio by the Investment Adviser. The Portfolio pays
all other expenses incurred in its operation and all of the Portfolio's
general administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses of registering the
shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of
the custodian, fees and expenses of Fund directors who are not "interested
persons" of the Fund, legal expenses, state franchise taxes, cost of auditing
services, costs of printing proxies, Securities and Exchange Commission fees,
advisory fees, certain insurance premiums, costs of corporate meetings, costs
of maintenance of corporate existence, investor services (including allocable
telephone and personnel expenses), extraordinary expenses, and other expenses
properly payable by the Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the period January 3, 1995 to December 31, 1995 because the
Portfolio's expenses did not exceed the expense limitation.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Dean Investment Associates (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolio pursuant to a Sub-Advisory Agreement dated August 18, 1994.
The Sub-Advisory Agreement was most recently approved by the Board of
Directors of the Fund, including a majority of the Directors who
6
<PAGE>
were not "interested persons" (as defined in the 1940 Act) of the Fund on
March 18, 1996. The Sub-Advisory Agreement provides that it will continue in
effect from year to year thereafter if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding shares of the
Portfolio, and (b) by a majority of the Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Sub-Advisory Agreement may be terminated without penalty on 60
days' written notice at the option of either party or by the vote of the
policyholders of the Portfolio and terminates automatically in the event of
its assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. For the period January
3, 1995 to December 31, 1995, the Sub-Adviser was paid fees in the amount of
$216,922.
The Sub-Adviser, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480,
is a registered investment adviser with the Securities and Exchange
Commission. Dean Investment Associates is wholly-owned by C.H. Dean and
Associates, Inc. Founded in 1972, Dean Investments manages portfolios for
individuals and institutional clients worldwide. Dean Investment Associates
provides a full range of investment advisory services and currently has over
$3.756 billion of assets under management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Tactical Asset Allocation Portfolio
and The Fund - Portfolio Turnover" in the Prospectus. In computing the
portfolio turnover rate for the Portfolio, securities whose maturities or
expiration dates at the time of acquisition are one year or less are
excluded. Subject to this exclusion, the turnover rate for the Portfolio is
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities for the fiscal year by (b) the monthly average of portfolio
securities owned by the Portfolio during the fiscal year. The Portfolio's
turnover rate for the period January 3, 1995 to December 31, 1995 was 38.68%.
The future annual turnover rate cannot be precisely predicted, although an
annual turnover rate in excess of 100% is not presently anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
7
<PAGE>
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolio. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
8
<PAGE>
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealer to execute Portfolio transactions.
In addition, the Sub-Adviser may occasionally place portfolio business with
the affiliated brokers of the Investment Adviser or the Sub-Adviser,
including InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida
34618-5068. As stated above, any such placement of portfolio business will be
subject to the ability of the broker-dealer to provide best execution and to
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
The Portfolio paid aggregate commissions for the period from January 3,
1995 to December 31, 1995 in the amount of $208,950. For the same period, the
Portfolio paid no commissions to Dean Investment Associates.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining asset value, securities listed
on the national securities exchanges and the NASDAQ National Market are
valued at the closing prices on the principal trading market for such
security, or if such a price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their
current bid price. Foreign securities and currencies are converted to U.S.
dollars using the exchange rate in effect at the close of the Exchange. Other
securities which are traded on the over-the-counter market are valued at bid
price. Other securities for which quotations are not readily available are
valued at fair values as determined in good faith by the Investment Adviser
and the Sub-Adviser under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days or less are valued on the
amortized cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios. It does not represent or project future
investment performance.
The Tactical Asset Allocation Portfolio commenced operations on January 3,
1995. The rates of return indicated below depict the actual investment
experience of the Portfolio for the periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rates of return are based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rates are average annual compounded
9
<PAGE>
rates of return for the period ended December 31, 1995. The Portfolio's rate
of return for the period January 3, 1995 to December 31, 1995 was 20.09%.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period)
</TABLE>
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C><C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends
d = the maximum offering price per share on the last day of the period
</TABLE>
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio has qualified and expects to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, the Portfolio must distribute to its Policyholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than
10
<PAGE>
three months - options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Portfolio's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities.
11
<PAGE>
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Equity-Income Portfolio; Utility Portfolio; Balanced Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; Leisure Portfolio; International Equity
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/INVESCO US Sector Portfolio; and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for the Portfolio for the period ended
December 31, 1995 and the report of the Fund's independent accountants are
included in the Fund's 1995 Annual Report and are incorporated herein by
reference to such report.
12
<PAGE>
APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 on 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 or 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.
CORPORATE BONDS - STANDARD & POOR'S CORPORATION
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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.
COMMERCIAL PAPER - MOODY'S INVESTORS SERVICE, INC.
"PRIME-1" - Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term obligations.
COMMERCIAL PAPER - STANDARD & POOR'S CORPORATION
"A" - Issues assigned this highest rate 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-1
<PAGE>
APPENDIX B
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
3. Asset-Backed Securities. The Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. The Portfolio will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.
4. Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral is passed through to the security holder. Mortgage-backed
bonds are general obligations of their issuers, payable out of the issuers'
general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities exhibit characteristics of both
pass-throughs and mortgage-backed bonds. Mortgage-backed securities also
include other debt obligations secured by mortgages on commercial real estate
or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.
5. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
6. Stripped Mortgage-Backed Securities are created when the principal and
interest payments of a mortgage-backed security are separated by a U.S.
Government agency or a financial institution. The holder of the
"principal-only" security receives the principal payments made by the
underlying mortgage-backed security, while the holder of the "interest-only"
security receives interest payments from the same underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the
prices of stripped mortgage-backed securities can be significantly affected
by changes in interest rates as well. As interest rates fall, prepayment
rates tend to increase, which in turn tends to reduce prices of
"interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.
B-1
<PAGE>
7. Financing Corporation securities. (FICOs) are debt obligations issued
by the Financing Corporation. The Financing Corporation was originally
created to recapitalize the Federal Savings and Loan Insurance Corporation
(FSLIC) and now functions as a financing vehicle for the FSLIC Resolution
Fund, which received substantially all of FSLIC's assets and liabilities.
8. Zero Coupon Bonds. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the
principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financial Corporation (FICO) also can be stripped in this
fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells the
coupon payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities (CATS), Treasury Investment Growth Receipts (TIGRS), and generic
Treasury Receipts (TRs), are stripped U.S. Treasury securities separated into
their component parts through custodial arrangements established by their
broker sponsors. FICO bonds have been stripped in this fashion. The Portfolio
has been advised that the staff of the Division of Investment Management of
the Securities and Exchange Commission does not consider such privately
stripped obligations to be U.S. Government securities, as defined by the 1940
Act. Therefore, the Portfolio will not treat such obligations as U.S.
Government securities for purposes of the 65% portfolio composition ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds are
originated in the form of a zero coupon bond and are not created by stripping
an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond
does not pay current income, its price can be very volatile when interest
rates change. In calculating its dividends, the fund takes into account as
income a portion of the difference between a zero coupon bond's purchase
price and its face value.
B-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
[WRL LOGO]
Telephone: (800) 851-9777
(813) 585-6565
[UTILITY LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Utility Portfolio of the Fund.
The investment objective of the Utility Portfolio is to achieve high
current income and moderate capital appreciation. The Utility Portfolio seeks
to achieve its objective by investing primarily in a professionally managed
and diversified portfolio of equity and debt securities of utility companies.
There can be, of course, no assurance that the Utility Portfolio will achieve
its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Federated Investment Counseling serve as the investment adviser
(the "Investment Adviser") and the sub-adviser (the "Sub-Adviser"),
respectively, to the Utility Portfolio. See "The Investment Adviser" and "The
Sub-Adviser."
This Prospectus sets forth concisely the information about the Utility
Portfolio that prospective investors ought to know before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund, the Utility Portfolio and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the Utility
Portfolio bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Highlights .................. 1
The Utility Portfolio and the Fund ... 1
Management of the Fund ................ 4
Dividends and Other Distributions .... 6
Taxes ................................. 6
Purchase and Redemption of Shares .... 6
Valuation of Shares ................... 6
The Fund and Its Shares ............... 7
Performance Information ............... 7
General Information ................... 8
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the Utility Portfolio for the period March 1, 1994
(commencement of operations) through December 31, 1994, and for the year
ended December 31, 1995, is taken from the Portfolio's audited financial
statements as incorporated by reference in the Statement of Additional
Information. The Fund's Annual Report contains additional performance
information for this Portfolio. A copy of the Annual Report may be obtained
without charge upon request.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED 3/1/94 TO
12/31/95 12/31/94
------------- --------------
<S> <C> <C>
Net Asset Value,
Beginning of Period ........ $ 9.30 $ 10.00
Income From Investment
Operations
Net Investment Income ..... .46 .43
Net Gains or Losses on
Securities (both realized
and unrealized) .......... 1.93 (.70)
------------- --------------
Total Income (Loss) From
Investment Operations ... 2.39 (.27)
------------- --------------
Less Distributions
Dividends (from net
investment income) .... (.46) (.43)
Distributions (from
capital gains) ........... (.11) .00
------------- --------------
Total Distributions ....... (.57) (.43)
------------- --------------
Net Asset Value,
End of Period .............. $ 11.12 $ 9.30
============= ==============
Total Return* ................ 25.25% (4.58%)
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) .............. $24,607 $10,482
Ratio of Expenses to Average
Net Assets** ............... 1.00% 1.00%
Ratio of Net Investment
Income to Average Net Assets 4.56% 5.36%
Portfolio Turnover Rate ..... 78.34% 36.13%
</TABLE>
* The total return shown for 1994 is for the ten month period ended December
31, 1994, and is not annualized. The total return of the Portfolio
reflects the advisory fee and all other Portfolio expenses and includes
reinvestment of dividends and capital gains; it does not reflect the
charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the periods
ended December 31, 1994 and 1995, for which periods the annualized
ratio of expenses to average net assets would have been 1.90% and
1.08%, respectively, absent the advisory fee waiver by Western Reserve Life.
THE UTILITY PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Utility Portfolio is a series of the Fund. The Fund consists of
several series, or separate investment portfolios, which offer shares for
investment by the Separate Accounts. This Prospectus describes only the
Utility Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Utility Portfolio (the "Portfolio") is to
achieve high current income and moderate capital appreciation. The Portfolio
seeks to achieve its objective by investing primarily in a professionally
managed and diversified portfolio of equity and debt securities of utility
companies. The Portfolio's investment approach is based on the conviction
that over the long-term, the economy will continue to expand and develop and
that this economic growth will be reflected in the growth of the revenues and
1
<PAGE>
earnings of such companies. The Portfolio intends to achieve its investment
objective by investing in equity and debt securities of utility companies
that produce, transmit, or distribute gas and electric energy as well as
those companies that provide communications facilities, such as telephone and
telegraph companies. As a matter of investment policy which can be changed
without shareholder vote, the Portfolio will invest at least 65% of its total
assets in securities of utility companies.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
The common stocks of utility companies are selected by the Portfolio's
Sub-Adviser on the basis of traditional research techniques, including
assessment of earnings and dividend growth prospects and of the risk and
volatility of the company's industry. However, other factors, such as product
position, market share, or profitability will also be considered by the
Portfolio's Sub-Adviser.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities
1
<PAGE>
exchanges or in the over-the-counter market in the form of depository
receipts. Securities of a foreign issuer may present greater risks in the
form of nationalization, confiscation, domestic marketability, or other
national or international restrictions. The Portfolio has no present
intention to hold more than 15% of its total assets in securities of foreign
issuers. As a matter of practice, the Portfolio will not invest in the
securities of a foreign issuer if any such risk appears to the Sub-Adviser to
be substantial. The risks involved in investing in securities of foreign
issuers are described in more detail below.
The Portfolio may also invest in cash, U.S. government securities, and
money market instruments in proportions determined by its Sub-Adviser.
TYPES OF SECURITIES AND RISK FACTORS
While the Portfolio invests primarily in common stocks of utility
companies, to a limited extent, it may invest in other securities of utility
companies such as preferred stocks, corporate bonds, notes and warrants. The
Portfolio may invest up to 15% of its net assets in illiquid securities. The
Portfolio also may enter into repurchase agreements with domestic banks and
broker-dealers which involve certain risks. The Portfolio does not currently
intend to invest more than 5% of its assets in debt securities below the four
highest grades (commonly referred to as junk bonds). The risks involved in
such practices are described under "Investment Objective and Policies" in the
Statement of Additional Information.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio intends to invest in
restricted securities. Restricted securities are any securities in which the
Portfolio may otherwise invest pursuant to its investment objective and
policies but which are subject to restrictions on resale under Federal
securities law. However, the Portfolio will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to
15% of its net assets.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
Federal securities law and is generally sold to institutional investors, such
as the Portfolio, who agree that they are purchasing the paper for investment
purposes and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the Portfolio through
or with the assistance of the issuer or investment dealers who make a market
in Section 4(2) commercial paper, thus providing liquidity.
TEMPORARY INVESTMENTS. The Portfolio may also invest temporarily in cash,
cash items, and short-term instruments, including notes and commercial paper,
for liquidity and during times of unusual market conditions for defensive
purposes (up to 100% of its assets). Cash items may include obligations such
as: certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks); obligations issued or guaranteed as to
principal and interest by the U.S. government or any of its agencies or
instrumentalities; and repurchase agreements.
FOREIGN SECURITIES. The Portfolio may invest up to 15% of its total assets
in securities of foreign issuers that are not publicly traded in the United
States. In addition, the Portfolio may invest in securities of foreign
issuers that are publicly traded on exchanges in the United States, including
American Depositary Receipts ("ADRs"). ADRs are dollar-denominated receipts
issued generally by domestic banks and represent the deposit with the bank of
a security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. The Portfolio may also invest in
American Depositary Shares. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. For example,
changes in currency exchange rates and exchange rate controls may affect the
value of foreign securities and the value of their dividend or interest
payments, and therefore the Portfolio's share price and return. Foreign
companies generally are subject to tax laws and accounting, auditing, and
financial reporting standards, practices and requirements that differ from
those applicable to U.S. companies. There is generally less publicly
available information about foreign companies and less securities and other
governmental regulation and supervision of foreign companies, stock exchanges
and securities brokers and dealers. The Portfolio may encounter difficulties
in enforcing obligations in foreign countries and negotiating favorable
brokerage commission rates. Securities of some foreign companies are less
liquid, and their prices more volatile, than securities of comparable U.S.
companies.
In addition, with respect to some foreign countries, there is the
possibility of: expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolio; political
or social instability or war; or diplomatic developments which could affect
U.S. investment in those countries. The Sub-Adviser will consider these and
2
<PAGE>
other factors before investing in foreign securities. The Portfolio will not
concentrate its investments in any particular country.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell U.S.
government securities or other securities to the Portfolio and agree at the
time of sale to repurchase them at a mutually agreed upon time and price. The
Portfolio or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked-to-market daily. To
the extent that the original seller does not repurchase the securities from
the Portfolio, the Portfolio could receive less than the repurchase price on
any sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Portfolio might be
2
<PAGE>
delayed pending court action. The Portfolio believes that under the regular
procedures normally in effect for custody of the Portfolio's securities
subject to repurchase agreements, a court of competent jurisdiction would
rule in favor of the Portfolio and allow retention or disposition of such
securities. The Portfolio will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker/dealers,
which are found by the Portfolio's Sub-Adviser to be creditworthy pursuant
to guidelines established by the Board of Directors.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may also enter into reverse
repurchase agreements. This transaction is similar to borrowing cash. In a
reverse repurchase agreement, the Portfolio transfers possession of a
portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market
value in cash, and agrees that on a stipulated date in the future the
Portfolio will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, assets of the Portfolio, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Portfolio's records at the trade date and
maintained until the transaction is settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Portfolio purchases or sells securities with
payment and delivery scheduled for a future time. The Portfolio engages in
when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Portfolio's investment
objective and policies, not for leverage. In when-issued and delayed delivery
transactions, the Portfolio relies on the seller to complete the transaction.
The seller's failure to complete the transaction may cause the Portfolio to
miss a price or yield considered to be advantageous. The Portfolio intends to
limit its purchases of securities on a when-issued or delayed delivery basis
to no more than 10% of the value of its total assets.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on its
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Portfolio holds against decreases in value. The
Fund will only purchase puts which are traded on a recognized exchange.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
The Portfolio may also write call options on all or any portion of its
portfolio to generate income for the Portfolio. The Portfolio will write call
options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration. The call
options which the Portfolio writes must be listed on a recognized options
exchange. Although the Portfolio reserves the right to write covered call
options on its entire portfolio, it will not write such options on more than
25% of its total assets unless a higher limit is authorized by the Board of
Directors.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and
sell financial futures contracts to hedge all or a portion of its portfolio
of long-term debt securities against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments issued
or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Portfolio may also write call options and purchase put options on
financial futures contracts as a hedge to attempt to protect securities in
its portfolio against decreases in value. When the Portfolio writes a call
option on a futures contract, it is undertaking the obligation of selling a
futures contract at a fixed price at any time during a specified period if
the option is exercised. Conversely, as purchaser of a put option on a
futures contract, the Portfolio is entitled (but not obligated) to sell a
futures contract at the fixed price during the life of the option.
The Portfolio may not purchase or sell futures or related options if
immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Portfolio's total assets. When the
Portfolio purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated account
with the Portfolio's custodian (or the broker, if legally permitted) to
3
<PAGE>
collateralize the position and thereby insure that the use of such futures
contracts is unleveraged.
RISKS. When the Portfolio uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the securities
subject to the futures contracts may not correlate perfectly with the prices
of the securities in the Portfolio's portfolio. This may cause the futures
contract and any related options to react differently than the portfolio
securities to market changes. In addition, the Portfolio's Sub-Adviser could
be incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Portfolio may
lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Sub-Adviser
will consider liquidity before entering into
3
<PAGE>
futures and options transactions, there is no assurance that a liquid
secondary market on an exchange will exist for any particular futures
contract or option at any particular time. The Portfolio's ability to
establish and close out futures and options positions depends on this
secondary market.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Portfolio may lend its
portfolio securities on a short-term or a long-term basis up to one-third of
the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. Securities lending may involve some
credit risk to the Portfolio if the borrower defaults and the Portfolio is
delayed or prevented from recovering the collateral for the loan or is
otherwise required to cover a transaction in the security loaned. The
Portfolio will only enter into loan arrangements with broker/ dealers, banks,
or other institutions which the Sub-Adviser has determined are creditworthy
under guidelines established by the Board of Directors and will receive
collateral equal to at least 100% of the value of the securities loaned. The
Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment.
FIXED-INCOME INVESTING
The performance of the debt component of the Portfolio depends primarily
on interest rate changes, the average weighted maturity of debt securities
held by the Portfolio and the quality of securities held. The debt component
of the Portfolio will tend to decrease in value when interest rates rise and
increase when interest rates fall. The Portfolio may vary the average
maturities of its portfolio of debt securities based on the portfolio
manager's analysis of interest rate trends and other factors. Generally,
shorter term securities are less sensitive to interest rate changes, but
longer term securities offer higher yields. The Portfolio's share price and
yield will also depend, in part, on the quality of its investments in debt
securities. For example, while U.S. Government securities generally are of
high quality, government securities that are not backed by the full faith and
credit of the United States and other debt securities, including those of
foreign governments, may be affected by changes in the creditworthiness of
the issuer of the security. The extent that such changes are reflected in a
Portfolio's share price will depend upon the extent of the Portfolio's
investment in such securities.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The Portfolio
may engage in short-term trading. Although not presently anticipated, the
Portfolio's annual turnover rate may exceed 100%, which is higher than that
of many other companies. A 100% turnover rate occurs, for example, if all the
Portfolio's securities are replaced during one year. High turnover and
short-term trading involve correspondingly higher transaction costs for the
Portfolio which are ultimately borne by the shareholders and Policyholders.
See "Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
SPECIAL RISKS
Because of the Portfolio's investment concentration, there exist certain
risks associated with the utility industry of which investors should be
aware. These include difficulty in earning adequate returns on investment
despite frequent rate increases, restriction on operation and increased costs
and delays due to government regulations, building or construction delays,
environmental regulations, difficulty of the capital markets in absorbing
utility debt and equity securities, and difficulties in obtaining fuel at
reasonable prices.
REDUCING RISKS OF UTILITY SECURITIES
The Portfolio's Sub-Adviser believes that the risks of investing in
utility securities can be reduced. The professional portfolio management
techniques used by the Portfolio to attempt to reduce these risks include
credit research. The Portfolio's Sub-Adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgement of other
investment analysts, and its own informed judgement. The Sub-Adviser's credit
4
<PAGE>
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest or dividend coverage, and earnings. In evaluating an
issuer, the Sub-Adviser places special emphasis on the estimated current
value of the issuer's assets rather than historical costs.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and Federated Investment Counseling as Sub-Adviser, the
Fund requires no employees other than its executive officers, none of whom
devotes full time to the affairs of the Fund. These officers are employees of
WRL and receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's
4
<PAGE>
Investment Adviser. The Investment Adviser is a wholly-owned subsidiary of
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance
company which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a
financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly-traded international insurance group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.75% of the average
daily net assets of the Portfolio. For the fiscal year ended December 31,
1995, the Portfolio paid the Investment Adviser advisory fees of 0.75% of its
average daily net assets.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation and related expenses of the officers and Directors of the Fund,
except for such Directors who are not interested persons (as that term is
defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are also
provided for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment management fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets. For the fiscal year
ended December 31, 1995, the actual expenses of the Portfolio as a percentage
of average daily net assets were 1.08%. For the year ended December 31, 1995,
the Investment Adviser paid expenses on behalf of the Portfolio in the amount
of $14,417.
THE SUB-ADVISER
Federated Investment Counseling, located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, serves as the Sub-Adviser to the
Portfolio. The Sub-Adviser, a Delaware business trust organized on April 11,
1989, is a registered investment adviser under the Investment Advisers Act of
1940. It is a subsidiary of Federated Investors. The Sub-Adviser serves as
investment adviser to a number of investment companies and private accounts.
Total assets under management or administered by the Sub-Adviser and other
subsidiaries of Federated Investors is approximately $85 billion.
Christopher H. Wiles has served as the portfolio manager of the Portfolio
since its inception. Mr. Wiles joined the Sub-Adviser in 1990 and has been a
Vice President of the Sub-Adviser since 1992. Mr. Wiles served as Assistant
Vice President of the Sub-Adviser from 1990 to 1992. Mr. Wiles was a
portfolio manager at Mellon Bank from 1986 to 1990. Mr. Wiles is a chartered
financial analyst and received his MBA in Finance from Cleveland State
University.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser, as a percentage of the Portfolio's average daily net
assets at an annual rate of 0.50% of the first $30 million of assets, 0.35%
of the next $20 million in assets, and 0.25% of assets in excess of $50
million.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
5
<PAGE>
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. The Sub-Adviser is authorized to pay higher commissions to brokerage
firms that provide it with investment and research information than to firms
which do not provide such services, if the Sub-Adviser determines that such
commissions are reasonable in relation to the overall services provided and
the Sub-Adviser receives best execution. The information
5
<PAGE>
received may be used by the Sub-Adviser in managing the assets of other
advisory and sub-advisory accounts, as well as in the management of the
assets of the Portfolio.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute substantially all such income and gains.
Portfolio shares are offered only to WRL and the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
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<PAGE>
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session
6
<PAGE>
of business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
7
<PAGE>
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield do not reflect charges or deductions against the Separate Accounts
or charges and deductions against the Policies or the Annuity Contracts.
Where relevant, the prospectuses for the Policies and the Annuity Contracts
contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio
7
<PAGE>
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc. ("Lipper"), Variable Annuity Research & Data Service ("VARDS")
and Morningstar, Inc. ("Morningstar") or reported by other services,
companies, individuals or other industry or financial publications of general
interest, such as Forbes, Money, The Wall Street Journal, Business Week,
Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or rate
mutual funds by overall performance or other criteria; and (3) the Consumer
Price Index. Lipper, VARDS and Morningstar are widely quoted independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets. Unmanaged indices may assume the reinvestment of
dividends but usually do not reflect any "deduction" for the expense of
operating or managing a fund. In connection with a ranking, a Portfolio will
also provide additional information with respect to the ranking, including
the particular category to which it relates, the number of funds in the
category, the period and criteria on which the ranking is based, and the
effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Federated Investment Counseling
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00061-05/96
9
<PAGE>
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Utility Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of the
Prospectus may be obtained from the Fund by writing the Fund at 201 Highland
Avenue, Largo, Florida 34640 or by calling the Fund at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
FEDERATED INVESTMENT COUNSELING
Sub-Adviser
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1996.
WRL00062-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 4
Lending of Portfolio Securities 3 4
U.S. Government Securities 3 2
Non-Investment Grade Debt Securities 3 2
When-Issued and Delayed Delivery Transactions 3 3
Reverse Repurchase Agreements 4 3
Warrants 4 2
Foreign Securities 4 2
Management of the Fund 5 4
Directors and Officers 5 4
The Investment Adviser 6 4
The Sub-Adviser 7 5
Portfolio Transactions and Brokerage 8 5
Portfolio Turnover 8 4
Placement of Portfolio Brokerage 8 5
Purchase and Redemption of Shares 10 6
Determination of Offering Price 10 6
Net Asset Valuation 10 6
Investment Experience Information 10 7
Calculation of Performance Related Information 10 7
Total Return 10 7
Yield Quotations 11 8
Taxes 11 6
Capital Stock of the Fund 13 7
Registration Statement 13 N/A
Financial Statements 13 8
Appendix A--Description of Selected Corporate
Bond and Commercial Paper Ratings A-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Utility Portfolio (the "Portfolio") of the
Fund is described in the Portfolio's Prospectus. Shares of the Portfolio are
sold only to the separate accounts of Western Reserve Life Assurance Co. of
Ohio ("WRL") and separate accounts of certain of its affiliated life
insurance companies (collectively, the "Separate Accounts") to fund the
benefits under certain variable life insurance policies (the "Policies") and
variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of any one class of
securities of such issuer.
2. Purchase or sell commodities. However, the Portfolio may purchase put
options on portfolio securities and on financial futures contracts. In
addition, the Portfolio reserves the right to hedge the portfolio by entering
into financial futures contracts and to sell calls on financial futures
contracts.
3. Purchase or sell real estate, although it may invest in the securities
of companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real estate.
4. Lend any of its assets except portfolio securities up to one-third of
the value of its total assets. This shall not prevent the purchase or holding
of corporate bonds, debentures, notes, certificates of indebtedness or other
debt securities of an issuer, repurchase agreements, or other transactions
which are permitted by the Portfolio's investment objective and policies.
5. Underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale of
restricted securities which the Portfolio may purchase pursuant to its
investment objective, policies, and limitations.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio will not invest more than 5% of its net assets in
warrants, not more than 2% of which may be warrants not listed on the New
York Stock Exchange or the American Stock Exchange.
(B) The Portfolio will not sell securities short unless: (i) during the
time the short position is open, it owns an equal amount of the securities
sold or securities readily and freely convertible into or exchangeable,
without payment of additional consideration, for securities of the same issue
as, and
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<PAGE>
equal in amount to, the securities sold short; and (ii) not more than 10% of
the Portfolio's net assets (taken at current value) is held as collateral for
such sales at any one time.
(C) The Portfolio will not purchase securities on margin, other than in
connection with the purchase of put options on financial futures contracts,
but may obtain such short-term credits as may be necessary for the clearance
of transactions.
(D) The Portfolio will not purchase shares of or otherwise invest in any
other investment companies.
(E) The Portfolio will not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any securities for
which the Board of Directors or the Sub-Adviser has made a determination of
liquidity, as permitted under the 1940 Act.
(F) The Portfolio will not purchase interests in oil, gas, or other
mineral exploration or development programs or leases, although it may invest
in or sponsor such programs.
(G) The Portfolio will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary,
or emergency measure to facilitate management of the portfolio by enabling
the Portfolio to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio
will not purchase any securities while any borrowings are outstanding.
However, during the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to assure completion of the reverse
repurchase agreements, the Portfolio will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the expiration
date of the reverse repurchase agreements.
(H) The Portfolio will not purchase or retain the securities of any issuer
if the officers and Directors of the Portfolio or its Sub-Adviser owning
individually more than 1/2 of 1% of the issuer's securities together own more
than 5% of the issuer's securities.
(I) The Portfolio will not purchase securities of a company for the
purpose of exercising control or management. However, the Portfolio will
acquire no more than 10% of the voting securities of an issuer and may
exercise its voting power in the Portfolio's best interest. From time to
time, the Portfolio, together with other investment companies advised by
affiliates or subsidiaries of Federated Investors, may together buy and hold
substantial amounts of a company's voting stock. All such stock may be voted
together. In some cases, the Portfolio and the other investment companies
might collectively be considered to be in control of the company in which
they have invested.
(J) The Portfolio will not issue senior securities, except that the
Portfolio may borrow money and engage in reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the amounts
borrowed.
(K) The Portfolio will not purchase the securities of any issuer (other
than the U.S. government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements or cash
or cash items) if, as a result, more that 5% of the value of its total assets
would be invested in the securities of such issuer, or acquire more than 10%
of any class of voting securities of any issuer. For these purposes the
Portfolio takes all common stock and all preferred stock of an issuer each as
a single class, regardless of priorities, series, designations, or other
differences.
(L) The Portfolio will not write call options on securities unless the
securities are held in the Portfolio's portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Portfolio will not
purchase put options on securities unless the securities are held in the
Portfolio's portfolio.
(M) The Portfolio will not invest more then 5% of the value of its total
assets in securities of companies, including their predecessors, that have
been in operation for less than three years.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in
2
<PAGE>
value or of the Portfolio's net assets will not result in a violation of such
restriction. The Portfolio will not invest more than 15% of its net assets in
illiquid securities.
The Portfolio does not intend to borrow money, invest in reverse
repurchase agreements, or sell securities short during the coming year. State
laws and regulations may impose additional limitations on borrowing, lending,
and the use of options, futures, and other derivative instruments. In
addition, such laws and regulations may require the Portfolio's investments
in foreign securities to meet additional diversification and other
requirements.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Portfolio lends portfolio securities must
be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Portfolio.
During the time portfolio securities are on loan, the borrower pays the
Portfolio any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Portfolio or the borrower. The
Portfolio may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the
cash or equivalent collateral to the borrower or placing broker. The
Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in U.S. government obligations which generally
include direct obligation of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by: the full faith
and credit of the U.S. Treasury; the issuer's right to borrow from the U.S.
Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentalities issuing the obligations. Examples of agencies and
instrumentalities which may not always receive financial support from the
U.S. government are: Federal Land Banks; Central Bank for Cooperatives;
Federal Intermediate Credit Banks; Federal Home Loan Banks; Farmers Home
Administration; and Federal National Mortgage Associations.
NON-INVESTMENT GRADE DEBT SECURITIES
The Portfolio may, but does not currently invest, or intend to invest,
more than 5% of its assets in debt securities below the four highest grades
("lower grade debt securities"), commonly referred to as junk bonds, as
determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or Standard &
Poor's Corporation (BBB). Before investing in any lower-grade debt
securities, the Sub-Adviser will determine that such investments meet the
Portfolio's investment objective and that the lower-grade debt securities
ratings are supported by an internal credit review, which the Sub-Adviser
will conduct in each such instance. Lower-grade debt securities usually have
moderate to poor protection of principal and interest payments, have certain
speculative characteristics (see Appendix A for a description of the
ratings), and involve greater risk of default or price declines due to
changes in the issuer's creditworthiness than investment-grade debt
securities. Because the market for lower-grade debt securities may be thinner
and less active than for investment grade debt securities, there may be
market price volatility for these securities and limited liquidity in the
resale market. Market prices for lower-grade debt securities may decline
significantly in periods of general economic difficulty or rising interest
rates. Through portfolio diversification and credit analysis, investment risk
can be reduced, although there can be no assurance that losses will not
occur.
The quality limitation set forth in the Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Portfolio. Settlement dates may be a
month or more after entering into these transactions, and the market values
of the securities purchased may vary from the purchase prices.
3
<PAGE>
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment
for the securities to be purchased are segregated on the Portfolio's records
at the trade date. These securities are marked-to-market daily and maintained
until the transaction is settled. The Portfolio may engage in these
transactions to an extent that would cause the segregation of an amount up to
20% of the total value of its assets.
REVERSE REPURCHASE AGREEMENTS
The use of reverse repurchase agreements may enable the Portfolio to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Portfolio will be able to avoid selling portfolio
instruments at a disadvantageous time.
WARRANTS
Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price
of the warrant plus the exercise price of the warrant, thus giving him a
profit. Of course, because the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than exercised.
Warrants are sometimes sold in unit form with other securities of an issuer.
Units of warrants and common stock may be employed in financing young
unseasoned companies. The purchase price of a warrant varies with the
exercise price of the warrant, the current market value of the underlying
security, the life of the warrant and various other investment factors. No
more than 5% of the total assets of the Portfolio at the time of purchase
will be invested in warrants.
FOREIGN SECURITIES
The Portfolio may purchase up to 15% of its total assets in certain
foreign securities that are not publicly traded in the United States. In
addition, the Portfolio may purchase American Depositary Receipts. American
Depositary Receipts (ADRs) are dollar-denominated receipts issued generally
by domestic banks and represent the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States. Investments in foreign securities, particularly those of
non-governmental issuers, involve considerations which are not ordinarily
associated with investing in domestic issuers. These considerations include
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign
securities markets, the impact of political, social or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It is possible that market quotations for foreign securities will
not be readily available. In such event, these securities shall be valued at
a fair market value as determined in good faith by the Sub-Adviser under the
supervision of the Board of Directors. If it should become necessary, the
Portfolio could encounter greater difficulties in invoking legal processes
abroad than would be the case in the United States. Transaction costs with
respect to foreign securities may be higher. WRL and the Sub-Adviser will
consider these and other factors before investing in foreign securities. The
Portfolio will not concentrate its investments in any particular foreign
country.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle
4
<PAGE>
the transaction. Although the counterparty in such transactions is often a
bank or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 -
present); Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3;
Rear Admiral (Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President,
Treasurer (1966 - 1988), Western Reserve Life Assurance Co. of Ohio;
Vice President, Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer
Western Corporation; Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key
Resort (resort hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB
9/12/48). Executive Vice President (June, 1993 - present), Chief
Operating Officer (March, 1994 - present), Western Reserve Life
Assurance Co. of Ohio; President and Chief Executive Officer (September,
1990 - present), Trustee (June, 1990 - present) and Executive Vice
President (June, 1988 - September, 1990) of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; President, Chief Executive Officer and Director of
InterSecurities, Inc. (May, 1988 - present); Assistant Vice President of
AEGON USA Managed Portfolios, Inc. (September, 1991 -August, 1992); Vice
President of Pioneer Western Corporation (May, 1988 - February, 1991).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(DOB 2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President (1978 - 1987 and December,
1992 - present), Director (1978 - present), Western Reserve Life
Assurance Co. of Ohio; Chairman of the Board of Directors and Chief
Executive Officer (1988 - February, 1991), President (1988 - 1989),
Director (1976 - February, 1991), Executive Vice President (1972 -
1988), Pioneer Western Corporation (financial services), Largo, Florida;
President and Director (1985 - September, 1990) and Director (December,
1990 - present); Idex Management, Inc. (investment adviser), Largo,
Florida; Trustee (1987 - present), Chairman (December, 1989 - September,
1990 and November, 1990 - present) and President and Chief Executive
Officer (November, 1986 - September, 1990), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice
President (1987 - present), Chief Financial Officer (1987 -December,
1995) and Treasurer (1988 - present), Western Reserve Life Assurance Co.
of Ohio; Senior Vice President and Treasurer (1988 - February, 1991),
Pioneer Western Corporation (financial services), Largo, Florida;
Treasurer (1988 - September, 1990 and November, 1990 - present), IDEX
Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all of
Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co.
of Ohio; Secretary and Assistant Vice President (March, 1994 -September,
1995) Secretary, Vice President and Counsel (September, 1995 - present)
of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September,
1992 - August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal
Writing Instructor (August, 1991
5
<PAGE>
- June, 1992), Florida State University College of Law; Teaching
Assistant, English (August 1990 - July, 1991), University of South
Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer
(December, 1995 -present), Senior Vice President (1981 - June, 1993) and
Actuary (1972 - present), Western Reserve Life Assurance Co. of Ohio.
------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co.
of Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated
person of the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular or special Board meeting attended. For the fiscal
year ended December 31, 1995, the Portfolio's share of Directors' fees and
expenses paid by the Fund were $411. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting currently of Messrs.
Brown, Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund -The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated December 7, 1993 with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, on March 18,
1996. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a
6
<PAGE>
majority of the outstanding shares of the Portfolio, and (b) by a majority of
the Directors who are not parties to such contract or "interested persons" of
any such party. The Investment Advisory Agreement may be terminated without
penalty on 60 days' written notice at the option of either party or by the
vote of the shareholders of the Portfolio and terminates automatically in the
event of its assignment (within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser," on page 7.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. For the year ended December 31, 1995, and for
the period from March 1, 1994 to December 31, 1994, the Investment Adviser
was paid fees for its services to the Portfolio in the amount of $128,859 and
$33,553, respectively.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Portfolio pays all
other expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, shareholder servicing costs,
expenses of registering the shares under Federal and state securities laws,
pricing costs (including the daily calculation of net asset value), interest,
certain taxes, charges of the custodian and transfer agent, fees and expenses
of Fund directors who are not "interested persons" of the Fund, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies and stock certificates, Securities and Exchange Commission fees,
advisory fees, certain insurance premiums, costs of corporate meetings, costs
of maintenance of corporate existence, investor services (including allocable
telephone and personnel expenses), extraordinary expenses, and other expenses
properly payable by the Portfolio. Depending upon the nature of the lawsuit,
litigation costs may be borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Fund's Board of
Directors.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
For the fiscal year ended December 31, 1995, and for the period from March 1,
1994 to December 31, 1994, the Investment Adviser paid expenses on behalf of
the Portfolio in the amount of $14,417 and $40,148, respectively.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Federated Investment Counseling (the "Sub-Adviser") serves as the
Sub-Adviser for the Portfolio pursuant to a Sub-Advisory Agreement dated
December 7, 1993. The Sub-Advisory Agreement was most recently approved by
the Board of Directors of the Fund, including a majority of the Directors who
7
<PAGE>
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 18, 1996. The Sub-Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such Agreement or
"interested persons" of any such party. The Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of its assignment (within the meaning of the 1940
Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. For the fiscal year
ended December 31, 1995, and for the period from March 1, 1994 to December
31, 1994, the Sub-Adviser was paid fees in the amount of $85,906 and $22,369,
respectively.
The Sub-Adviser, located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, is a wholly-owned subsidiary of Federated Investors.
All of the voting securities of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, his wife, Rhodora Donahue, and his
son, J. Christopher Donahue.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Utility Portfolio and The Fund -
Portfolio Turnover" in the Prospectus. In computing the portfolio turnover
rate for the Portfolio, securities whose maturities or expiration dates at
the time of acquisition are one year or less are excluded. Subject to this
exclusion, the turnover rate for the Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of portfolio securities owned by the Portfolio
during the fiscal year. The Portfolio's turnover rate for the fiscal year
ended December 31, 1995, and for the period from March 1, 1994 to December
31, 1994 was 78.34% and 36.13%, respectively. The future annual turnover rate
cannot be precisely predicted, although an annual turnover rate in excess of
100% is not presently anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
8
<PAGE>
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolio. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
9
<PAGE>
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
The Portfolio paid aggregate commissions for the year ended December 31,
1995, and for the period March 1, 1994 to December 31, 1994 in the amount of
$52,921 and $40,095, respectively.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining net asset value, securities
listed on the national securities exchanges and the NASDAQ National Market
are valued at the closing prices on the principal trading market for such
security, or if such a price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their
current bid price. Foreign securities and currencies are converted to U.S.
dollars using the exchange rate in effect at the close of the Exchange. Other
securities which are traded on the over-the-counter market are valued at bid
price. Other securities for which quotations are not readily available are
valued at fair values as determined in good faith by the Investment Adviser
and the Sub-Adviser under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days' or less are valued on the
amortized cost basis.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on March 1, 1994. The rate of return
indicated below depicts the actual investment experience of the Portfolio for
the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance, after
the deduction of investment advisory fees and direct Portfolio expenses. The
rate is an average annual compounded rate of return for the period from March
1, 1994 (commencement of operations) through December 31, 1994 and for
10
<PAGE>
the fiscal year ended December 31, 1995. The Portfolio's rate of return for
the period from March 1, 1994 to December 31, 1994 and for the fiscal year
ended December 31, 1995, was (4.58%) and 25.25%, respectively.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period).
</TABLE>
The total return quotation calculations reflect the deduction of a
proportional share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C><C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursement).
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
TAXES
Shares of the Portfolio are offered only to WRL and the Separate Accounts
that fund the Policies and Annuity Contracts. See the respective prospectuses
for the Policies and Annuity Contracts for a discussion of the special
taxation of insurance companies with respect to the Separate Accounts and of
the Policies, the Annuity Contracts and the holders thereof.
The Portfolio has qualified and intends to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, the Portfolio must distribute to its Policyholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or
11
<PAGE>
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months - options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the Portfolio's
principal business of investing in securities (or options and futures with
respect thereto) ("Short-Short Limitation"); (3) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs, and other securities that, with respect
to any one issuer, do not exceed 5% of the value of the Portfolio's total
assets and that do not represent more than 10% of the outstanding voting
securities of the issuer; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
12
<PAGE>
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Equity-Income
Portfolio; Emerging Growth Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; Leisure Portfolio; International Equity
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the Fund's 1995 Annual Report and are
incorporated by reference herein to such report.
13
<PAGE>
APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 on 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 or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue. Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
CORPORATE BONDS - STANDARD & POOR'S CORPORATION
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.
A-1
<PAGE>
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus () - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER - MOODY'S INVESTORS SERVICE, INC.
"Prime-1" - Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term obligations.
"Prime-2" - Issuers in the Commercial Paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and
value of current assets as well as cash generation in sound relationship to
current indebtedness. They are rated lower than the best commercial paper
issuers because margins of protection may not be as large or because
fluctuations of protective elements over the near or immediate term may be of
greater amplitude. Temporary increases in relative short and overall debt
load may occur. Alternative means of financing remain assured.
COMMERCIAL PAPER - STANDARD & POOR'S CORPORATION
"A" - Issues assigned this highest rate 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 overwhelming as for
issues designated "A-1".
"A-3" - Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
A-2
<PAGE>
THIS VALUE EQUITY PORTFOLIO PROSPECTUS WHICH FOLLOWS IS NOT CURRENTLY
AVAILABLE TO THE "ASSET ACCUMULATOR" OFFERED BY AUSA LIFE INSURANCE COMPANY,
INC.
PROSPECTUS
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
[WRL LOGO] [NWQ LOGO]
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Value Equity Portfolio of the Fund.
The investment objective of the Value Equity Portfolio is to achieve
maximum, consistent total return with minimum risk to principal. The Value
Equity Portfolio seeks to achieve its objective by investing primarily in
common stocks with above-average statistical value which, in the
Sub-Adviser's opinion, are in fundamentally attractive industries, and are
undervalued at the time of purchase. There can be, of course, no assurance
that the Value Equity Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and NWQ Investment Management Company, Inc. serve as the investment
adviser (the "Investment Adviser") and the sub-adviser (the "Sub-Adviser"),
respectively, to the Value Equity Portfolio. See "The Investment Adviser" and
"The Sub-Adviser."
This Prospectus sets forth concisely the information about the Value
Equity Portfolio that prospective investors ought to know before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund, the Value Equity Portfolio and the
other portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the Value
Equity Portfolio bears the same date as this Prospectus and is incorporated
by reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Value Equity Portfolio and the Fund ... 1
Management of the Fund ..................... 5
Dividends and Other Distributions .......... 6
Taxes ...................................... 6
Purchase and Redemption of Shares .......... 7
Valuation of Shares ........................ 7
The Fund and Its Shares .................... 7
Performance Information .................... 7
General Information ........................ 8
</TABLE>
i
<PAGE>
THE VALUE EQUITY PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Value Equity Portfolio is a series of the Fund. The Fund consists
of several series, or separate investment portfolios, which offer shares for
investment by the Separate Accounts. This Prospectus describes only the Value
Equity Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE
The investment objective of the Value Equity Portfolio (the "Portfolio")
is to achieve maximum, consistent total return with minimum risk to principal
by investing primarily in common stocks with above-average statistical value
which, in the Sub-Adviser's opinion, are in fundamentally attractive
industries and are undervalued at the time of purchase.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
The Portfolio seeks to achieve its objective by investing at least 65% of
its total assets in common stocks with above-average statistical value
which, in the Sub-Adviser's opinion, are in fundamentally attractive
industries and are undervalued at the time of purchase. The Sub-Adviser will
seek to identify stocks of above-average statistical value by using
statistical measures to screen for below-average price-to-earnings and
price-to-book ratios, above-average dividend yields and strong financial
stability. The Portfolio may also invest in other equity-related securities
consisting of convertible bonds, convertible preferred stocks, rights and
warrants.
The Sub-Adviser will begin the process of evaluating potential common
stock and equity-related securities investments by screening a universe of
1100 companies, primarily of medium to large capitalization. For these
purposes, the Sub-Adviser considers medium capitalization stocks to be stocks
issued by companies with market capitalization of between $500 million and $3
billion, and large capitalization stocks to be those stocks issued by
companies with market capitalization in excess of $3 billion. Investments in
companies with market capitalization under $500 million (considered to be
small capitalization stocks by the Sub-Adviser) will be limited to 10% of the
Portfolio's total assets. The process used by the Sub-Adviser to identify
promising under-valued companies within this universe of companies may be
differentiated from those of other value-oriented investment managers in the
following ways: the use of normalized earnings to value cyclical companies; a
focus on quality of earnings; investment in relative value; and concentration
in industries/sectors having strong long-term fundamentals. As part of a
multi-disciplined approach to capturing value, the Sub-Adviser first seeks to
identify market sectors early in their cycle of fundamental improvement,
investor recognition and market exploitation. Industry fundamentals used in
this decision making process are business trend analysis to analyze industry
and company fundamentals for the impact of changing worldwide product
demand/supply, direction of inflation and interest rates, and
expansion/contraction of business cycles. The Sub-Adviser utilizes in-house
capabilities, in addition to independent resources, for economic, industry
and securities research.
Following this initial phase, approximately 200 companies that the
Sub-Adviser believes have above-average statistical value and are in a sector
identified as having positive fundamentals on a long-term basis will be
actively followed by the Sub-Adviser. Company visits and interviews with
management augment fundamental research in seeking to identify the potential
value in these investments. The Portfolio will be concentrated in those
industries with positive fundamentals and likewise will minimize risk by
avoiding industries with deteriorating long-term fundamentals.
The Sub-Adviser anticipates that the majority of the investments in the
Portfolio will be in United States-based companies. However, from time to
time, securities of foreign based companies may be purchased, in accordance
with the selection process outlined above. The Portfolio may invest up to 20%
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of its assets in foreign securities and American Depositary Receipts
("ADRs"), which are dollar-denominated receipts issued generally by domestic
banks and which represent the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded in the United States on exchanges or
over-the-counter. (See "Types of Securities--Foreign Securities" on page 2
for a description of certain risks involved in foreign investing and
"Investment Objectives and Policies--Foreign Securities" in the Statement of
Additional Information.)
TYPES OF SECURITIES
In seeking to meet its investment objective, the Portfolio may invest in
any type of security whose investment characteristics are consistent with the
Portfolio's investment policies and techniques. These and some of the other
investment techniques the Portfolio may use are described below.
CONVERTIBLE SECURITIES. The Portfolio may invest up to 10% of its assets
in convertible securities. Convertible securities may include corporate notes
or preferred stock, but ordinarily are a long-term debt obligation of the
issuer convertible at a stated exchange rate into common stock of the issuer.
As
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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. In evaluating investment in
a convertible security, primary emphasis will be given to the attractiveness
of the underlying common stock. (See p. 4, "The Value Equity Portfolio and
the Fund - Risk Factors" for a description of risks involved.
WARRANTS AND RIGHTS. The Portfolio may invest in warrants and rights. A
warrant is a type of security that entitles the holder to buy a proportionate
amount of common stock at a specified price, usually higher than the market
price at the time of issuance, for a period of years or to perpetuity. In
contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks. Warrants in which the Portfolio
may invest are freely transferrable and are traded on the major securities
exchanges.
FOREIGN SECURITIES. The Portfolio may, from time to time, invest in
securities of foreign issuers and ADRs. The Portfolio has no present
intention to hold more than 20% of its total assets in such securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in domestic issuers. For example, changes in currency exchange
rates and exchange rate controls may affect the value of foreign securities
and the value of their dividend or interest payments, and therefore the
Portfolio's share price and return. Foreign companies generally are subject
to tax laws and accounting, auditing, and financial reporting standards,
practices and requirements that differ from those applicable to U.S.
companies. There is generally less publicly available information about
foreign companies and less securities and other governmental regulation and
supervision of foreign companies, stock exchanges and securities brokers and
dealers. The Portfolio may encounter difficulties in enforcing obligations in
foreign countries and negotiating favorable brokerage commission rates.
Securities of some foreign companies are less liquid, and their prices more
volatile, than securities of comparable U.S. companies. Transaction costs
with respect to foreign securities may be higher.
In addition, with respect to some foreign countries, there is the
possibility of: expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolio; political
or social instability or war; or diplomatic developments which could affect
U.S. investment in those countries. The Sub-Adviser will consider these and
other factors before investing in foreign securities.
REPURCHASE AGREEMENTS. The Portfolio may invest up to 25% of its total
assets in repurchase agreements collateralized by U.S. Government securities,
certificates of deposit, and certain bankers' acceptances and other
securities outlined below under "Short-Term Investments." In a repurchase
agreement, the Portfolio purchases a security and simultaneously commits to
resell that security at a future date (usually not more than seven days from
the date of purchase) to the seller (a qualified bank or securities dealer)
at an agreed upon price plus an agreed upon market rate of interest (itself
unrelated to the coupon rate or date of maturity of the purchased security).
The seller under a repurchase agreement will be required to maintain the
value of the securities subject to the agreement at not less than (1) the
repurchase price if such securities mature in one year or less, or (2) 101%
of the repurchase price if such securities mature in more than one year. The
Sub-Adviser will mark-to-market daily the value of the securities purchased,
and the Sub-Adviser will, if necessary, require the seller to maintain
additional securities to ensure that the value is in compliance with the
previous sentence. The Sub-Adviser will consider the creditworthiness of a
seller in determining whether the Portfolio should enter into a repurchase
agreement.
In effect, by entering into a repurchase agreement, the Portfolio is
lending its funds to the seller at the agreed upon interest rate, and
receiving a security as collateral for the loan. Such agreements can be
entered into for periods of one day (overnight repo) or for a fixed term
(term repo). Repurchase agreements are a common way to earn interest income
on short-term funds.
The use of repurchase agreements involves certain risks. For example, if
the seller of the agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has
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declined, the Portfolio may incur a loss upon disposition of the securities.
If the seller of the agreement becomes insolvent and subject to liquidation
or reorganization under the Bankruptcy Code or other laws, a bankruptcy court
may determine that the underlying securities are collateral not within the
control of the Portfolio and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Portfolio may not be able to
substantiate its interest in the underlying securities. While the Sub-Adviser
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
While it does not presently appear possible to eliminate all
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risks from these transactions (particularly the possibility of a decline in
the market value of the underlying securities, as well as delays and costs to
the Portfolio in connection with bankruptcy proceedings), the Portfolio will
only enter into repurchase agreements with parties whose creditworthiness has
been reviewed and found satisfactory by the Sub-Adviser in accordance with
standards established by the Fund's Board of Directors.
WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES. The
Portfolio may purchase and sell securities on a "when-issued," "delayed
settlement," or "forward delivery" basis. Such transactions will be limited
to no more than 10% of the equity portion of the Portfolio's assets.
"When-issued" or "forward delivery" refers to securities whose terms and
indenture are available, and for which a market exists, but which are not
available for immediate delivery. When-issued or forward delivery
transactions may be expected to occur a month or more before delivery is due.
Delayed settlement is a term used to describe settlement of a securities
transaction in the secondary market which will occur sometime in the future.
No payment or delivery is made by the Portfolio until it receives payment or
delivery from the other party to any of the above transactions. The Portfolio
will maintain a separate account of cash, U.S. Government securities or other
high grade debt obligations at least equal to the value of purchase
commitments until payment is made. Such segregated securities will either
mature or, if necessary, be sold on or before the settlement date. Typically,
no income accrues on securities purchased on a delayed delivery basis prior
to the time delivery of the securities is made although the Portfolio may
earn income in securities it has deposited in a segregated account.
The Portfolio may engage in when-issued transactions to obtain what is
considered to be an advantageous price and yield at the time of the
transaction. When the Portfolio engages in when-issued or forward delivery
transactions, it will do so for the purpose of acquiring securities
consistent with its investment objective and policies and not for the
purposes of investment leverage.
SHORT-TERM INVESTMENTS. From time to time, in order to earn a return on
uninvested assets, meet anticipated redemptions, or for temporary defensive
purposes, the Portfolio may invest temporarily in cash, cash items, and
short-term instruments, including notes and commercial paper, certificates of
deposit (including those issued by domestic and foreign branches of
FDIC-insured banks), obligations issued or guaranteed as to principal and
interest by the U.S. government or any of its agencies or instrumentalities,
and repurchase agreements. (See Appendix B in the Statement of Additional
Information for a detailed description of these instruments.) For defensive
purposes, during times of unusual market conditions, the Portfolio may invest
up to 100% of its assets in such short-term investments. When the Portfolio
increases its cash or debt investment position, its income may increase while
its ability decreases to participate in stock market declines or advances.
Investments in commercial paper are limited to obligations rated A-1 or
A-2 by Standard & Poor's ("S&P") or Prime-1 or Prime-2 by Moody's Investors
Service, Inc. ("Moody's"). The designation A-1 by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very
strong. The S&P designation A-2 indicates issues with this designation have a
strong capacity for timely payment, but the relative degree of safety is not
overwhelming as for issues designated "A-1". Issuers of commercial paper
rated P-1 by Moody's must have a superior capacity for repayment of
short-term promissory obligations. Issuers rated Prime-2 (P-2) are high
quality. (See Appendix A in the Statement of Additional Information for
further information concerning commercial paper ratings.)
BANK OBLIGATIONS. Because the Portfolio may invest (up to 100%) of its
assets in bank obligations, an investment in the Portfolio should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions on
resale. However, certain restricted securities that are not registered for
sale to the general public but that can be resold to institutional investors
("Rule 144A Securities") may not be considered illiquid, provided that a
dealer or institutional trading market exists. The institutional trading
market is relatively new and liquidity of the Portfolio's investments could
be impaired if such trading does not further develop or declines. The
Sub-Adviser will determine the liquidity of Rule 144A Securities under
guidelines approved by the Board of Directors of the Fund.
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NON-INVESTMENT GRADE CONVERTIBLE BONDS AND PREFERRED STOCK. The Portfolio
may invest up to 10% of its assets in convertible bonds, including
convertible bonds rated in the lowest investment grade debt category and
below, commonly referred to as "junk bonds," as determined by Moody's (below
Baa) or S&P (below BBB), or in unrated securities deemed by the Sub-Adviser
to be of comparable quality. Although bonds in the lowest investment grade
debt category (those rated BBB by S&P or Baa by Moody's) are regarded as
having adequate capability to pay principal and interest, they have
speculative characteristics. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
principal and interest
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payments than is the case for higher rated bonds. (See Appendix A in the
Statement of Additional Information for a description of bond ratings.) The
Portfolio will not invest in rated securities that, at the time of
investment, are rated below "B" by Moody's or "B" by S&P ("b" in the case of
Moody's preferred stock ratings) or, if unrated, are judged by the
Sub-Adviser not to possess investment qualities at least equivalent to a "B"
or "b" rating. Securities rated "B" or "b" are predominantly speculative with
respect to their issuers' capacity to make payments of both principal and
interest or of preferred stock dividend and sinking fund obligations in
accordance with the securities' obligations. While such securities will
likely possess some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse
conditions. In the event that ratings decline after the Portfolio's
investment in such securities, the Sub-Adviser may make a determination to
dispose, or retain, such downgraded securities, based on all such factors as
it deems relevant. (See "The Value Equity Portfolio and the Fund - Risk
Factors" below for a description of risks involved.)
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. The Portfolio will not
loan portfolio securities if more than one-third of its total assets at fair
market value would be committed to loans. By lending its investment
securities, the Portfolio attempts to increase its income through the receipt
of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. The Portfolio may lend its investment
securities to qualified brokers, dealers, domestic and foreign banks or other
financial institutions, so long as the terms, the structure and the aggregate
amount of such loans are not inconsistent with the 1940 Act or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"SEC") thereunder, which currently require that (a) the borrower pledge and
maintain with the Portfolio collateral consisting of cash, an irrevocable
letter of credit issued by a domestic U.S. bank or securities issued or
guaranteed by the United States Government having a value at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks-to-the-market" on a daily basis), (c) the loan be made
subject to termination by the Portfolio at any time, and (d) the Portfolio
receives reasonable interest on the loan (which may include the Portfolio
investing any cash collateral in interest bearing short-term investments).
All relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board
of Directors.
At the present time, the Staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities
so long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. The Portfolio will continue to
retain any voting rights with respect to the loaned securities. If a material
event occurs affecting an investment on a loan, the loan must be called and
the securities voted.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
Generally, the Portfolio has a one to three year investment horizon and
will not trade in securities for short-term profits. When circumstances
warrant, however, securities may be sold without regard to length of time
held. It should be understood that the rate of portfolio turnover will depend
upon market and other conditions, and it will not be a limiting factor when
the Sub-Adviser believes that Portfolio changes are appropriate. It is
expected that the annual portfolio turnover rate for the Portfolio will
average 50%. The Portfolio will not normally engage in short-term trading but
reserves the right to do so.
RISK FACTORS
The investment policies of the Portfolio entail certain risks and
considerations. There can be no assurance that the Portfolio will achieve its
investment objective. Prospective investors should consider the following
factors that could affect the Portfolio's rate of return: (1) The Portfolio
may invest in repurchase agreements which entail a risk of loss should the
seller default on its transaction. (see p. 2, "Repurchase Agreement.") (2)
The Portfolio may lend its investment securities which entails a risk of loss
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should the borrower fail financially. (See "Lending of Securities" above.)
(3) The Portfolio may purchase securities on a when-issued basis. Securities
purchased on a when-issued basis earn no interest until issued and may
decline or appreciate in market value prior to their actual delivery to the
Portfolio. (See p. 3, "When-Issued, Delayed Settlement and Forward Delivery
Securities.") (4) The performance of the Portfolio may depend on the
investing ability of the Sub-Adviser which, while it has approximately
thirteen years of experience as an investment adviser, has limited experience
as a Sub-Adviser to a registered mutual fund.
The Portfolio's investments in non-investment grade debt securities, bonds
and preferred stock generally are subject to both credit risk and market
risk. Credit risk relates to the ability of the issuer to meet interest or
principal payments, or both, as they come due. Market risk relates to the
fact that the market values of the debt securities in which the Portfolio
invests generally will be affected by changes in the level of interest
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rates. Both kinds of risks are increased by investing in debt securities
rated below the top three grades by S&P or Moody's or, if unrated, securities
determined by the Sub-Adviser to be of equivalent quality.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and NWQ Investment Management Company, Inc. as
Sub-Adviser, the Fund requires no employees other than its executive
officers, none of whom devotes full time to the affairs of the Fund. These
officers are employees of WRL and receive no compensation from the Fund. The
Statement of Additional Information contains the names of and general
background information regarding each Director and executive officer of the
Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and maintenance of the Portfolio, including the
preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any qualification
under state securities laws required in connection with the Portfolio's
offering of shares. The Investment Adviser will also pay all reasonable
compensation, fees and related expenses of the officers and Directors of the
Fund, except for such Directors who are not interested persons (as that term
is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Pursuant to an expense limitation
voluntarily adopted by WRL, WRL has undertaken, until at least April 30,
1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment management fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets.
THE SUB-ADVISER
NWQ Investment Management Company, Inc., located at 655 South Hope Street,
11th Floor, Los Angeles, California 90017, serves as the Sub-Adviser to the
Portfolio. The Sub-Adviser was founded in 1982 and is a wholly-owned
subsidiary of United Asset Management Corporation. The Sub-Adviser provides
investment management services to institutions and high net worth
individuals. As of December 31, 1995, the Sub-Adviser had over $5.6 billion
in assets under management.
An investment policy committee is responsible for the day-to-day
management of the Portfolio's investments. David A. Polak, CFA, Edward C.
Friedel, CFA, James H. Galbreath, CFA, and Phyllis G. Thomas, CFA, constitute
the committee.
Edward C. Friedel, CFA serves as Senior Portfolio Manager for the
Portfolio. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of the Sub-Adviser since 1983. From 1971 to
1983, Mr. Friedel was a portfolio manager for Beneficial Standard Investment
Management. Mr. Friedel is a graduate of the University of California at
Berkeley (BS) and Stanford University (MBA).
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The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio, less 50% of
the amount of any excess expenses paid by the Investment Adviser on behalf of
the Portfolio pursuant to the expense limitation described above. (See "The
Investment Adviser," above.)
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The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. The Sub-Adviser is authorized to pay higher commissions to brokerage
firms that provide it with investment and research information than to firms
which do not provide such services, if the Sub-Adviser determines that such
commissions are reasonable in relation to the overall services provided and
the Sub-Adviser receives best execution. The information received may be used
by the Sub-Adviser in managing the assets of other advisory and sub-advisory
accounts, as well as in the management of the assets of the Portfolio.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute substantially all such income and gains.
Portfolio shares are offered only to WRL and the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
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securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional
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Information for a more detailed discussion. Prospective investors are urged
to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses or disclosure documents for the Policies and
the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
7
<PAGE>
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield do not reflect charges or deductions against the Separate Accounts
or charges and deductions against the Policies or the Annuity Contracts.
7
<PAGE>
Where relevant, the prospectuses for the Policies and the Annuity Contracts
contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses, and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc. ("Lipper"), Variable Annuity Research & Data Service ("VARDS")
and Morningstar, Inc. ("Morningstar") or reported by other services,
companies, individuals or other industry or financial publications of general
interest, such as Forbes, Money, The Wall Street Journal, Business Week,
Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or rate
mutual funds by overall performance or other criteria; and (3) the Consumer
Price Index. Lipper, VARDS and Morningstar are widely quoted independent
research firms which rank mutual funds by overall performance, investment
objectives, and assets. Unmanaged indices may assume the reinvestment of
dividends but usually do not reflect any "deduction" for the expense of
operating or managing a fund. In connection with a ranking, a Portfolio will
also provide additional information with respect to the ranking, including
the particular category to which it relates, the number of funds in the
category, the period and criteria on which the ranking is based, and the
effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
NWQ Investment Management Company, Inc.
655 South Hope Street
11th Floor
Los Angeles, CA 90017
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00092-05/96
9
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Value Equity Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of
the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00093-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 4
Lending of Portfolio Securities 2 4
U.S. Government Securities 3 3
Non-Investment Grade Convertible
Bonds and Preferred Stock 3 3
When-Issued, Delayed Settlement and Forward
Delivery Securities 3 3
Repurchase Agreements 3 2
Illiquid Securities 4 3
Warrants and Rights 4 2
Convertible Securities 4 1
Foreign Securities 5 2
Management of the Fund 5 5
Directors and Officers 5 5
The Investment Adviser 7 5
The Sub-Adviser 8 5
Portfolio Transactions and Brokerage 9 6
Portfolio Turnover 9 4
Placement of Portfolio Brokerage 9 6
Purchase and Redemption of Shares 10 7
Determination of Offering Price 10 7
Net Asset Valuation 11 7
Calculation of Performance Related Information 11 7
Total Return 11 8
Yield Quotations 12 8
Taxes 12 6
Capital Stock of the Fund 14 7
Registration Statement 14 N/A
Financial Statements 14 8
Appendix A (Description of Selected Corporate
Bond and Commercial Paper Ratings) A-1 3
Appendix B (Description of Short-Term Securities) B-1 3
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Value Equity Portfolio (the "Portfolio")
of the Fund is described in the Portfolio's Prospectus. Shares of the
Portfolio are sold only to the separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than Government securities as defined in
the 1940 Act) if immediately after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the securities of such issuer
exceeds 5% of the value of the Portfolio's total assets, or (b) the Portfolio
owns more than 10% of the outstanding voting securities of such issuer.
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone, and each will be considered a separate industry for purposes of
this restriction. In addition, there shall be no limitation on the purchase
of obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances.
3. Make loans except (i) by purchasing debt securities in accordance with
its investment objectives and policies or by entering into repurchase
agreements or (ii) by lending the Portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the Securities and Exchange Commission (the "SEC")
thereunder.
4. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
5. Purchase or sell real estate or real estate limited partnerships (but
this shall not prevent the Portfolio from investing in securities or other
instruments backed by real estate, including mortgage-backed securities, or
securities of companies engaged in the real estate business).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not purchase on margin or sell short.
1
<PAGE>
(B) The Portfolio may not invest more than an aggregate of 15% of the net
assets of the Portfolio, determined at the time of investment, in illiquid
securities, subject to legal or contractual restrictions on resale or
securities for which there are no readily available markets.
(C) The Portfolio may not invest in companies for the purpose of
exercising control or management.
(D) The Portfolio may not write or acquire options or interests, or invest
directly, in oil, gas, mineral leases or other mineral exploration or
development programs or leases; however the Portfolio may own debt or equity
securities of companies engaged in these businesses.
(E) The Portfolio may not pledge, mortgage or hypothecate any of its
assets to an extent greater than 10% of its total assets at fair market
value.
(F) The Portfolio may borrow money only from banks for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 10% of the value of the Portfolio's total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings
that exceed 10% of the value of the Portfolio's total assets by reason of a
decline in net assets will be reduced within three business days to the
extent necessary to comply with the 10% limitation. The Portfolio may not
purchase additional securities when borrowings exceed 5% of total assets.
(G) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of a consolidation, merger or other reorganization.
(H) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements. The Portfolio has no present intention of borrowing.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 3. above, the Portfolio may lend its
investment securities to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its investment securities, the Portfolio attempts to
increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Portfolio. The Portfolio may
lend its investment securities to qualified brokers, dealers, domestic and
foreign banks or other financial institutions and receive as collateral cash
or U.S. Treasury securities which at all times while the loan is outstanding
will be maintained in amounts equal to at least 100% of the current market
value of the loaned securities. Any cash collateral will be invested in
short-term securities, which will likely increase the current income of the
Portfolio. Such loans may not have terms longer than 30 days and will be
terminable at any time. The Portfolio may also pay reasonable fees to persons
unaffiliated with the Portfolio for services in arranging such loans. No loan
will be made if, as a result, the aggregate of Portfolio loans would exceed
33 1/3 % of the fair market value of the Portfolio's total assets.
All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions
with respect to the lending of securities, subject to review by the Fund's
Board of Directors. The Portfolio will continue to retain any voting rights
with respect to the loaned securities. If a material event occurs affecting
an investment on a loan, the loan must be called and the securities voted.
2
<PAGE>
U.S. GOVERNMENT SECURITIES
Examples of the types of U.S. Government securities that the Portfolio may
hold include, in addition to those described in the Prospectus and direct
obligations of the U.S. Treasury, the obligations of the Federal Housing
Administration, Farmers Home Administration, Small Business Administration,
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Banks,
Federal Land Banks and Maritime Administration. U.S. Government securities
may be supported by the full faith and credit of the U.S. Government (such as
securities of the Small Business Administration); by the right of the issuer
to borrow from the Treasury (such as securities of the Federal Home Loan
Bank); by the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage
Association); or only by the credit of the issuing agency.
NON-INVESTMENT GRADE CONVERTIBLE BONDS AND PREFERRED STOCK
The Portfolio may invest up to 10% of its assets in convertible bonds that
are rated below the four highest grades ("lower grade debt securities",
commonly referred to as "junk bonds") as determined by Moody's Investors
Service, Inc. ("Moody's") (below Baa) or Standard & Poor's ("S&P") (below
BBB). Bonds and preferred stock rated "B" or "b" by Moody's are not
considered investment grade securities. See Appendix A for a description of
debt securities ratings. Before investing in any lower-grade debt
securities, the Sub-Adviser will determine that such investments meet the
Portfolio's investment objective and that the lower-grade debt securities'
ratings are supported by an internal credit review, which the Sub-Adviser
will conduct in each such instance. Lower-grade debt securities usually have
moderate to poor protection of principal and interest payments, have certain
speculative characteristics, and involve greater risk of default or price
declines due to changes in the issuer's creditworthiness than
investment-grade debt securities. Because the market for lower-grade debt
securities may be thinner and less active than for investment-grade debt
securities, there may be a market price volatility for these securities and
limited liquidity in the resale market. Market prices for lower-grade debt
securities may decline significantly in periods of general economic
difficulty or rising interest rates. Through portfolio diversification and
credit analysis, investment risk can be reduced, although there can be no
assurance that losses will not occur.
WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
These transactions are made to secure what is considered to be an
advantageous price and yield for the Portfolio. Settlement dates may be a
month or more after entering into these transactions, and the market values
of the securities purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment
for the securities to be purchased are segregated on the Portfolio's records
at the trade date. These securities are marked-to-market daily and maintained
until the transaction is settled. The Portfolio may engage in these
transactions to an extent that would cause the segregation of an amount up to
10% of the equity portion of the Portfolio's assets.
REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs
3
<PAGE>
to the Portfolio in connection with bankruptcy proceedings), it is the policy
of the Portfolio to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by the Sub-Adviser.
The Portfolio does not intend to invest more than 25% of its total assets
in repurchase agreements. The Portfolio does not currently intend to invest
in reverse repurchase agreements.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in illiquid
securities (i.e., securities that are not readily marketable). The Fund's
Board of Directors has authorized the Sub-Adviser to make liquidity
determinations with respect to Rule 144A securities in accordance with the
guidelines established by the Board of Directors. Under the guidelines, the
Sub-Adviser will consider the following factors in determining whether a Rule
144A security is liquid: 1) the frequency of trades and quoted prices for the
security; 2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; 3) the willingness of dealers
to undertake to make a market in the security; and 4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. The sale of
illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. The Portfolio may be restricted in its ability to
sell such securities at a time when the Sub-Adviser deems it advisable to do
so. In addition, in order to meet redemption requests, the Portfolio may have
to sell other assets, rather than such illiquid securities, at a time which
is not advantageous.
WARRANTS AND RIGHTS
The Portfolio may invest up to 10% of its assets in warrants and rights. A
warrant is a type of security that entitles the holder to buy a proportionate
amount of common stock at a specified price, usually higher than the market
price at the time of issuance, for a period of years or to perpetuity. In
contrast, rights, which also represent the right to buy common shares,
normally have a subscription price lower than the current market value of the
common stock and a life of two to four weeks. Warrants in which the Portfolio
may invest are freely tranferable and are traded on the major securities
exchanges.
Warrants and rights may be considered more speculative than certain other
types of investments in that they do not entitle a holder to dividends or
voting rights with respect to the securities which may be purchased nor do
they represent any rights in the assets of the issuing company. Also, the
value of a warrant or right does not necessarily change with the value of the
underlying securities and a warrant or right ceases to have value if it is
not exercised prior to the expiration date.
CONVERTIBLE SECURITIES
The Portfolio may invest up to 10% of its assets in convertible
securities. Convertible securities may include corporate notes or preferred
stock, but ordinarily are a long-term debt obligation of the issuer
convertible 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. In evaluating investment in
a convertible security, primary emphasis will be given to the attractiveness
of the underlying common
4
<PAGE>
stock. The convertible debt securities in which the Portfolio may invest are
subject to the same rating criteria as the Portfolio's investment in
non-convertible debt securities.
FOREIGN SECURITIES
The Portfolio may purchase certain foreign securities and American
Depositary Receipts (ADRs), although the Portfolio has no present intention
to hold more than 20% of its total assets in such securities. ADRs are
dollar-denominated receipts issued generally by domestic banks and represent
the deposit with the bank of a security of a foreign issuer. ADRs are
publicly traded on exchanges or over-the-counter in the United States.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in domestic issuers. These considerations include changes in
currency rates, currency exchange control regulations, the possibility of
expropriation, the unavailability of financial information or the difficulty
of interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities markets,
the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available.
In such event, these securities shall be valued at fair market value as
determined in good faith by the Sub-Adviser under the supervision of the
Board of Directors. If it should become necessary, the Portfolio could
encounter greater difficulties in invoking legal processes abroad than would
be the case in the United States. Transaction costs with respect to foreign
securities may be higher. The Investment Adviser and the Sub-Adviser will
consider these and other factors before investing in foreign securities.
Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recoverable portion of foreign withholding taxes will
reduce the income received from the companies comprising the Portfolio's
investments. However, these foreign withholding taxes are not expected to
have a significant impact.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
5
<PAGE>
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President (1978 - 1987 and December,
1992 - present), Director (1978 - present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 - February, 1991), President (1988 - 1989), Director (1976 - February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 - present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 -June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991), University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL.The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular or special Board meeting attended. Because the
Portfolio had not commenced operations as of December 31, 1995, the Portfolio
did not pay any Directors' fees for the fiscal year ended December 31, 1995.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
6
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting currently of Messrs.
Brown, Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated April 30, 1996 with the Fund. The Investment Adviser
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), a stock life insurance company which is wholly-owned by AEGON USA,
Inc. ("AEGON"). AEGON is a financial services holding company whose primary
emphasis is on life and health insurance and annuity and investment products.
AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund, on December 4, 1995. The
Investment Advisory Agreement provides that subsequent to its approval by the
Portfolio's sole shareholder, it will continue in effect for an initial term
ending April 22, 1998, and will continue in effect from year to year
thereafter, if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such contract or "interested
persons" of any such party. The Investment Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of its assignment (within the meaning of the 1940
Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser," below.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolio for the year ended December 31, 1995 because the Portfolio
had not commenced operations as of that date.
7
<PAGE>
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Portfolio pays all
other expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, shareholder servicing costs,
expenses of registering the shares under Federal and state securities laws,
pricing costs (including the daily calculation of net asset value), interest,
certain taxes, charges of the custodian and transfer agent, fees and expenses
of Fund directors who are not "interested persons" of the Fund, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies and stock certificates, SEC fees, advisory fees, certain insurance
premiums, costs of corporate meetings, costs of maintenance of corporate
existence, investor services (including allocable telephone and personnel
expenses), extraordinary expenses, and other expenses properly payable by the
Portfolio. Depending upon the nature of the lawsuit, litigation costs may be
borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Fund's Board of
Directors.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
NWQ Investment Management Company, Inc. (the "Sub-Adviser") serves as the
Sub-Adviser for the Portfolio pursuant to a Sub-Advisory Agreement dated
April 30, 1996. The Sub-Advisory Agreement was approved by the Board of
Directors of the Fund, including a majority of the Directors who were not
"interested persons" of the Fund (as defined in the 1940 Act) on December 4,
1995. The Sub-Advisory Agreement provides that subsequent to its approval by
the Portfolio's sole shareholder, it will continue in effect for an initial
term ending April 22, 1998, and will continue in effect from year to year
thereafter, if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such Agreement or
"interested persons" of any such party. The Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of its assignment (within the meaning of the 1940
Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. Because the
8
<PAGE>
Portfolio did not commence operations until May 1, 1996, no sub-advisory fees
were paid by the Investment Adviser to the Sub-Adviser with respect to the
Portfolio for the year ended December 31, 1995.
The Sub-Adviser, located at 655 South Hope Street, 11th Floor, Los
Angeles, California 90017, is a wholly-owned subsidiary of United Asset
Management Corporation and provides investment management services to
institutions and high net worth individuals. The Sub-Adviser had
approximately $5.6 billion in assets under management as of December 31,
1995.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Value Equity Portfolio and The Fund
- - Portfolio Turnover" in the Prospectus. In computing the portfolio turnover
rate for the Portfolio, securities whose maturities or expiration dates at
the time of acquisition are one year or less are excluded. Subject to this
exclusion, the turnover rate for the Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of portfolio securities owned by the Portfolio
during the fiscal year. The future annual turnover rate cannot be precisely
predicted, although an annual turnover rate in excess of 50% is not presently
anticipated.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and
9
<PAGE>
services in servicing other accounts in addition to the Portfolio. If the
Sub-Adviser determines that any research product or service has a mixed use,
such that it also serves functions that do not assist in the investment
decision-making process, the Sub-Adviser will allocate the costs of such
service or product accordingly. The portion of the product or service that a
Sub-Adviser determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Such allocation may
create a conflict of interest for the Sub-Adviser. Conversely, such
supplemental information obtained by the placement of business for the
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
10
<PAGE>
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining net asset value, securities
listed on the national securities exchanges and the NASDAQ National Market
are valued at the closing prices on the principal trading market for such
security, or if such a price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their
current bid price. Foreign securities and currencies are converted to U.S.
dollars using the exchange rate in effect at the close of the Exchange. Other
securities which are traded on the over-the-counter market are valued at bid
price. Other securities for which quotations are not readily available are
valued at fair values as determined in good faith by the Investment Adviser
and the Sub-Adviser under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days' or less are valued on the
amortized cost basis.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period)
</TABLE>
The total return quotation calculations reflect the deduction of a
proportional share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Accordingly, these rates of return do not
illustrate how actual investment performance will affect benefits under the
Policies or the Annuity Contracts. Where relevant, the prospectuses for the
Policies and the Annuity Contracts contain performance information about
these products. Moreover, these rates of return are not an estimate,
projection or guarantee of future performance.
11
<PAGE>
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C><C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends
d = the maximum offering price per share on the last day of the period
</TABLE>
Because the Portfolio did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
TAXES
Shares of the Portfolio are offered only to WRL and the Separate Accounts
that fund the Policies and Annuity Contracts. See the respective prospectuses
for the Policies and Annuity Contracts for a discussion of the special
taxation of insurance companies with respect to the Separate Accounts and of
the Policies, the Annuity Contracts and the holders thereof.
The Portfolio intends to qualify and expects to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for that
treatment, the Portfolio must distribute to its Policyholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain,
and net gains from certain foreign currency transactions) ("Distribution
Requirement") and must meet several additional requirements. These
requirements include the following: (1) the Portfolio must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months - options,
futures or forward contracts (other than those on foreign currencies), or
foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Portfolio's principal business of investing
in securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by
cash and cash items, U.S. government securities, securities of other RICs,
and other securities that, with respect to any one issuer, do not exceed 5%
of the value of the Portfolio's total assets and that do not represent more
than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer.
12
<PAGE>
For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a
13
<PAGE>
complete explanation of the Federal tax treatment of the Portfolio's
activities, and this discussion and the discussion in the prospectuses and/or
statements of additional information for the Policies and Annuity Contracts
are not intended as a substitute for careful tax planning. Accordingly,
potential investors are urged to consult their own tax advisors for more
detailed information and for information regarding any state, local, or
foreign taxes applicable to the Policies, Annuity Contracts and the holders
thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Equity-Income
Portfolio, Emerging Growth Portfolio, Balanced Portfolio, Utility Portfolio,
Aggressive Growth Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, Janus Balanced Portfolio, Leisure Portfolio, International Equity
Portfolio, Meridian/INVESCO Global Sector Portfolio, Meridian/INVESCO Foreign
Sector Portfolio, Meridian/INVESCO US Sector Portfolio, and Value Equity
Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
No financial statements for the Portfolio are available for the year ended
December 31, 1995, because the Portfolio had not commenced operations as of
that date.
14
<PAGE>
APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
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 edged." 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 on 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 or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
A-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S ("S&P")
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus () - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER - MOODY'S
"Prime-1" - Commercial paper issuers rated Prime-1 are judged to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely
to impair the fundamentally strong position of short-term obligations.
"Prime-2" - Issuers in the commercial paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and
value of current assets as well as cash generation in sound relationship to
current indebtedness. They are rated lower than the best commercial paper
issuers because margins of protection may not be as large or because
fluctuations of protective elements over the near or immediate term may be of
greater amplitude. Temporary increases in relative short and overall debt
load may occur. Alternative means of financing remain assured.
COMMERCIAL PAPER -S&P
"A" - Issues assigned this highest rate 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 overwhelming as for
issues designated "A-1".
"A-3" - Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SHORT-TERM SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a non-negotiable deposit maintained in
a banking institution for a specified period of time at a stated interest
rate. Time deposits maturing in more than seven days will not be purchased by
the Portfolio, and time deposits maturing from two business days through
seven calendar days will not exceed 15% of the total assets of the Portfolio.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolio acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolio, reflecting an agreed upon market rate of interest for
the period from the time of the Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. The Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While the Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the Securities and Exchange Commission has taken
the position that repurchase agreements of greater than seven days together
with other illiquid investments should be limited to an amount not in excess
of 15% of the Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, the Portfolio could
be ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by the Portfolio upon liquidation of
the securities may be limited.
B-1
<PAGE>
THIS C.A.S.E. GROWTH PORTFOLIO PROSPECTUS WHICH FOLLOWS IS NOT CURRENTLY
AVAILABLE TO THE "ASSET ACCUMULATOR" OFFERED BY AUSA LIFE INSURANCE COMPANY,
INC.
PROSPECTUS
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [C.A.S.E. LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the C.A.S.E. Growth Portfolio of the Fund
(the "Portfolio").
The investment objective of the C.A.S.E. Growth Portfolio is capital
growth through investments in common stocks of small to medium-sized
companies. The Portfolio will generally invest in smaller, less
well-established companies, with limited product lines and financial
resources. The Portfolio, however, seeks to invest in such companies with
above-market growth characteristics in several investment classifications
including sales, earnings, returns and institutional support. There can be,
of course, no assurance that the Portfolio will achieve its objectives.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and C.A.S.E. Management, Inc. serve as the investment adviser
("Investment Adviser") and the sub-adviser ("Sub-Adviser") respectively, to
the Portfolio. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolio
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolio bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL HIGHLIGHTS .......................... 1
THE C.A.S.E. GROWTH PORTFOLIO AND THE FUND ... 1
MANAGEMENT OF THE FUND ........................ 5
DIVIDENDS AND DISTRIBUTIONS ................... 7
TAXES ......................................... 7
PURCHASE AND REDEMPTION OF SHARES ............. 7
VALUATION OF SHARES ........................... 7
THE FUND AND ITS SHARES ....................... 8
PERFORMANCE INFORMATION ....................... 8
GENERAL INFORMATION ........................... 9
</TABLE>
i
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
The information contained in the tables below for a share of capital stock
outstanding of the C.A.S.E. Growth Portfolio for the period May 1, 1995
(commencement of operations) through December 31, 1995, is taken from the
Portfolio's audited financial statements as incorporated by reference in the
Statement of Additional Information. The Annual Report contains additional
information for this Portfolio. A copy of the Statement of Additional
Information and Annual Report may be obtained without charge upon request.
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/95 TO
12/31/95
--------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
Income From Investment Operations
Net Investment Income .12
Net Gains or Losses on Securities
(both realized and unrealized) 2.49
--------------
Total Income (Loss) From Investment
Operations 2.61
--------------
Less Distributions
Dividends (from net
investment income) (.12)
--------------
Distributions (from net
realized gains) (.83)
--------------
Total Distributions (.95)
--------------
Net Asset Value, End of Period $ 11.66
==============
Total Return* 20.65%
==============
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $ 2,578
==============
Ratio of Expenses to Average Net
Assets** 1.00%
==============
Ratio of Net Investment Income to
Average Net Assets 1.02%
==============
Portfolio Turnover Rate 121.62%
==============
</TABLE>
* The total return shown for 1995 is for the eight month period ended
December 31, 1995, and is not annualized. The total return of the
Portfolio reflects the advisory fee and all other Portfolio expenses and
includes reinvestment of dividends and capital gains; it does not reflect
the charges against the corresponding sub-accounts or the charges and
deductions under the applicable Policy or Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the period ended
December 31, 1995, for which period the annualized ratio of expenses to
average net assets would have been 4.15% absent the advisory fee waiver by
Western Reserve Life.
THE C.A.S.E. GROWTH PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolio is a series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment
by the Separate Accounts. This Prospectus describes only the Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios that are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Portfolio is capital growth through
1
<PAGE>
investments in small to medium-sized companies. For these purposes, the
Sub-Adviser considers "small cap" stocks to be stocks issued by companies
with market capitalization of between $50 million and $500 million. As noted
above, the Sub-Adviser considers "mid-capitalization" stocks to be stocks
issued by companies with market capitalization of between $350 million and $3
billion. (Companies with market capitalization from $350 million to $500
million may be classified by the Sub-Adviser as either small cap or medium
cap, depending upon the Sub-Adviser's evaluation of the liquidity of trading
in the company's stock.) This Portfolio will generally invest in smaller,
less well-established companies, with limited product lines and financial
resources. The Portfolio seeks, however, to invest in such companies with
above-market growth characteristics in several investment classifications
including sales, earnings, returns and institutional support. Income derived
is incidental to the Portfolio's investment objective.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the portfolio manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected from industries and companies that the portfolio
manager believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Portfolio invests in common stocks traded on
recognized securities exchanges and in the over-the-counter market. The
Portfolio generally intends to invest in medium to small sized companies
which exhibit sustainable above-market characteristics in sales, earnings,
rates of return, insider and institutional buying. The Sub-Adviser intends to
be aggressive in its efforts to increase shareholders' capital by investing
primarily in companies which are likely to benefit from the comparatively
strong conditional and fundamental circumstances uncovered by the
Sub-Adviser's analysis. The Portfolio will invest in securities of companies
that appear to be under-valued from several
1
<PAGE>
vantage points and which, in the opinion of the Sub-Adviser, demonstrate the
characteristics necessary for significant future growth. As a result of these
investment policies, the market prices of many of the securities purchased by
the Portfolio may fluctuate widely; any income received by the Portfolio from
these securities will be incidental. Investors should be aware that whenever
the securities markets become volatile, secondary growth securities such as
those in which the Portfolio will invest have historically become even more
so. The Sub-Adviser nonetheless believes that small to middle capitalization
securities in emerging markets often have sales and earnings growth rates
which exceed more developed companies. Such growth rates may in turn be
reflected in more rapid share price appreciation.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Adviser believes they are advisable, typically 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 ordinarily will be made without reference to the length of
time a security has been held, a significant number of short-term
transactions may result. The rate of portfolio turnover will not be a
limiting factor when changes are deemed to be appropriate. However, certain
tax rules may restrict the Portfolio's ability to sell securities in some
circumstances when the security has been held for an insufficient length of
time. Increased portfolio turnover necessarily results in correspondingly
higher brokerage costs for the Portfolio which are ultimately borne by the
shareholders and Policyholders.
Although the assets of the Portfolio are ordinarily invested in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, corporate bonds and debentures, high-grade commercial paper,
preferred stocks, certificates of deposits or other securities of U.S.
issuers when the Sub-Adviser perceives an opportunity for capital growth from
such securities, or so that the Portfolio may receive a competitive return on
its uninvested cash. The Portfolio's investments in debt securities will be
made in securities of U.S. and foreign companies, the U.S. Government,
foreign governments, and U.S. and foreign governmental agencies and
instrumentalities and other governmental entities. The Portfolio may invest
up to 15% of its assets in securities of issuers in a single industry. The
Portfolio does not presently intend to invest more than 5% of its assets in
debt securities rated less than investment grade. When the Portfolio invests
in such securities, investment income may increase and may constitute a
larger portion of the return on the Portfolio's investments, and the
Portfolio may not participate in market advances or declines to the extent
that it would if it were fully invested.
The Portfolio may invest up to 25% of its net assets at the time of
purchase in the securities of foreign issuers and obligors, as described
below and in the Statement of Additional Information. (See "Certain Portfolio
Practices and Techniques--Foreign Investments and Special Risks," page 3.)
The Portfolio also may invest in repurchase agreements and reverse repurchase
agreements. (See "Certain Portfolio Practices and Techniques--Repurchase and
Reverse Repurchase Agreements," page 3.)
There can, of course, be no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER HEDGING STRATEGIES. Subject
to certain limitations, the Portfolio may engage in hedging strategies
involving futures contracts and related options, forward currency contracts,
and interest rate swaps, caps and floors. A put option gives the holder the
right, upon payment of a premium, to deliver a specified amount of a security
to the writer of the option on or before a fixed date at a predetermined
price. The call option gives the holder the right, upon payment of a premium,
to call upon the writer to deliver a specified amount of a security on or
before a fixed date at a predetermined price. The Portfolio may engage in
hedging strategies to attempt to reduce the overall level of investment risk
that normally would be expected to be associated with the Portfolio's
securities, and to attempt to protect the Portfolio against market movements
that might adversely affect the value of the Portfolio's securities or the
price of securities that the Portfolio is considering purchasing. There can
be no assurance, however, that the use of these instruments by the Portfolio
will assist it in achieving its investment objective. Generally, the use of
hedging strategies involves investment risks and transaction costs to which
the Portfolio would not be subject absent the use of these strategies. If the
Sub-Adviser engages in a hedging transaction intended to protect the
Portfolio against potential adverse movements in the securities, foreign
2
<PAGE>
currency or interest rate markets using these instruments, and such markets
do not move in a direction adverse to the Portfolio, the Portfolio could be
left in a less favorable position than if such hedging strategy had not been
used. The use of hedging strategies involves special risks, which include: 1)
the risk that interest rates, securities prices and currency markets will not
move in the directions anticipated; 2) imperfect correlation between the
price of the hedging instruments and movements in the prices of the
securities or currencies underlying the hedging transaction; 3) the fact that
skills needed to use these strategies are
2
<PAGE>
different from those needed to select portfolio securities; 4) the possible
absence of a liquid secondary market for any particular instrument at any
time; and 5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences. Further information on these instruments,
hedging strategies and risk considerations relating to them is set forth in
the Statement of Additional Information.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by the Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers
a method of earning income on idle cash. The repurchase agreement is
effectively secured by the value of the underlying security. A risk
associated with repurchase agreements is the failure of the seller to
repurchase the securities as agreed, which may cause the Portfolio to suffer
a loss if the market value of such securities declines before they can be
liquidated on the open market. In the event of bankruptcy or insolvency of
the seller, the Portfolio may encounter delays and incur costs in liquidating
the underlying security. Repurchase agreements not terminable within seven
days are considered illiquid securities and are subject to the limit stated
below.
When the Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities or to earn
additional income on portfolio securities, such as Treasury bills and notes.
Reverse repurchase agreements may expose the Portfolio to greater
fluctuations in the value of its assets.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions on
resale. However, certain restricted securities that are not registered for
sale to the general public but that can be resold to institutional investors
("Rule 144A Securities") may not be considered illiquid, provided that a
dealer or institutional trading market exists. The institutional trading
market is relatively new and liquidity of the Portfolio's investments could
be impaired if such trading does not further develop or declines. The
Sub-Adviser will determine the liquidity of Rule 144A Securities under
guidelines approved by the Board of Directors of the Fund.
WHEN-ISSUED SECURITIES. The Portfolio may purchase new issues of U.S.
Government securities on a "when-issued" basis. However, the Portfolio does
not intend to invest more than 20% of its assets in when-issued securities.
Because actual payment for and delivery of when-issued securities generally
take place 15 to 45 days after the purchase date, a portfolio that purchases
when-issued securities bears the risk that interest rates and the security's
value at the time of delivery may have changed prior to delivery of the
when-issued security.
SPECIAL SITUATIONS. The Portfolio may invest in "special situations" from
time to time. A special situation arises when, in the opinion of the
portfolio manager, the securities of a particular issuer will be recognized
and appreciate in value due to a specific development with respect to that
issuer. Developments creating a special situation might include, among
others, a new product or process, a management change, a technological
breakthrough, or other extraordinary corporate event, or differences in
market supply of and demand for the security. 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 impact of this strategy on the Portfolio will depend on the
Portfolio's size and the extent of the holdings of the special situation
issuer relative to its total assets.
LENDING SECURITIES AND BORROWING. The Portfolio may lend its portfolio
securities to qualified institutional buyers for the purpose of realizing
additional income. Such loans must be continuously secured by liquid assets
at least equal to the market value of the securities loaned and may not
together with any other outstanding loans exceed 25% of the Portfolio's total
assets. Securities lending may involve some credit risk to the Portfolio if
the borrower defaults and the Portfolio is delayed or prevented from
recovering the collateral or is otherwise required to cover a transaction in
the security loaned. To secure borrowings, the Portfolio may not mortgage or
pledge its securities in amounts that exceed 15% of its net assets, at the
time the loan or borrowing is made. If portfolio securities are loaned,
collateral values will be continuously maintained at no less than 100% by
marking-to-market daily. If a material event is to be voted upon affecting
the Portfolio's investment in securities which are on loan, the Portfolio
will take such action as may be appropriate in order to vote its shares.
The Portfolio may also borrow money from banks. Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
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emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of the Portfolio's net assets at the time the loan or borrowing is
made. In accordance with the requirements of current California insurance
regulations, the Portfolio will restrict borrowings to no more than 10% of
total assets, except that the Portfolio may temporarily borrow amounts equal
to as much as 25% of total assets if such borrowing is necessary to meet
redemptions. If California's insurance regulations are changed at some future
time to permit borrowings in excess of 10% of total assets but less than 25%
of net assets, the Portfolio may conduct borrowings in accordance with such
revised limits.
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Portfolio may invest up to 25%
of its net assets at the time of purchase in the securities of foreign
issuers and obligors.
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Investments may be made in both domestic and foreign companies. In
selecting investments in foreign securities for the Portfolio, the
Sub-Adviser considers a variety of factors which may include the political
and economic conditions in a country, the prospect for changes in the value
of its currency and the liquidity of the investment in that country's
securities markets. If appropriate and available, the Sub-Adviser may
purchase foreign securities through dollar-denominated American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other types of receipts or shares evidencing ownership
of the underlying foreign securities. While ADRs are dollar-denominated
receipts that are issued by domestic banks and traded in the United States,
EDRs are typically issued by European banks, and GDRs may be issued by either
domestic or foreign banks. In addition, the Portfolio may invest indirectly
in foreign securities through foreign investment funds or trusts (including
passive foreign investment companies).
Investing in foreign securities involves opportunities and risks that
differ from those involved with investing solely in U.S. markets. The
Sub-Adviser believes that there is substantial opportunity from a
professionally managed portfolio of securities selected from the U.S. and
foreign markets. This investment framework seeks to take advantage of the
investment opportunities created by the global economy. Accordingly, an
investor may benefit from worldwide access to investment opportunities,
without being constrained by the location of a company's headquarters or the
trading market for its shares.
At the same time, these opportunities involve considerations and risks
that may not be encountered in U.S. investments. For example, changes in
currency exchange rates and exchange rate controls may affect the value of
foreign securities and the value of their dividend or interest payments, and
therefore the Portfolio's share prices and returns. Foreign companies
generally are subject to tax laws and accounting, auditing, and financial
reporting standards, practices and requirements that differ from those
applicable to U.S. companies. There is generally less publicly available
information about foreign companies and less securities and other
governmental regulation and supervision of foreign companies, stock exchanges
and securities brokers and dealers. The Portfolio may encounter difficulties
in enforcing obligations in foreign countries and negotiating favorable
brokerage commission rates. Securities of some foreign companies are less
liquid, and their prices more volatile, than securities of comparable U.S.
companies. Security trading practices abroad may offer less protection to
investors such as the Portfolio than the practices of domestic securities
trading. Custody charges are generally higher for foreign securities than for
domestic securities.
The considerations noted above may be intensified in the case of
investments in developing countries or countries with limited or developing
capital markets. In particular, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers
located in developing countries may have limited marketability and may be
subject to more abrupt or erratic price fluctuations.
At times, securities held by the Portfolio may be listed on foreign
exchanges or traded in foreign markets which are open on days (such as
Saturday) when the Portfolio does not compute its price or accept orders for
the purchase, redemption or exchange of its shares. As a result, the net
asset value of the Portfolio may be significantly affected by trading on days
when shareholders cannot make transactions.
In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolio; political
or social instability or war; or diplomatic developments which could affect
U.S. investments in those countries. These latter considerations generally
are more of a concern in developing countries. Developing countries may also
have economies that are based on only a few industries. Although investments
in companies domiciled in developing countries may be subject to potentially
greater risk than investments in developed countries, the Portfolio will not
invest in any securities of issuers located in developing countries if the
Sub-Adviser determines these securities to be speculative.
To the extent the Portfolio invests in international foreign securities
markets, changes in the Portfolio's share price may have a reduced
correlation with movements in the U.S. markets. The Portfolio's share price
reflects the movements of both the prices of securities in which the
Portfolio is invested and the currencies in which the investments are
denominated. Because the foreign securities in which the Portfolio may invest
include those that are denominated in foreign currencies, or that otherwise
have values that depend on the performance of foreign currencies relative to
the U.S. dollar, the relative strength of the U.S. dollar may be, to that
extent, an important factor in the performance of the Portfolio. In an effort
to manage exchange rate risks, the Portfolio may enter into foreign currency
exchange contracts (agreements to exchange one currency for another at a
future date). The Portfolio may exchange foreign currencies for U.S. dollars
and for other foreign currencies in the normal course of business, and may
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purchase and sell currencies through currency exchange contracts in order to
fix a price for securities they have agreed to buy or sell. The Sub-Adviser
may also seek to hedge some or all of the Portfolio's investments denominated
in foreign currency against a decline in the value of that currency relative
to U.S. dollars, by entering into contracts to exchange that currency for
U.S. dollars (not exceeding the value of the Portfolio's assets denominated
in that currency), or by participating in options or futures contracts with
respect to such currency. This type of hedge may minimize the effect of
currency appreciation as well as depreciation, but does not protect
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against a decline in the security's value relative to other securities
denominated in that currency.
The Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the
Sub-Adviser believed that a particular currency may decline relative to the
U.S. dollar, the Portfolio could enter into a contract to sell that currency
(up to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable
or to appreciate relative to the U.S. dollar. As a non-fundamental operating
policy, the Portfolio will not enter into currency exchange contracts if, as
a result, more than 10% of its assets would be committed to the consummation
of cross-hedge contracts, and will instruct its custodian bank to set aside
high-grade, liquid assets to cover the Portfolio's purchase obligations under
this type of contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which the Portfolio would not be subject absent the use
of these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect the Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets, and such markets do
not move in a direction adverse to the Portfolio, the Portfolio could be left
in a less favorable position than if such hedging strategy had not been used.
The use of hedging strategies involves special risks, which include: 1) the
risk that interest rates, securities prices and currency markets will not
move in the directions anticipated; 2) imperfect correlation between the
price of the hedging instruments and movements in the prices of the
securities or currencies underlying the hedging transaction; 3) the fact that
the skills needed to use these strategies are different from those needed to
select portfolio securities; 4) the possible absence of a liquid secondary
market for any particular hedging instrument at any time; and 5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. See the Statement of Additional Information for further
information concerning these risks. The Sub-Adviser will bear the costs of
any separately identifiable expenses incurred in connection with consultation
of experts.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to other investment policies and restrictions
which are described in the Statement of Additional Information, some of which
are fundamental policies of the Portfolio and as such may not be changed
without the approval of the shareholders of the Portfolio.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. See
"Financial Highlights" on page 1 for more information on historical turnover
rates. The Portfolio may engage frequently in short-term trading. High
turnover and short-term trading involve correspondingly greater commission
expenses and transaction costs for the Portfolio. The Sub-Adviser is unable
to predict precisely the future turnover rate of the Portfolio. The annual
portfolio turnover rate for the Portfolio is expected to range between 150%
and 200% annually. Turnover rates may vary based on market volatility and
economic conditions. The rate of portfolio turnover will not be a limiting
factor when changes in the Portfolio's holdings are deemed appropriate by the
Sub-Adviser. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and C.A.S.E. Management, Inc. as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund. These officers are employees of WRL and
receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
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products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group. The Investment Adviser has served as the investment adviser to the
Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objectives and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Fund, as well as the fees of all Directors of the Fund
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who are affiliated persons of WRL or any of its subsidiaries. The Portfolio
pays all other expenses incurred in their operation, including general
administrative expenses. Accounting services are provided for the Portfolio
by the Investment Adviser. The Investment Adviser has voluntarily undertaken,
until at least April 30, 1997, to pay expenses on behalf of the Portfolio to
the extent normal operating expenses (including investment advisory fees but
excluding interest, taxes, brokerage fees, commissions and extraordinary
charges) exceed, as a percentage of the Portfolio's average daily net assets,
1.00%. For the fiscal year ended December 31, 1995, the actual expenses as a
percentage of average daily net assets for the Portfolio was 4.15%.
THE SUB-ADVISER
C.A.S.E. Management, Inc., located at 2255 Glades Road, Suite 221-A, Boca
Raton, Florida 33431, serves as the Sub-Adviser to the Portfolio. C.A.S.E.
Management, Inc. is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is indirectly controlled by William
Edward Lange, president and chief executive officer of the Sub-Adviser. The
Sub-Adviser provides investment management services to financial
institutions, high net worth individuals, and other professional money
managers. The Sub-Adviser has not previously managed a registered investment
company.
Informally, the Sub-Adviser's Board members confer on a continuous basis,
gathering economic sector, industry and stock specific information from the
Sub-Adviser's research and management resources. Each of the Sub-Adviser's
Board members are individually responsible for the analytical coverage of one
or two of the market's eight economic sectors. The Sub-Adviser's "sector
specialists" are encouraged to maintain contact with counterpart sector
specialists from leading outside research organizations. The information
gathered for consideration by the Board's sector specialists also includes
objective forms of research from various governmental agencies, stock
exchanges and financial capitols. Formally, the Sub-Adviser's Board meets
monthly to formulate overall strategic investment positions. The Board then
formally reviews its current investment focus towards every stock, industry,
and economic sector owned in its overall stock population. When stocks are
sold or removed from the Sub-Adviser's overall population, it is generally
because their investment characteristics have deteriorated to a point deemed
to be unfavorable by the sector specialist or the full membership of the
Board. Stocks which appear to have above-market characteristics may also be
added to the Sub-Adviser's overall population, and to the Portfolio (if
otherwise consistent with the Portfolio's investment objective and
restrictions) by the sector specialist or the collective vote of the
Sub-Adviser's Board members, anytime during the month, or during the
Sub-Adviser's formal month-end Board meeting.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
The Sub-Adviser's investment philosophies reflect fundamental research,
both qualitative and quantitative. It utilizes industry analysts, direct
field investigations, and market relative comparative measures in evaluating
prospective and current investments of the Portfolio. These comparative
measures include, but are not limited to, insider ownership and changes
thereto, institutional ownership and changes thereto, earnings projections
and predictability, return on equity, price/earnings ratios during various
measuring periods, and price to book value. Investment selections are also
influenced by the cyclical aspects of the economy, monetary flows, policies
of the Federal Reserve, and the Sub-Adviser's proprietary comparative
analysis methods. The Sub-Adviser conducts a detailed review of the
Portfolio's investments on a monthly basis, based on comparative and other
research categories. The scope of its research is obtained from governmental
agencies, analyst driven research departments and stock exchanges.
In undertaking its research and conducting its analysis of current and
potential investments for the Portfolio, the Sub-Adviser utilizes complex
proprietary computer-based programs developed by the Sub-Adviser's parent,
C.A.S.E., Inc. These programs are available to the Sub-Adviser by license
from its parent. The Sub-Adviser believes that time and cost efficiencies
associated with these programs permit it to maintain current information on
over 4,000 stocks listed on the major North American exchanges in fifty-seven
industries and eight economic sectors and to evaluate this information on a
market comparative basis using over 30 different strategic and econometric
models.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net
assets of the Portfolio.
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The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. In addition, the Sub-Adviser may occasionally place portfolio business
with broker-dealers affiliated with the Investment
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Adviser or the Sub-Adviser; in such event, the Sub-Adviser always will seek
best execution.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy (the "Ethics Policy") that has
been adopted by the Board of Directors of the Fund. Access Persons are
required to follow the guidelines established by this Ethics Policy in
connection with all personal securities transactions and are subject to
certain prohibitions on personal trading. The Fund's Sub-Advisers, pursuant
to Rule 17j-1 and other applicable laws, and pursuant to the terms of the
Ethics Policy, must adopt and enforce their own Code of Ethics and Insider
Trading Policies appropriate to their operations. Each Sub-Adviser is
required to report to the Board of Directors on a quarterly basis with
respect to the administration and enforcement of such Ethics Policy,
including any violations thereof which may potentially affect the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio intends to distribute substantially all of the net
investment income, if any. Dividends from investment income, if any, of the
Portfolio normally are declared and paid semi-annually in additional shares
of the Portfolio at net asset value. Distributions of net realized capital
gains from security transactions and net gains from foreign currency
transactions, if any, normally are declared and paid in additional shares of
the Portfolio at the end of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter or within 30 days
thereafter no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, WRL, the Policies and the
Annuity Contracts, and tax consequences to the holders thereof, other than as
described in the prospectus for the Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
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tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
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Net asset value of the Portfolio share is computed by dividing the value
of the net assets of the Portfolio by the total number of Portfolio shares
outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis. (See the Statement of Additional
Information for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers shares of the Portfolio for purchase by the Separate
Accounts to fund benefits under the Policies and the Annuity Contracts. The
Fund also offers shares of other Fund portfolios, not available under the
Policies and the Annuity Contracts, for purchase by other insurance company
separate accounts (the "Other Separate Accounts") of Western Reserve Life
Assurance Company of Ohio ("WRL"), PFL Life Insurance Company ("PFL"), and
AUSA Life Assurance Company, Inc. ("AUSA"), (WRL, PFL and AUSA together, the
"Life Companies"), to fund the benefits under certain variable life insurance
policies and variable annuity contracts. The Life Companies are affiliates.
Because shares of all portfolios of the Fund are sold to these various
separate accounts established to receive and invest premiums received under
variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for such variable life insurance separate accounts and
variable annuity separate accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of shares of the Portfolio by the Separate Accounts or of shares of other
Fund portfolios by one or more of the Other Separate Accounts, which could
have adverse consequences. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in Federal income tax laws,
or (3) differences in voting instructions between those given by variable
life insurance policyowners and those given by variable annuity
contractowners. If the Board of Directors were to conclude that separate
funds should be established for variable life and variable annuity separate
accounts, the affected Life Companies will bear the attendant expenses, but
variable life insurance policyowners and variable annuity contractowners
would no longer have the economies of scale typically resulting from a larger
combined fund.
The Fund offers a separate class of common stock for the portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio will be entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts and the Other Separate Accounts of the Life
Companies may hold shares of portfolios of the Fund and are entitled to
exercise the rights directly as described above. If and to the extent
required by law, WRL will vote the Portfolio's shares, and the Life Companies
will vote the shares of the Fund's other portfolios in the Other Separate
Accounts, including shares which are not attributable to Policyholders, at
meetings of the Fund in accordance with instructions received from
Policyholders having voting interests in the corresponding sub-accounts of
the Separate Account and the Other Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
If the 1940 Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Annuity Contracts and the
Policies, respectively.
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PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for the corresponding
sub-account for any Separate Account in advertisements, sales literature or
reports to Policyholders or to prospective investors. Total return and yield
quotations reflect only the performance of a hypothetical investment in the
Portfolio during the particular time period shown as calculated based on the
historical performance of the Portfolio during that period. Such quotations
do not in any way indicate or project future performance. Quotations of total
return and yield do not reflect charges or deductions against the Separate
Accounts or charges and deductions against the Policies and the Annuity
Contracts. Where relevant, the prospectuses for the Policies and the Annuity
Contracts contain additional performance information.
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The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations for the Portfolio are expressed as average annual compound rates
of return for each of the periods quoted, reflect the deduction of a
proportionate share of the Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
returns for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Fund may also, from time to time, compare performance information for
the Portfolio in advertisements, sales literature and reports to
Policyholders or to prospective investors to: (1) the Standard & Poor's Index
of 500 Common Stocks, the Dow Jones Industrial Average or other widely
recognized indices; (2) other mutual funds whose performance is reported by
Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity Research &
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar") or reported by
other services, companies, individuals or other industry or financial
publications of general interest, such as Forbes, Money, The Wall Street
Journal, Business Week, Barron's, Kiplinger's Personal Finance and Fortune,
which rank and/or rate mutual funds by overall performance or other criteria;
and (3) the Consumer Price Index. Lipper, VARDS and Morningstar are widely
quoted independent research firms which rank mutual funds according to
overall performance, investment objective, and assets. Unmanaged indices may
assume the reinvestment of dividends but usually do not reflect any
"deduction" for the expense of operating or managing a fund.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
9
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
C.A.S.E. Management, Inc.
2255 Glades Road
Suite 221-A
Boca Raton, FL 33431
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00109-05/96
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<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
C.A.S.E. Growth Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy
of the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
C.A.S.E. MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00110 - 05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF ADDITIONAL INFORMATION TO PAGE IN PROSPECTUS
------------------------------ --------------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 5
Repurchase and Reverse Repurchase Agreements 3 3
Lending of Portfolio Securities 3 3
Foreign Securities 3 3
Non-Investment Grade Debt Securities 4 2
Investments in Futures, Options and Other
Derivative Instruments 4 2
Management of the Fund 15 5
Directors and Officers 15 5
The Investment Adviser 17 5
The Sub-Adviser 18 6
Portfolio Transactions and Brokerage 19 6
Portfolio Turnover 19 5
Placement of Portfolio Brokerage 19 6
Personal Securities Transactions N/A 7
Purchase and Redemption of Shares 21 7
Offering of the Shares and Determination of
Offering Price 21 7
Net Asset Valuation 21 7
Investment Experience Information 21 8
Calculation of Performance Related Information 21 8
Total Return 22 9
Yield Quotations 22 8
Taxes 23 7
Capital Stock of the Fund 24 8
Registration Statement 25 N/A
Financial Statements 25 9
Appendix A - Description of Portfolio Securities A-1 1
Appendix B - Description of Selected Corporate Bond
and Commercial Paper Ratings B-1 2
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the C.A.S.E. Growth Portfolio (the
"Portfolio") of the Fund is described in the Portfolio's Prospectus. Shares
of the Portfolio are sold only to the separate accounts of Western Reserve
Life Assurance Co. of Ohio ("WRL") to fund the benefits under certain
variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of the shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholder"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from those which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 15% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by
physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not, as a matter of non-fundamental policy: (i)
enter into any futures contracts or options on futures contracts for purposes
other than bona fide hedging transactions within the meaning of Commodity
Futures Trading Commission regulations if the aggregate initial margin
deposits and premiums required to establish positions in futures contracts
and related options that do not fall within the definition of bona fide
hedging transactions would exceed 5% of the fair market value
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<PAGE>
of the Portfolio's net assets, after taking into account unrealized profits
and losses on such contracts it has entered into and (ii) enter into any
futures contracts or options on futures contracts if the aggregate amount of
the Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total
assets.
(B) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to provide
margin or guarantee positions in options, futures contracts, swaps, forward
contracts or other derivative instruments or the segregation of assets in
connection with such transactions;
(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short;
(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, forward contracts, and other derivative instruments shall not be
deemed to constitute purchasing securities on margin;
(E) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% restriction. This policy shall not prohibit reverse
repurchase agreements or deposits of assets to provide margin or guarantee
positions in connection with transactions in options, future contracts,
swaps, forward contracts, or other derivative instruments or the segregation
of assets in connection with such transactions;
(F) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or other securities
for which the Board of Directors or the Sub-Adviser has made a determination
of liquidity, as permitted under the 1940 Act;
(G) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to money market funds or to securities received as dividends, through offers
to exchange, or as a result of reorganization, consolidation, or merger. If
the Portfolio invests in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money
market fund;
(H) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(I) The Portfolio may not invest more than 25% of its net assets at the
time of purchase in the securities of foreign issuers and obligors;
(J) The Portfolio may not invest in companies for the purpose of
exercising control or management; and
(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
2
<PAGE>
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to the Portfolio in connection with bankruptcy
proceedings), it is the policy of the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by the Sub-Adviser.
In a reverse repurchase agreement, the Portfolio sells a portfolio
security to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Portfolio will
maintain cash and appropriate liquid assets in a segregated custodial account
to cover its obligation under the agreement. The Portfolio will enter into
reverse repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) the
Portfolio must receive any dividends or interest paid by the issuer on such
securities; (c) the Portfolio must have the right to call the loan and obtain
the securities loaned at any time upon notice of not more than five business
days, including the right to call the loan to permit voting of the
securities; and (d) the Portfolio must receive either interest from the
investment of collateral or a fixed fee from the borrower. Securities loaned
by the Portfolio remain subject to fluctuations in market value. The
Portfolio may pay reasonable finders, custodian and administrative fees in
connection with a loan. Securities lending, as with other extensions of
credit, involves the risk that the borrower may default. Although securities
loans will be fully collateralized at all times, the Portfolio may experience
delays in, or be prevented from, recovering the collateral. During the period
that the Portfolio seeks to enforce its rights against the borrower, the
collateral and the securities loaned remain subject to fluctuations in market
value. The Portfolio may also incur expenses in enforcing its rights. If the
Portfolio has sold a loaned security, it may not be able to settle the sale
of the security and may incur potential liability to the buyer of the
security on loan for its costs to cover the purchase.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It is possible that market quotations for foreign
securities will not be readily available. In such event, these securities
shall be valued at fair market value as determined in good faith by the
Sub-Adviser under the supervision of the Board of Directors. If it should
become necessary, the Portfolio could encounter greater difficulties in
invoking legal
3
<PAGE>
processes abroad than would be the case in the United States. Transaction
costs with respect to foreign securities may be higher. The Investment
Adviser and the Sub-Adviser will consider these and other factors before
investing in foreign securities. The Portfolio will not concentrate its
investments in any particular foreign country.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions. For a more
detailed explanation regarding the special risks of investing in foreign
securities, see "Foreign Investments and Special Risks" in the Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES
The Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities")
as determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or
Standard & Poor's ("S&P") (BBB). The Portfolio does not currently intend to
invest more than 5% of their assets in non-investment grade securities.
Before investing in any lower-grade debt securities, the Sub-Adviser will
determine that such investments meet the Portfolio's investment objectives
and that the lower-grade debt securities' ratings are supported by an
internal credit review, which the Sub-Adviser will conduct in each such
instance. Lower-grade debt securities usually have moderate to poor
protection of principal and interest payments, have certain speculative
characteristics (see Appendix B for a description of the ratings), and
involve greater risk of default or price declines due to changes in the
issuer's creditworthiness than investment-grade debt securities. Because the
market for lower-grade debt securities may be thinner and less active than
for investment grade debt securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Market
prices for lower-grade debt securities may decline significantly in periods
of general economic difficulty or rising interest rates. Through portfolio
diversification and credit analysis, investment risk can be reduced, although
there can be no assurance that losses will not occur.
The quality limitation set forth in the Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. The Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities, foreign currencies or
contracts based on financial indices including interest rates or indices of
U.S. Government or foreign government securities or equity or fixed-income
securities ("futures contracts"). U.S. futures contracts are traded on
exchanges that have been designated "contract markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant ("FCM"), or brokerage firm, which is a member of the
relevant contract market. Through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. Since all transactions in the futures market are made through a
member of, and are offset or fulfilled through a clearinghouse associated
with, the exchange on which the contracts are traded, the Portfolio will
incur brokerage fees when it buys or sells futures contract.
When the Portfolio buys or sells a futures contract, it incurs a
contractual obligation to receive or deliver the underlying instrument (or a
cash payment based on the difference between the underlying instrument's
closing price and the price at which the contract was entered into) at a
specified price on a
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<PAGE>
specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against
potential changes in interest or currency exchange rates or the price of a
security or a securities index which might correlate with or otherwise
adversely affect either the value of the Portfolio's securities or the prices
of securities which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the
delivery date. However, both the buyer and seller are required to deposit
"initial margin" for the benefit of a FCM when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be maintained in
cash or certain high-grade liquid assets. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments with a FCM to settle the change in value on a daily basis.
The party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments are similar to good faith
deposits or performance bonds, unlike margin extended by a securities broker,
and initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Portfolio's investment limitations.
In the event of the bankruptcy of an FCM that holds margin on behalf of the
Portfolio, the Portfolio may be entitled to return of margin owed to the
Portfolio only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser will attempt to minimize the risk by careful
monitoring of the creditworthiness of the FCM's with which the Portfolio does
business and by depositing margin payments in a segregated account with the
custodian when practical or otherwise required by law.
Although the Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost
of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
the Portfolio holds or is considering purchasing equity securities and seeks
to protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. The Portfolio also could seek
to protect against potential price declines by selling portfolio securities
and investing in money market instruments. However, since the futures market
is more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility
of having to buy equity securities at higher prices. This technique is
sometimes known as an anticipatory hedge. Since the fluctuations in the value
of futures contracts should be similar to those of equity securities, the
Portfolio could take advantage of the potential rise in the value of equity
securities without buying them until the market has stabilized. At that time,
the futures contracts could be liquidated and the Portfolio could buy equity
securities on the cash market. To the extent the Portfolio enters into
futures contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with respect to
futures contracts will consist of high-grade liquid assets from its portfolio
in an amount equal to the difference between the contract price and the
aggregate value of the initial and variation margin payments made by the
Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are
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<PAGE>
subject to initial margin and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close out
futures contracts through offsetting transactions which could distort the
normal price relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced and prices in the futures market distorted. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the Sub-Adviser
still may not result in a successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolio, if the Sub-Adviser's investment
judgment is incorrect, the Portfolio's overall performance could be worse
than if the Portfolio had not entered into futures contracts. For example, if
the Portfolio has attempted to hedge against the effects of a possible
decrease in prices of securities held by the Portfolio and prices increase
instead, the Portfolio may lose part or all of the benefit of the increased
value of these securities because of offsetting losses in the Portfolio's
futures positions. In addition, if the Portfolio has insufficient cash, it
may have to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may, but will not necessarily, be at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to the Portfolio will not match exactly the Portfolio's current or
potential investments. The Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests - for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities - which involves a risk that the futures position will not
correlate precisely with the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with the
Portfolio's investments. Futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
the underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between the Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. The Portfolio may buy or sell
futures contracts with a greater or lesser value than the securities it
wishes to hedge or is considering purchasing in order to attempt to
compensate for differences in historical volatility between the futures
contract and the securities, although this may not be successful in all
cases. If price changes in the Portfolio's futures positions are poorly
correlated with its other investments, its futures positions may fail to
produce desired gains or result in losses that are not offset by the gains in
the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached, it may be
impossible for the Portfolio to enter into new positions or close out
existing positions. If the secondary market for a futures contract is not
liquid
6
<PAGE>
because of price fluctuation limits or otherwise, the Portfolio may not be
able to promptly liquidate unfavorable positions and potentially be required
to continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets
held to cover its futures positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
The Portfolio intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. Such guidelines presently require that to the extent that a
Portfolio enters into futures contracts or options on a futures position that
are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a
futures contract at a specified price on or before a specified date. The
purchase and writing of options on futures contracts is similar in some
respects to the purchase and writing of options on individual securities. See
"Options on Securities" below. Transactions in options on futures contracts
will not be made for speculation and will not be made other than to attempt
to hedge against potential changes in interest rates or currency exchange
rates or the price of a security or a securities index which might correlate
with or otherwise adversely affect either the value of the Portfolio's
securities or the prices of securities which the Portfolio is considering
buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at the expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract may
constitute a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option the Portfolio has written is exercised, the Portfolio will incur a
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, the
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities.
For example, the Portfolio may buy a put option on a futures contract to
attempt to hedge the Portfolio's securities against the risk of falling
prices.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed
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above, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the options bought.
Forward Contracts. The Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed
price (which may be in U.S. dollars or a foreign currency) at a future date
which is individually negotiated between currency traders and their
customers. The Portfolio may invest in forward currency contracts with stated
contract values of up to the value of the Portfolio's assets.
The Portfolio may exchange foreign currencies for U.S. dollars and for
other foreign currencies in the normal course of business and may buy and
sell currencies through forward currency contracts in order to fix a price
for securities it has agreed to buy or sell. The Portfolio may enter into a
forward currency contract, for example, when it enters into a contract to buy
or sell a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward currency
contract to sell an amount of that foreign currency (or a proxy currency
whose performance is expected to replicate the performance of that currency)
for U.S. dollars approximating the value of some or all of the portfolio
securities denominated in that currency (not exceeding the value of the
Portfolio's assets denominated in that currency) or by participating in
options or futures contracts with respect to the currency, or, when the
Sub-Adviser believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, the Portfolio may enter into a forward currency
contract to buy that foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge seeks to minimize the effect of
currency appreciation as well as depreciation, but does not protect against a
decline in the security's value relative to other securities denominated in
the foreign currency.
The Portfolio also may enter into a forward currency contract with respect
to a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances the Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, the
Portfolio could enter into a contract to sell that currency or a proxy
currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting the
Portfolio's currency exposure from one foreign 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 to the Portfolio if
the Sub-Adviser's projection of future exchange rates is inaccurate.
The Portfolio also may enter into forward contracts to buy or sell at a
later date instruments in which the Portfolio may invest directly or on
financial indices based on those instruments. The market for those types of
forward contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the
Fund's custodian will place cash or high-grade liquid assets in a segregated
account of the Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in
the segregated account declines, additional cash or high-grade liquid assets
will be placed in the account on a daily basis so that the value of the
account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of
the segregated account, the Portfolio may
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buy call options permitting the Portfolio to buy the amount of foreign
currency subject to the hedging transaction by a forward sale contract or the
Portfolio may buy put options permitting the Portfolio to sell the amount of
foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unforeseen changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent
value of the proceeds of or rates of return on the Portfolio's foreign
currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedging transaction generally
will not be precise. In addition, the Portfolio may not always be able to
enter into forward contracts at attractive prices and accordingly may be
limited in its ability to use these contracts in seeking to hedge the
Portfolio's assets.
Also, with regard to the Portfolio's use of cross-hedging transactions,
there can be no assurance that historical correlations between the movement
of certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are subject of the
cross-hedging transaction are denominated.
Options on Foreign Currencies. The Portfolio may buy put and call options
and may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in
the U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. 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 Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to the
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to the Portfolio from purchases of foreign currency options will be reduced
by the amount of the premium and related transaction costs.
The Portfolio may write options on foreign currencies for the same types
of hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities
due to adverse fluctuations in exchange rates, the Portfolio could, instead
of purchasing a put option, write a call option on the relevant currency. If
the expected decline occurs, the option will most likely not be exercised and
the diminution in value of portfolio securities will be offset by the amount
of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. dollar cost of securities to be acquired,
the Portfolio could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow the
Portfolio
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<PAGE>
to hedge the increased cost up to the amount of premium. 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
received, and only if exchange rates move in the expected direction. If that
does not occur, the option may be exercised and the Portfolio would be
required to buy 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, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, and if the difference is
maintained by the Portfolio in cash or high-grade liquid assets in a
segregated account with the Fund's custodian.
The Portfolio may also write call options on foreign currencies for
cross-hedging purposes that may not be deemed to be covered. A call option on
a foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes
the option by maintaining, in a segregated account with the Fund's custodian,
cash or high-grade liquid assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The
Portfolio will effect such transactions only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
institutions) deemed creditworthy, and only pursuant to procedures adopted by
the Sub-Adviser for monitoring the creditworthiness of those entities. To the
extent that an option bought or written by the Portfolio in a negotiated
transaction is illiquid, the value of an option bought or the amount of the
Portfolio's obligations under an option written by the Portfolio, as the case
may be, will be subject to the Portfolio's limitation on illiquid
investments. In the case of illiquid options, it may not be possible for the
Portfolio to effect an offsetting transaction at the time when the
Sub-Adviser believes it would be advantageous for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, the Portfolio may write covered put and call options and may buy put
and call options and warrants on securities that are traded on United States
and foreign securities exchanges and over-the-counter. The Portfolio also may
write call options that are not covered for cross-hedging purposes. The
Portfolio may write and buy options on the same types of securities that the
Portfolio could buy directly and may buy options on financial indices as
described above with respect to futures contracts. There are no specific
limitations on the Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by the Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with
a value equal to the exercise price in a segregated account with its
custodian or (ii) holds a put on the same security and in the same principal
amount as the put written and the exercise price of the put held is equal to
or greater than the exercise price of the put
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written. The premium paid by the buyer of an option will reflect, among other
things, the relationship of the exercise price to the market price and the
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.
A call option written by the Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid
assets in a segregated account with its custodian.
The Portfolio collateralizes its obligation under a written call option
for cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. The
Portfolio would write a call option for cross-hedging purposes, instead of
writing a covered call option, when the premium to be received from the
cross-hedge transaction would exceed that which would be received from
writing a covered call option and the Sub-Adviser believes that writing the
option would achieve the desired hedge.
If a put or call option written by the Portfolio was exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit the Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to
the option to be used for other portfolio investments. If the Portfolio
desires to sell a particular security on which the Portfolio has written a
call option, the Portfolio will effect a closing transaction prior to or
concurrent with the sale of the security.
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The Portfolio may realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing
the option or the price received from a sale transaction is more than the
premium paid to buy the option; the Portfolio may realize a loss from a
closing transaction if the price of the purchase transaction is more than the
premium received from writing the option or the price received from a sale
transaction is less than the premium paid to buy the option. Because
increases in the market of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options with the result that the Portfolio would have to exercise the options
in order to realize any profit. If the Portfolio is unable to effect a
closing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or the Portfolio
delivers the underlying security upon exercise. Reasons for the absence of a
liquid secondary market may include the following: (i) there may be
insufficient trading interest in certain options, (ii) restrictions may be
imposed by a national securities exchange on which the option is traded
("Exchange") on opening or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v)
the facilities of an Exchange or the Options Clearing Corporation ("OCC") may
not at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC
as a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may buy a security and then write a call
option against that security. The exercise price of the call the Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when
it is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions
using at-the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-of-the-money
call options may be used when it is expected that the premiums received from
writing the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Portfolio's maximum gain will
be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Portfolio's purchase price of the
security and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus
the amount by which the market price of the security is below the exercise
price.
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The Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, the Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
The Portfolio may buy call options to attempt to hedge against an increase
in the price of securities that the Portfolio may buy in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Portfolio.
In purchasing an option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option brought by the Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to
protect the value of the Portfolio's investments from interest rate or
currency exchange rate fluctuations, the Portfolio may enter into interest
rate swaps, and may buy or sell interest rate caps and floors. The Portfolio
expects to enter into these transactions primarily to attempt to preserve a
return or spread on a particular investment or portion of its portfolio. The
Portfolio also may enter into these transactions to attempt to protect
against any increase in the price of securities the Portfolio may consider
buying at a later date. The Portfolio does not intend to use these
transactions as a speculative investment. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The exchange commitments can involve payments to be made
in the same currency or in different currencies. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter
instruments and their use involves risks specific to the markets in which
they are entered into. The Portfolio will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap
will be calculated on a daily basis and an amount of cash or high-grade
liquid assets having an aggregate net asset value of at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If the Portfolio enters into an interest rate swap on other than a
net basis, the Portfolio would maintain a segregated account in the full
amount accrued on a daily basis of the Portfolio's obligations with respect
to the swap. The Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest
rating categories of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. The Sub-Adviser
will monitor the creditworthiness of all counterparties on an ongoing basis.
If there is a default by the other party to such a transaction, the Portfolio
will have contractual remedies pursuant to the agreements related to the
transaction.
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
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<PAGE>
documentation. The Sub-Adviser has determined that, as a result, the swap
market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. To the extent the
Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or high-grade liquid assets having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of
the Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio; although the Portfolio does not
presently intend to engage in such transactions in excess of 5% of its total
assets. These transactions may in some instances involve the delivery of
securities or other underlying assets by the Portfolio or its counterparty to
collateralize obligations under the swap. Under the documentation currently
used in those markets, the risk of loss with respect to interest rate swaps
is limited to the net amount of the interest payments that the Portfolio is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Portfolio would risk the loss of the
net amount of the payments that the Portfolio contractually is entitled to
receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques, that become
available as the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. The Sub-Adviser may use these
opportunities to the extent they are consistent with the Portfolio's
investment objective and are permitted by the Portfolio's investment
limitations and applicable regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolio invests. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected
manner, the Portfolio may not achieve the desired benefits of futures,
options, swaps and forwards or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to options on currencies,
forward contracts and other negotiated or over-the-counter instruments, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. In addition, the correlation between movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to the Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that the Portfolio will be able to use those instruments effectively
for the purposes set forth above.
In connection with certain of its hedging transactions, the Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be
disposed of for so long as the Portfolio maintains the positions giving rise
to the segregation
14
<PAGE>
requirement. Segregation of a large percentage of the Portfolio's assets
could impede implementation of the Portfolio's investment policies or the
Portfolio's ability to meet redemption requests or other current obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation. Similarly,
options on currencies may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the buyer of an option
cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, an option writer and a
buyer or seller of futures or forward contracts could lose amounts
substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result,
the OCC may, if it determines that foreign government restrictions or taxes
would prevent the orderly settlement of foreign currency option exercises, or
would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in
the mechanics of delivery of currency, the fixing of dollar settlement prices
or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in
foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) low
trading volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
15
<PAGE>
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer, (1968 - 1988), Director (1968 -1987), Pioneer Western
Corporation; Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44),1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1)(2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present) President (1978 - 1987 and December, 1992
- present), Director (1978 -present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President (1988 - 1989), Director (1976 - February, 1991),
Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 -present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1)(2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1)(2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 - present), Chief Financial Officer (1987 - December, 1995) and
Treasurer (1988 -present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1)(2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995); Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992
-August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 -June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 -July, 1991), University of
South Florida.
ALAN M. YAEGER (1)(2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 -present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
16
<PAGE>
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. For the period from May
1, 1995 (commencement of operations) to December 31, 1995, the Portfolio's
share of Directors' fees and expenses paid by the Fund were $3.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,500
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Contracts indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and
Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio ("WRL" or the "Investment
Adviser") serves as the investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement dated February 6, 1995 with the Fund on behalf
of the Portfolio. The Investment Adviser is a wholly-owned subsidiary of
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance
company which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a
financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 18,
1996. The Investment Advisory Agreement provides that subsequent to its
approval by the Portfolio's initial shareholder, it will continue in effect
for an initial term ending April 22, 1997, and will continue in effect from
year to year thereafter, if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolio and
terminate automatically in the event of assignment (within the meaning of the
1940 Act).
17
<PAGE>
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Portfolio and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. For the period from May 1, 1995 (commencement of
operations) through December 31, 1995, the Investment Adviser was paid fees
for its services to the Portfolio in the amount of $5,519.
Payment of Expenses. The Investment Adviser provides investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Fund pays all other
expenses incurred in its operation and all of the Portfolio's general
administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses of registering the shares under
Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), interest, certain taxes, charges of the
custodian, fees and expenses of Fund non-interested directors, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, SEC fees, advisory fees, certain insurance premiums, costs of
corporate meetings, costs of maintenance of corporate existence, investor
services (including allocable telephone and personnel expenses),
extraordinary expenses, and other expenses properly payable by the Fund.
Depending upon the nature of the lawsuit, litigation costs may be borne by
the Fund.
Expenses that relate exclusively to a particular portfolio, such as
brokerage commissions, custodian fees, and registration fees for shares, are
paid by that portfolio. Other expenses are allocated to the portfolios in an
equitable manner determined by the portfolios' Investment Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
For the period May 1, 1995 to December 31, 1995, the Investment Adviser paid
expenses on behalf of the Portfolio in the amount of $23,832.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
C.A.S.E. Management, Inc. (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolio pursuant to a Sub-Advisory Agreement dated February 6, 1995
on behalf of the Portfolio. The Sub-Advisory Agreement was most recently
approved by the Board of Directors of the Fund, including a majority of the
Directors who were not "interested persons" of the Fund (as defined in the
1940 Act), on March 18, 1996. The Sub-Advisory Agreement provides that
subsequent to its approval by the Portfolio's initial shareholder, it will
continue in effect for an initial term ending April 22, 1997, and will
continue in effect from year to year thereafter, if approved annually (a) by
the Board of Directors of the Fund or by a majority of the outstanding shares
of the Portfolio, and (b) by a majority of the Directors who are not parties
to such Agreement or "interested persons" (as defined in the 1940 Act) of any
such party. The Sub-Advisory Agreement may be terminated without penalty on
60 days' written notice at the option of either party or by the vote of the
shareholders of the Portfolio and terminate automatically in the event of
assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
18
<PAGE>
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio manager for the Portfolio. The portfolio manager
considers analyses from various sources, makes the necessary decisions and
effects transactions accordingly. The Sub-Adviser bears all of its expenses
in connection with the performance of its services under the Sub-Advisory
Agreement, such as compensating and furnishing office space for its officers
and employees connected with investment and economic research, trading and
investment management of the Portfolio. The method of computing the
Sub-Adviser's fee is set forth in the Prospectus. For the period May 1, 1995
(commencement of operations) through December 31, 1995, sub-advisory fees
were paid in the amount of $2,759 for the Portfolio.
The Sub-Adviser, located at 2255 Glades Road, Suite 221-A, Boca Raton,
Florida 33431, is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E., Inc. The Sub-Adviser provides investment management
services to financial institutions, high net worth individuals, and other
professional money managers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The C.A.S.E. Growth Portfolio and The
Fund - Portfolio Turnover" in the Prospectus. In computing the portfolio
turnover rate for the Portfolio, securities whose maturities or expiration
dates at the time of acquisition are one year or less are excluded. Subject
to this exclusion, the turnover rate for the Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year. For the period May 1, 1995 (commencement of
operations) to December 31, 1995, the Portfolio turnover rate for the
Portfolio was 121.62%.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Securities
initially satisfying the basic policies and objective of the Portfolio may be
disposed of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser and/or
the Sub-Adviser's parent, and pay spreads or commissions to such brokers or
dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same
transaction. Supplemental investment research provided to the Sub-Adviser's
parent, C.A.S.E., Inc., is available to the Sub-Adviser pursuant to the
Sub-Adviser's license agreement with its parent. (See "Management of the Fund
- - The Sub-Adviser" in the Prospectus.)
19
<PAGE>
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security traded; the size
and type of the transaction; the nature and character of the markets for the
security purchased or sold; the desired timing of the trade; the activity
existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement
services; financial stability; the existence of actual or apparent
operational problems of any broker or dealer; and research products or
services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio strategy;
access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services, and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information), including the research described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt by the Sub-Adviser or its parent of such
supplemental information. The Sub-Adviser may use such research products and
services in servicing other accounts in addition to the Portfolio. If the
Sub-Adviser determines that any research product or service has a mixed use,
such that it also serves functions that do not assist in the investment
decision-making process, the Sub-Adviser will allocate the costs of such
service or product accordingly. The portion of the product or service that a
Sub-Adviser determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Such allocation may
create a conflict of interest for the Sub-Adviser. Conversely, such
supplemental information obtained by the placement of business for the
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
20
<PAGE>
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
The Portfolio paid aggregate commissions for the period from May 1, 1995
to December 31, 1995 in the amount of $8,662. For the same period the
Portfolio paid no commissions to C.A.S.E. Management, Inc.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are sold currently only to the Separate Accounts
to fund the benefits under the Policies and Annuity Contracts. The Portfolio
may, in the future, offer its shares for other insurance company separate
accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and Annuity Contracts. Such allocation rights are further described
in the prospectuses and disclosure documents for the Policies and Annuity
Contracts. Shares of the Portfolio are sold and redeemed at their respective
net asset values as described in the Prospectus.
Net asset value of the Portfolio share is computed by dividing the value
of the net assets of the Portfolio by the total number of shares of the
Portfolio outstanding.
NET ASSET VALUATION
As stated in the Prospectus and above, the net asset value of the
Portfolio's shares ordinarily is determined, once daily, as of the close of
the regular session of business on the New York Stock Exchange ("Exchange")
(usually 4:00 p.m., Eastern time), on each day the Exchange is open.
(Currently the Exchange is closed on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.) The per share net asset value of the Portfolio is determined
by dividing the total value of the securities and other assets, less
liabilities, by the total number of shares outstanding. In determining asset
value, securities listed on the national securities exchanges and the NASDAQ
National Market are valued at the closing prices on such markets, or if such
a price is lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities which are
traded on the over-the-counter market are valued at bid price. Other
securities for which quotations are not readily available are valued at fair
values as determined in good faith by the Sub-Adviser under the supervision
of the Fund's Board of Directors. Money market instruments maturing in 60
days or less are valued on the amortized cost basis discussed above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future
investment performance.
The Portfolio commenced operations on May 1, 1995. The rate of return
indicated below depicts the actual investment experience of the Portfolio for
the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief discussion of how performance is
calculated.
21
<PAGE>
TOTAL RETURN
The rate of return is based on the actual investment performance, after
deduction of investment advisory fees and direct Portfolio expenses. The rate
is an average annual compounded rate of return for the period May 1, 1995
(commencement of operations) through December 31, 1995. The Portfolio rate of
return for the period May 1, 1995 to December 31, 1995 was 20.65%.
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period)
</TABLE>
The total return quotation calculations for the Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
The rates of return do not reflect charges or deductions against the
Separate Accounts, or charges and deductions against the Policies or the
Annuity Contracts. Accordingly, these rates of return do not illustrate how
actual investment performance will affect benefits under the Policies or the
Annuity Contracts. Where relevant, the prospectus for the Policies or the
Annuity Contracts contain performance information. Moreover, these rates of
return are not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C><C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends
d = the maximum offering price per share on the last day of the period
</TABLE>
22
<PAGE>
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts, and the holders thereof.
The Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months - options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of 817(h), all securities of the same issuer, all interests in the
same real property project, and all interests in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while a particular foreign
government and its agencies, instrumentalities and political subdivisions all
are considered the same issuer. For information concerning the consequences
of failure to meet the requirements of section 817(h), see the respective
prospectuses for the Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross
23
<PAGE>
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances,
the Portfolio will be subject to Federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of that stock (collectively "PFIC income"), plus interest
thereon, even if the Portfolio distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included
in the Portfolio's investment company taxable income and, accordingly, will
not be taxable to it to the extent that income is distributed to its
shareholders. If the Portfolio invests in a PFIC and elects to treat the PFIC
as a "qualified electing fund," then in lieu of the foregoing tax and
interest obligation, the Portfolio will be required to include in income each
year its pro rata share of the qualified electing fund's annual ordinary
earnings and net capital gain (the excess of net long-term capital gain over
net short-term capital loss), even if they are not distributed to the
Portfolio; those amounts would be subject to the Distribution Requirement. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that limitation. The Portfolio intends that, when it engages in
hedging transactions, they will qualify for this treatment, but at the
present time it is not clear whether this treatment will be available for all
of the Portfolio's hedging transactions. To the extent this treatment is not
available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
Policyholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies and Annuity Contracts and their Policyholders.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Aggressive Growth Portfolio, Balanced
Portfolio, Utility Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, International Equity Portfolio, Leisure Portfolio, Janus
24
<PAGE>
Balanced Portfolio, Value Equity Portfolio, Meridian/INVESCO Global Sector
Portfolio, Meridian INVESCO US Sector Portfolio and Meridian/INVESCO Foreign
Sector Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for the Portfolio for the period ended
December 31, 1995 and the report of the Fund's independent accountants are
included in the 1995 Annual Report and are incorporated herein by reference
to such report.
25
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolio acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolio, reflecting an agreed upon market rate of interest for
the period from the time of the Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. The Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While the Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the SEC has taken the position that repurchase
agreements of greater than seven days together with other illiquid
investments should be limited to an amount not in excess of 15% of the
Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, the Portfolio could
be ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by the Portfolio upon liquidation of
the securities may be limited.
9. Reverse Repurchase Agreement. A reverse repurchase agreement involves
the sale of securities held by the Portfolio, with an agreement to repurchase
the securities at an agreed upon
A-1
<PAGE>
price, date and interest payment. The Portfolio will use the proceeds of the
reverse repurchase agreements to purchase other money market securities
maturing, or under an agreement to resell, at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. The Portfolio
will utilize reverse repurchase agreements when the interest income to be
earned from the investment of the proceeds from the transaction is greater
than the interest expense of the reverse repurchase transaction.
10. Asset-Backed Securities. The Portfolio may invest in securities backed
by automobile receivables and credit-card receivables and other securities
backed by other types of receivables or other assets. Credit support for
asset-backed securities may be based on the underlying assets and/or provided
through credit enhancements by a third party. Credit enhancement techniques
include letters of credit, insurance bonds, limited guarantees (which are
generally provided by the issuer), senior-subordinated structures and
over-collateralization. The Portfolio will only purchase an asset-backed
security if it is rated at least "A" by S&P or Moody's.
11. Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and
mortgage pay-through securities. A mortgage pass-through security is a
pro-rata interest in a pool of mortgages where the cash flow generated from
the mortgage collateral is passed through to the security holder.
Mortgage-backed bonds are general obligations of their issuers, payable out
of the issuers' general funds and additionally secured by a first lien on a
pool of mortgages. Mortgage pay-through securities exhibit characteristics of
both pass-through and mortgage-backed bonds. Mortgage-backed securities also
include other debt obligations secured by mortgages on commercial real estate
or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.
12. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13. Stripped Mortgage-Backed Securities. Stripped mortgage backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security receives interest payments from
the same underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the
prices of stripped mortgage-backed securities can be significantly affected
by changes in interest rates as well. As interest rates fall, prepayment
rates tend to increase, which in turn tends to reduce prices of
"interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 edged". 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 on 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, or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
B-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S
AAA - This is the highest rating assigned by S & P to a debt obligation
and indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
B-2
<PAGE>
THIS MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO PROSPECTUS WHICH FOLLOWS IS NOT
CURRENTLY AVAILABLE TO THE WRL FREEDOM EQUITY PROTECTOR, WRL FREEDOM WEALTH
PROTECTOR, WRL FREEDOM SP PLUS AND THE EQUITY PROTECTOR VARIABLE LIFE INSURANCE
POLICIES, OR THE "ASSET ACCUMULATOR" OFFERED BY AUSA LIFE INSURANCE COMPANY,
INC.
PROSPECTUS
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
[MERIDIAN LOGO]
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [INVESCO LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Meridian/INVESCO Global Sector Portfolio
of the Fund (the "Portfolio").
The investment objective of the Portfolio is growth of capital. The
Portfolio seeks to achieve its objective by following an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of the Portfolio in accordance with the allocation
instructions received from holders of the Policies and the Annuity Contracts
(collectively, the "Policyholders"). Such allocation rights are further
described in the prospectuses or disclosure documents for the Policies and
the Annuity Contracts.
WRL, Meridian Investment Management Corporation ("Meridian") and INVESCO
Global Asset Management Limited ("INVESCO") serve as the investment adviser
(the "Investment Adviser") and the co-sub-advisers (the "Co-Sub-Advisers"),
respectively, to the Portfolio. See "The Investment Adviser" and "The
Co-Sub-Advisers."
This Prospectus sets forth concisely the information about the Portfolio
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the Portfolio
bears the same date as this Prospectus and is incorporated by reference into
this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
1 Registered service mark of INVESCO PLC.
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Meridian/INVESCO Global Sector Portfolio and the Fund ... 1
Management of the Fund ....................................... 5
Dividends and Other Distributions ............................ 7
Taxes ........................................................ 7
Purchase and Redemption of Shares ............................ 8
Valuation of Shares .......................................... 8
The Fund and Its Shares ...................................... 8
Performance Information ...................................... 9
General Information .......................................... 9
</TABLE>
i
<PAGE>
THE MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolio is a series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment
by the Separate Accounts. This Prospectus describes only the Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is growth of capital.
The Portfolio seeks to achieve this objective by following an asset
allocation strategy that shifts among a wide range of asset categories and
within them, market sectors. The Portfolio will invest in the following asset
categories: equity securities of domestic and foreign issuers, including
common stocks, preferred stocks, convertible securities and warrants; debt
securities of domestic and foreign issuers, including mortgage-related and
other asset-backed securities and securities rated below investment grade;
exchange-traded or over-the-counter real estate investment trusts (REITS);
equity securities of companies involved in the exploration, mining,
processing, or dealing or investing in gold ("gold stocks"); gold bullion;
and domestic money market instruments. Market sectors within the asset
categories include the industry, country or bond markets available for
investment. See "Certain Portfolio Policies and Techniques," below and "Risk
Factors," page 4 for a discussion of the additional risks associated with
investments in foreign securities, lower-rated debt securities, REITs, gold
stocks and gold bullion.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from those which a Policyholder deemed appropriate at the time of
investment.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in securities of issuers domiciled in at least three countries,
one of which may be the United States, although the Co-Sub-Advisers expect
the Portfolio's investments to be allocated among a larger number of
countries. The percentage of the Portfolio's assets invested in securities of
U.S. issuers normally will be higher than that invested in securities of
issuers domiciled in any other single country. However, it is possible that
at times the Portfolio may have 65% or more (but not more than 80%) of its
total assets invested in foreign securities.
The Portfolio is not required to maintain a portion of its assets in each
of the permitted asset categories. The Portfolio, however, under normal
circumstances, will maintain a minimum of 20% of its total assets in equity
securities and 10% in debt securities. The Portfolio may, however, invest up
to 100% of its total assets in equity securities and up to 70% in debt
securities. For temporary defensive purposes, during times of unusual market
conditions, the Portfolio may invest 100% of its assets in short-term
securities. (See Appendix B in the Statement of Additional Information for a
detailed description of these instruments.) The Portfolio will not invest
more than 20% of its total assets in gold stocks. The Portfolio will not
invest more than 25% of its total assets in the securities of any single
country, other than the United States, or in securities of issuers in any one
industry. In accordance with the requirements of current California insurance
regulations, the Portfolio will have no more than 20% of its net assets
invested in securities of issuers located in any one foreign country, but may
have an additional 5% of its net assets invested in securities of issuers
located in any one of the following countries: Australia, Canada, France,
Japan, the United Kingdom or West Germany. If California's insurance
regulations are changed at some future time to permit a larger percentage of
the Portfolio's net assets to be invested in a single foreign country, the
Portfolio may invest more of its net assets in a single foreign country, in
accordance with the Portfolio's investment objective and investment
restrictions. Meridian determines the allocation of the Portfolio's assets
among the asset categories described above based on proprietary quantitative
research.
After asset allocations and relative portfolio weightings of such
allocations have been designated by Meridian, INVESCO will select the
specific securities within each asset allocation category and market sector
therein in which the Portfolio will invest. See "Certain Portfolio Policies
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and Techniques," below.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES
The Portfolio's investment in stocks, bonds and cash securities may vary
from time to time, depending upon Meridian's assessment of business, economic
and market conditions. In periods of abnormal economic and market conditions,
as determined by Meridian, the Portfolio may depart from its basic investment
objective and assume a temporary defensive position, with up to 100% of its
assets invested in U.S. government and agency securities, investment grade
corporate bonds or cash securities such as domestic certificates of deposit
and bankers' acceptances, repurchase agreements and commercial paper. (See
Appendix B in the Statement of Additional Information for a description of
these securities.) The Portfolio reserves the right to hold equity, debt and
cash securities in whatever proportion is deemed desirable at any time for
defensive purposes. While the Portfolio is in a defensive position, the
opportunity to achieve capital growth will
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be limited; however, the ability to maintain a defensive position enables the
Portfolio to seek to avoid capital losses during market downturns. Under
normal market conditions, the Portfolio does not expect to have a substantial
portion of its assets invested in cash securities.
EQUITY SECURITIES. The Portfolio may invest in equity securities (common
stocks and, to a lesser degree, preferred stocks and securities convertible
into common stocks, such as rights, warrants and convertible debt
securities). In selecting the equity securities in which the Portfolio
invests, INVESCO attempts to identify companies that have demonstrated or, in
INVESCO's opinion, are likely to demonstrate in the future, strong earnings
growth relative to other companies in the same industry or country. The
dividend payment records of companies are also considered. Equity securities
may be issued by either established, well-capitalized companies or
newly-formed, small-cap companies, and may trade on regional or national
stock exchanges or in the over-the-counter market. The risks of investing in
small capitalization companies are discussed on page 5 under "Risk Factors -
Small Capitalization Companies."
DEBT SECURITIES. Consistent with its investment objective, the Portfolio
also may invest in debt securities (corporate bonds, commercial paper, debt
securities issued by the U.S. government, its agencies and instrumentalities,
or foreign governments, asset-backed securities and zero coupon bonds). The
Portfolio may invest no more than 15% of its total assets in debt securities
that are rated below BBB by Standard & Poor's or Baa by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are judged by INVESCO to be of
equivalent quality to debt securities having such ratings (commonly referred
to as "junk bonds"). In no event will the Portfolio ever invest in a debt
security rated below CCC by Standard & Poor's or Caa by Moody's. The risks of
investing in lower rated debt securities are discussed on page 4 under "Risk
Factors - Equity and Debt Securities."
The Portfolio may hold certain cash and cash equivalent securities as cash
reserves ("cash securities"), as described above.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible
securities. Convertible securities may include corporate notes or preferred
stock, but ordinarily are a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As
with all debt securities, the market value of convertible debt securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. 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. For additional information regarding
convertible securities, see the Statement of Additional Information.
FOREIGN SECURITIES. Consistent with its investment objective, the
Portfolio may invest in foreign securities. Foreign securities may also be
purchased by means of American Depositary Receipts ("ADRs"). ADRs that may be
purchased by the Portfolio are receipts, typically issued by a U.S. bank or
trust company, evidencing ownership of the underlying foreign equity
securities. ADRs are denominated in U.S. dollars and trade in the U.S.
securities markets. ADRs may be issued in sponsored or unsponsored programs.
In sponsored programs, the issuer makes arrangements to have its securities
traded in the form of ADRs; in unsponsored programs, the issuer may not be
directly involved in the creation of the program. Investments in foreign
securities involve certain risks that are not associated with investments in
domestic issuers. These risks are discussed on page 4 under "Risk Factors."
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. In order to hedge its
portfolio, the Portfolio may purchase and write options on securities
(including index options and options on foreign securities), and may invest
in futures contracts for the purchase or sale of debt securities and
instruments based on financial indices (collectively, "futures contracts"),
options on futures contracts and interest rate swaps and swap-related
products. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. These
practices and securities and their risks are discussed on page 5 under "Risk
Factors" and in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY CONTRACTS. The Portfolio may enter into contracts
to purchase or sell foreign currencies at a future date ("forward contracts")
as a hedge against fluctuations in foreign exchange rates pending the
settlement of transactions in foreign securities or during the time the
Portfolio holds foreign securities. A forward contract, which is also
included in the types of instruments commonly known as derivatives, is an
agreement between contracting parties to exchange an amount of currency at
some future time at an agreed upon rate. The Portfolio will not enter into a
forward contract for a term of more than one year or for purposes of
speculation. Investors should be aware that hedging against a decline in the
value of a currency in the foregoing manner does not eliminate fluctuations
in the prices of portfolio securities or prevent losses if the prices of such
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securities decline. Furthermore, such hedging transactions preclude the
opportunity for gain if the value of the hedging currency should rise.
Forward contracts may, from time to time, be considered illiquid, in which
case they would be subject to the Portfolio's limitation on investing in
illiquid securities, discussed on page 3. For additional information
regarding forward contracts, see the Statement of Additional Information.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES. The Portfolio may make
commitments to purchase or sell equity or debt securities on a when-issued or
delayed delivery basis (i.e., securities may be purchased or sold by the
Portfolio with
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settlement taking place in the future, often a month or more later). The
payment obligation and, in the case of debt securities, the interest rate
that will be received on the securities, generally are fixed at the time the
Portfolio enters into the commitment. During the period between purchase and
settlement, no payment is made by the Portfolio and no interest accrues to
the Portfolio. At the time of settlement, the market value of the security
may be more or less than the purchase price, and the Portfolio bears the risk
of such market value fluctuations. The Portfolio maintains in a segregated
account cash, U.S. government securities, or other high-grade debt
obligations readily convertible into cash having an aggregate value at least
equal to the amount of such purchase commitments.
REPURCHASE AGREEMENTS. Investments in short-term securities may include
repurchase agreements. The Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio.
These agreements are entered into with member banks of the Federal Reserve
System, registered broker-dealers, and registered government securities
dealers, which are deemed creditworthy. A repurchase agreement is a means of
investing monies for a short period. In a repurchase agreement, which may be
considered a loan under the 1940 Act, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. government or an agency
thereof, a bankers' acceptance, or a certificate of deposit) subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). In the event that the original seller defaults on its
obligation to repurchase the security, the Portfolio could incur costs or
delays in seeking to sell such a security. To minimize risk, the securities
underlying each repurchase agreement will be maintained with the Portfolio's
custodian in an amount at least equal to the repurchase price under the
agreement (including accrued interest), and such agreements will be effected
only with parties that meet certain creditworthiness standards established by
the Fund's Board of Directors. The Portfolio will not enter into a repurchase
agreement maturing in more than seven days if as a result more than 15% of
its net assets would be invested in such repurchase agreements and other
illiquid securities. The Portfolio has not adopted any limit on the amount of
its net assets that may be invested in repurchase agreements maturing in
seven days or less.
ILLIQUID AND RULE 144A SECURITIES. The Portfolio is authorized to invest
in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions on
resale. However, the Portfolio will not purchase any such security if the
purchase would cause the Portfolio to invest more than 15% of its net assets
in illiquid securities. Repurchase agreements maturing in more than seven
days will be considered as illiquid for purposes of this restriction.
Investments in illiquid securities involve certain risks to the extent that a
Portfolio may be unable to dispose of such securities at the time desired or
at a reasonable price. In addition, in order to resell a restricted security,
the Portfolio might have to bear the expense and incur the delays associated
with effecting a registration required in order to qualify for resale.
Certain restricted securities that are not registered for sale to the
general public, but that can be resold to dealers or institutional investors
("Rule 144A Securities"), may be purchased without regard to the foregoing
limitation if a liquid institutional trading market exists. The liquidity of
the Portfolio's investments in Rule 144A Securities could be impaired if
dealers or institutional investors become uninterested in purchasing these
securities. The Fund's Board of Directors has delegated to the
Co-Sub-Advisers the authority to determine the liquidity of Rule 144A
Securities pursuant to guidelines approved by the Board. For more information
concerning Rule 144A Securities, see the Statement of Additional Information.
GOLD STOCKS AND GOLD BULLION. Due to monetary and political policies on a
national and international level, the price of gold is subject to substantial
fluctuations, which will have an effect on the profitability of issuers of
gold stocks and the market value of their securities. Changes in the
political or economic climate for the two largest producers -South Africa and
the Commonwealth of Independent States (the former Soviet Union) - may have a
direct impact on the price of gold worldwide. The Portfolio's investments in
gold bullion will earn no income return. Appreciation in the market price of
gold is the sole manner in which the Portfolio would be able to realize gains
on such investments. Furthermore, the Portfolio may encounter storage and
transaction costs in connection with their ownership of gold bullion that may
be higher than those associated with the purchase, holding and disposition of
more traditional types of investments. In order to help reduce these risks,
the Portfolio will not invest more than 10% of its total assets in gold
bullion.
REAL ESTATE SECURITIES. Although the Portfolio will not invest in real
estate directly, it may invest in exchange-traded or over-the-counter equity
securities of real estate investment trusts ("REITs") and other real estate
industry companies. Therefore, the Portfolio may be subject to certain risks
associated with the direct ownership of real estate. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks
related to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
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costs resulting from the clean-up of, and liability to third parties for
damages resulting from, environmental problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates. (See page 5 under "Risk Factors" for a discussion of risks of
investing in REITs.)
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and
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derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Hybrid REITs
invest their assets in both real property and mortgages. REITs are not taxed
on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
LENDING AND BORROWING
The Portfolio is authorized to lend its securities to qualified brokers,
dealers, banks, or other financial institutions. Loans of securities will be
collateralized by cash, letters of credit, or securities issued or guaranteed
by the U.S. government or its agencies equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. The Portfolio
monitors the creditworthiness of borrowers in order to minimize such risks.
The Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. The Portfolio will not lend any
security if, as a result of such loan, the aggregate value of securities then
on loan would exceed 33 1/3 % of the Portfolio's total assets (taken at
market value).
The Portfolio may only borrow money from banks for temporary or emergency
purposes (not for leverage or investment) in an amount not exceeding 33 1/3 %
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Reverse repurchase agreements are
deemed to be borrowings for purposes of this limitation. In accordance with
the requirements of current California insurance regulations, the Portfolio
will restrict borrowings to no more than 10% of total assets, except that the
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 33 1/3 % of total assets, the Portfolio may
conduct borrowings in accordance with such revised limits.
RISK FACTORS
EQUITY AND DEBT SECURITIES. There can be no assurance that the Portfolio
will achieve its investment objective. The Portfolio's investments in common
stocks and other equity securities may, of course, decline in value.
The Portfolio's investments in debt securities generally are subject to
both credit risk and market risk. Credit risk relates to the ability of the
issuer to meet interest or principal payments, or both, as they come due.
Market risk relates to the fact that the market values of the debt securities
in which the Portfolio invests generally will be affected by changes in the
level of interest rates. An increase in interest rates will tend to reduce
the market values of debt securities, whereas a decline in interest rates
will tend to increase their values.
Although INVESCO limits the Portfolio's investments in debt securities to
securities it believes are not highly speculative, both kinds of risk are
increased by investing in debt securities rated below the top three grades by
Standard & Poor's or Moody's or, if unrated, securities determined by INVESCO
to be of equivalent quality. Although bonds in the lowest investment grade
debt category (those rated BBB by Standard & Poor's or Baa by Moody's) are
regarded as having adequate capability to pay principal and interest, they
have speculative characteristics. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.
Lower rated bonds by Moody's (categories Ba, B, Caa) are of poorer quality
and also have speculative characteristics. Bonds rated Caa may be in default
or there may be present elements of danger with respect to principal or
interest. Lower rated bonds by Standard & Poor's (categories BB, B, CCC)
include those which are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; BB indicates the lowest degree of speculation
and CCC a high degree of speculation. While such bonds likely will have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. For a specific
description of each corporate bond rating category, see Appendix A to the
Statement of Additional Information.
When the Portfolio invests in debt securities, investment income may
increase and may constitute a larger portion of the return on the Portfolio's
investments, and the Portfolio may not participate in stock market advances
or declines to the extent that it would if it were fully invested in equity
securities.
FOREIGN SECURITIES. For U.S. investors, the returns on foreign securities
are influenced not only by the returns on the foreign investments themselves,
but also by currency risk (i.e., changes in the value of the currencies in
which the securities are denominated relative to the U.S. dollar). In a
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period when the U.S. dollar generally rises against foreign currencies, the
returns on foreign securities for a U.S. investor are diminished. By
contrast, in a period when the U.S. dollar generally declines, the returns on
foreign securities generally are enhanced.
Other risks and considerations of investing in foreign securities include
the following: differences in accounting, auditing and financial reporting
standards which may result in less publicly available information than is
generally available with respect to U.S. issuers; generally higher commission
rates on foreign portfolio transactions and longer settlement periods; higher
custodial expenses; the smaller trading volumes and generally lower liquidity
of foreign stock markets, which may result in greater price volatility;
foreign withholding taxes payable on the Portfolio's foreign securities,
which may reduce dividend income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in investment or
exchange control regulations; less
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stringent or different regulations than those applicable to U.S. issuers;
political instability which could affect U.S. investment in foreign
countries; potential restrictions on the flow of international capital; and
the possibility of the Portfolio experiencing difficulties in pursuing legal
remedies and collecting judgments. The Portfolio's investments in foreign
securities may include investments in developing countries. Many of these
securities are speculative and their prices may be more volatile than those
of securities issued by companies located in more developed countries.
ADRs are subject to certain of the same risks as direct investments in
foreign securities, including the risk that changes in the value of the
currency in which the security underlying an ADR is denominated relative to
the U.S. dollar may adversely affect the value of the ADR. The regulatory
requirements with respect to ADRs that are issued in sponsored and
unsponsored programs are generally similar but the issuers of unsponsored
ADRs are not obligated to disclose material information in the United States
and, therefore, such information may not be reflected in the market value of
the ADRs.
SMALL CAPITALIZATION COMPANIES. The Portfolio may invest in equity
securities issued by small-cap companies. For these purposes, the
Co-Sub-Advisers consider small-cap companies to be companies with market
capitalizations of up to $1 billion. The Portfolio's investments in small
capitalization stocks may include companies that have limited operating
histories, product lines, and financial and managerial resources. These
companies may be subject to intense competition from larger companies, and
their stocks may be subject to more abrupt or erratic market movements than
the stocks of larger, more established companies. Due to these and other
factors, small cap companies may suffer significant losses as well as realize
substantial growth.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. The use of futures,
options, forward contracts and swaps exposes the Portfolio to additional
investment risks and transaction costs. If the Co-Sub-Advisers seek to
protect the Portfolio against potential adverse movements in the securities,
foreign currency or interest rate markets using these instruments, and such
markets do not move in a direction adverse to the Portfolio, the Portfolio
could be left in a less favorable position than if such strategies had not
been used. Risks inherent in the use of futures, options, forward contracts
and swaps include (1) the risk that interest rates, securities prices and
currency markets will not move in the directions anticipated; (2) imperfect
correlation between the prices of futures, options and forward contracts and
movements in the prices of the securities or currencies hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; and (5) the possible need
to defer closing out certain hedged positions to avoid adverse tax
consequences. Further information on the use of futures, options, forward
foreign currency contracts and swaps and swap-related products, and the
associated risks, is contained in the Statement of Additional Information.
REAL ESTATE INVESTMENT TRUSTS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified, and are subject to the risks of
financing projects. REITs are subject to 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. REITs
(especially mortgage REITs) are also subject to interest rate risk. (i.e., as
interest rates rise, the value of the REIT may decline).
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover. Although the
Portfolio does not trade for short-term profits, securities may be sold
without regard to the time they have been held in the Portfolio when, in the
opinion of the Co-Sub-Advisers, investment considerations warrant such
action. In addition, portfolio turnover rates may increase as a result of
large amounts of purchases or redemptions of Portfolio shares due to
economic, market or other factors that are not within the control of the
Co-Sub-Advisers. As a result, under certain market conditions, the portfolio
turnover rate may exceed 100%, and may be higher than that of other
investment companies seeking growth of capital. Increased portfolio turnover
would cause the Portfolio to incur greater brokerage costs than would
otherwise be the case.
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MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and Meridian and INVESCO as Co-Sub-Advisers, the Fund requires no
employees other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of WRL and receive
no compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
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THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 1.10% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and organization of the Portfolio, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post- effective amendments, and any registration or
qualification under state securities laws required in connection with the
Portfolio's offering of shares. The Investment Adviser will also pay all
reasonable compensation and related expenses of the officers and Directors of
the Fund, except for such Directors who are not interested persons (as that
term is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser.
THE CO-SUB-ADVISERS
Meridian Investment Management Corporation ("Meridian"), located at 12835
East Arapahoe Road, Tower II, 7th Floor, Englewood Colorado 80112, serves as
a Co-Sub-Adviser to the Portfolio. Meridian is a wholly-owned subsidiary of
Meridian Management & Research Corporation ("MM&R"). Michael J. Hart and Dr.
Craig T. Callahan each own 50% of MM&R. Meridian provides investment
management and related services to other mutual fund portfolios and
individual, corporate, charitable and retirement accounts. Meridian manages
seven mutual fund wrap-fee programs which, as of March 1, 1996, had aggregate
assets of approximately $500 million.
Meridian's Investment Committee determines guidelines for asset, country
and industry weightings based on Meridian's proprietary quantitative methods.
The Committee is comprised of Dr. Craig T. Callahan, Michael J. Hart, Patrick
S. Boyle and Bryan M. Ritz.
Bryan M. Ritz, C.F.A., serves as Portfolio Manager of the Portfolio. Mr.
Ritz is also a Portfolio Manager for Meridian's Premier private accounts, and
previously served as a research analyst for Meridian beginning in 1992. Prior
to entering the investment management industry, Mr. Ritz was a research and
teaching assistant in the Finance Department at the University of Denver. His
educational background is B.S.B.A., M.B.A., University of Denver. Mr. Ritz is
a Chartered Financial Analyst.
Meridian provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Portfolio. Meridian also provides
quantitative investment research and portfolio management advice to the
Investment Adviser for the Portfolio. Subject to review and supervision by
the Investment Adviser and the Board of Directors of the Fund, Meridian is
responsible for making decisions and recommendations as to asset allocation
and industry and country selections for the Portfolio. Meridian bears all of
its expenses in connection with the performance of its services, such as
compensating and furnishing office space for its officers and employees
connected with the investment and economic research and investment management
of the Portfolio.
INVESCO Global Asset Management Limited, located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Portfolio. INVESCO is an indirect wholly-owned subsidiary of INVESCO PLC, a
global firm that managed approximately $84 billion as of December 31, 1995.
INVESCO PLC is headquartered in London, with money managers located in
Europe, North America and the Far East.
INVESCO provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Portfolio. Subject to review and
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supervision by the Investment Adviser and the Board of Directors of the Fund,
INVESCO is responsible for actual security selection for the Portfolio
(within the constraints of Meridian's asset, industry, and country
selections). INVESCO's services are provided by a team of portfolio managers.
Individual industry and country specialists are responsible for managing
security selection for their assigned shares of the asset, industry and
country allocations established by Meridian. In performing these services,
INVESCO is authorized to draw upon the resources of certain
INVESCO-affiliated companies and their employees, provided that INVESCO
supervises and remains fully responsible for all such services. Pursuant to
this authority, INVESCO has entered into agreements with INVESCO Asset
Management Limited ("IAML"), 11 Devonshire Square, London, EC2M 4YR England,
for assistance in managing the
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Portfolios' investments in foreign securities, and with INVESCO Trust Company
("ITC"), 7800 East Union Avenue, Denver, Colorado 80237, for assistance in
managing the Portfolio's investments in U.S. securities. IAML is an indirect
wholly-owned subsidiary of INVESCO PLC and a registered investment adviser.
IAML provided investment advisory services to five U.S. mutual funds
distributed by INVESCO affiliates, as well as a number of offshore funds, as
of December 31, 1995. ITC is an indirect wholly-owned subsidiary of INVESCO
PLC and a registered investment adviser. ITC provided investment advisory or
sub-advisory services to 41 investment portfolios as of December 31, 1995.
For its services, Meridian receives monthly compensation from the
Investment Adviser, as a percentage of the Portfolio's average daily net
assets, at an annual rate of 0.30% of the first $100 million of assets and
0.35% of assets in excess of $100 million. For its services, INVESCO receives
monthly compensation from the Investment Adviser, as a percentage of the
Portfolio's average daily net assets, at an annual rate of 0.40% of the first
$100 million of assets and 0.35% of assets in excess of $100 million. Neither
IAML nor ITC receives any compensation from the Portfolio; IAML and ITC are
compensated for their services by INVESCO. With respect to the Global Sector
Portfolio, INVESCO pays 50% of the compensation it receives from the
Investment Adviser with respect to the Global Sector Portfolio to IAML for
investment advisory services, and 40% to ITC for investment advisory services
and administrative assistance. IAML and ITC each pay their own expenses
relating to personnel, office space and equipment.
INVESCO is also responsible for selecting the broker-dealers who execute
the portfolio transactions for the Portfolio. INVESCO is authorized to
consider sales of the Policies or Annuity Contracts described in the
accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. In placing portfolio
business with all dealers, INVESCO seeks best execution of each transaction
and all brokerage placement must be consistent with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof whch may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
7
<PAGE>
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of each of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
7
<PAGE>
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at its net asset value next
determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Investment Adviser and Co-Sub-Advisers under
the supervision of the Fund's Board of Directors. Money market instruments
maturing in 60 days or less are valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to separate accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for the Portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
8
<PAGE>
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and, in such event, holders of the remaining shares would not be able to
elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, the Life Companies will vote the Fund's
shares in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from Policyholders having voting interests in the
corresponding sub-accounts of
8
<PAGE>
the Separate Accounts. Except as required by the 1940 Act, the Fund does not
hold regular or special shareholder meetings. If the 1940 Act or any
regulation thereunder should be amended or if present interpretation thereof
should change, and as a result it is determined that the Life Companies are
permitted to vote Fund shares in their own right, they may elect to do so.
The rights of Policyholders are described in more detail in the prospectuses
or disclosure documents for the Policies and the Annuity Contracts,
respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for the corresponding
Sub-accounts of the Separate Account in advertisements, sales literature or
reports to Policyholders or to prospective investors. Total return and yield
quotations reflect only the performance of a hypothetical investment in the
Portfolio during the particular time period shown as calculated based on the
historical performance of the Portfolio during that period. Such quotations
do not in any way indicate or project future performance. Quotations of total
return and yield regarding the Portfolio does not reflect charges and
deductions against the Separate Accounts or charges and deductions against
the Policies or the Annuity Contracts. Where relevant, the prospectuses for
the Policies and the Annuity Contracts contain additional performance
information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began Operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fee and Portfolio expenses and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance, and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, the
Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
9
<PAGE>
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
9
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
CO-SUB-ADVISERS:
Meridian Investment Management Corporation
12835 East Arapahoe Road
Tower II, 7th Floor
Englewood, CO 80112
INVESCO Global Asset Management Limited
Rosebank, 12 Bermudiana Road
Hamilton, Bermuda HM11
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00116-05/96
10
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Meridian/INVESCO Global Sector Portfolio of the WRL Series Fund, Inc. (the
"Fund"). A copy of the Prospectus may be obtained from the Fund by writing
the Fund at 201 Highland Avenue, Largo, Florida 34640 or by calling the Fund
at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Co-Sub-Advisers
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00117-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 5
Lending of Portfolio Securities 3 4
Convertible Securities 3 2
Mortgage-Backed Securities 4 1
Asset-Backed Securities 4 1
Zero Coupon Bonds 4 2
Restricted/144A Securities 4 3
Futures, Options on Futures and Options on
Securities 5 2
Forward Foreign Currency Contracts 9 2
Swaps and Swap-Related Products 9 2
Repurchase Agreements 10 3
Foreign Exchange Transactions 10 4
Management of the Fund 11 5
Directors and Officers 11 5
The Investment Adviser 12 5
The Co-Sub-Advisers 13 6
Portfolio Transactions and Brokerage 14 7
Portfolio Turnover 14 5
Placement of Portfolio Brokerage 15 7
Purchase and Redemption of Shares 16 8
Determination of Offering Price 16 8
Net Asset Valuation 16 8
Calculation of Performance Related Information 17 8
Total Return 17 9
Yield Quotations 17 9
Taxes 17 7
Capital Stock of the Fund 19 8
Registration Statement 19 N/A
Financial Statements 20 9
Appendix A-Description of
Selected Corporate Bond Ratings A-1 2
Appendix B-Description of
Short-Term Securities B-1 2
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Meridian/INVESCO Global Sector Portfolio
(the "Portfolio") of the Fund is described in the Portfolio's Prospectus.
Shares of the Portfolio are sold only to the separate accounts of Western
Reserve Life Assurance Co. of Ohio ("WRL") and to separate accounts of
certain of its affiliated life insurance companies (collectively, the
"Separate Accounts") to fund the benefits under certain variable life
insurance policies (the "Policies") and variable annuity contracts (the
"Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
("Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to seventy-five percent (75%) of the Portfolio's total
assets, purchase the securities of any one issuer, except cash items and
"government securities" as defined under the 1940 Act, if the purchase would
cause the Portfolio to have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more than 10% of the
outstanding voting securities of such issuer.
2. Borrow money from banks or issue senior securities (as defined in the
1940 Act), except that the Portfolio may borrow money from banks for
temporary or emergency purposes (not for leveraging or investment) and may
enter into reverse repurchase agreements in an aggregate amount not exceeding
33 1/3 % of the value of its total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that come to exceed
33 1/3 % of the value of the Portfolio's total assets by reason of a decline
in net assets will be reduced within three business days to the extent
necessary to comply with the 33 1/3 % limitation. This restriction shall not
prohibit deposits of assets to margin or guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.
3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses.
4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities).
5. Lend any security or make any other loan if, as a result, more than 33
1/3 % of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.
7. Invest more than 25% of the value of its total assets in any particular
industry (other than government securities).
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<PAGE>
With respect to restriction no. 2, above, in accordance with the
requirements of current California insurance regulations, the Portfolio will
restrict borrowings to no more than 10% of total assets, except that the
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 33 1/3 % of total assets, the Portfolio may
conduct borrowings in accordance with such revised limits.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio will not (i) enter into any futures contracts or options
on futures contracts if immediately thereafter the aggregate margin deposits
on all outstanding futures contracts positions held by the Portfolio and
premiums paid on outstanding options on futures contracts, after taking into
account unrealized profits and losses, would exceed 5% of the market value of
the total assets of the Portfolio, or (ii) enter into any futures contracts
if the aggregate net amount of the Portfolio's commitments under outstanding
futures contracts positions of the Portfolio would exceed the market value of
the total assets of the Portfolio.
(B) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short without the payment of any additional consideration therefor, and
provided that transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short.
(C) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits in connection with transactions in options, futures, swaps and
forward contracts shall not be deemed to constitute purchasing securities on
margin.
(D) The Portfolio may not (i) purchase securities of closed-end investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds, funds that are the only practical means, or one of the
few practical means, of investing in a particular emerging country, or to
securities received as dividends, through offers of exchange, or as a result
of a reorganization, consolidation, or merger.
(E) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed
in a segregated account in connection with such contracts.
(F) The Portfolio may not purchase securities of any issuer with a record
of less than three years' continuous operation, including that of
predecessors (other than U.S. government agencies and instrumentalities or
instruments guaranteed by an entity with a record of more than three years'
continuous operation, including that of predecessors), if such purchase would
cause the Portfolio's investments in all such issuers to exceed 5% of the
Portfolio's total assets taken at market value at the time of such purchase.
(G) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(H) The Portfolio may not purchase any security or enter into a repurchase
agreement if, as a result, more than 15% of its net assets would be invested
in any combination of: (i) repurchase agreements not entitling the holder to
payment of principal and interest within seven days, and (ii) securities that
are illiquid by virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Board of Directors, or the
Portfolio's Co-Sub-Advisers acting pursuant to
2
<PAGE>
authority delegated by the Board of Directors, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, or any successor to such rule.
According to the determination, such securities would not be subject to the
foregoing limitation.
(I) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.
With respect to investment restriction (I) above, the Fund's Board of
Directors has delegated to the Co-Sub-Advisers the authority to determine
that a liquid market exists for securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended (the "1993 Act"), or
any successor to such rule and that such securities are not subject to such
restriction. Under guidelines established by the Board of Directors, the
Co-Sub-Advisers will consider the following factors, among others, in making
this determination: (1) the frequency of trades and quotes for the security;
(2) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
security and the nature of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer).
Except as otherwise required by law, if a percentage limitation is
complied with at the time of the investment, a subsequent change in the
percentage resulting from any change in value or of the Portfolio's net
assets will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowing, lending, and the
use of options, futures, and other derivative instruments. In addition, such
laws and regulations may require the Portfolio's investments in foreign
securities to meet additional diversification and other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to investment restriction 5 above, the Portfolio, from time to
time, may lend its securities to qualified brokers, dealers, banks, or other
financial institutions. This practice permits the Portfolio to earn income,
which, in turn, can be invested in additional securities of the type
described below in pursuit of the Portfolio's investment objective. Loans of
securities by the Portfolio will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S. government or its
agencies equal to at least 100% of the current market value of the loaned
securities, determined on a daily basis. Lending securities involves certain
risks, the most significant of which is the risk that a borrower may fail to
return the portfolio security. The Portfolio monitors the creditworthiness of
borrowers in order to minimize such risks. The Portfolio will not lend any
security if, as a result of such loan, the aggregate value of securities then
on loan would exceed 33 1/3 % of the Portfolio's total assets (taken at
market value). While voting rights may pass with the loaned securities, if a
material event (e.g., proposed merger, sale of assets, or liquidation) is to
occur affecting an investment on loan, the loan must be called and the
securities voted. Loans of securities made by the Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange and the requirements of the 1940 Act and the rules of the
Securities and Exchange Commission ("SEC") thereunder.
CONVERTIBLE SECURITIES
The Portfolio may invest in convertible securities. Convertible securities
may include corporate notes or preferred stock, but ordinarily are a
long-term debt obligation of the issuer convertible 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
3
<PAGE>
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. In evaluating investment in a convertible security, primary
emphasis will be given to the attractiveness of the underlying common stock.
The convertible debt securities in which the Portfolio may invest are subject
to the same rating criteria as the Portfolio's investment in non-convertible
debt securities.
MORTGAGE-BACKED SECURITIES
The Portfolio may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
institutions such as banks, insurance companies, and savings and loans. Some
of these securities, such as Government National Mortgage Association
("GNMA") certificates, are backed by the full faith and credit of the U.S.
Treasury while others, such as Federal Home Loan Mortgage Corporation
("Freddie Mac") certificates, are not. The Portfolio currently does not
intend to invest more than 5% of their respective net assets in
mortgage-backed securities.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. The value of these securities also may change because of
changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
ASSET-BACKED SECURITIES
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may
be supported by letters of credit or other credit enhancements. The
underlying assets (e.g., loans) are subject to prepayments which shorten the
securities' weighted average life and may lower their returns. If the credit
support or enhancement is exhausted, losses or delays in payment may result
if the required payments of principal and interest are not made. The value of
these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement. The Portfolio currently does not intend to invest
more than 5% of their respective net assets in asset-backed securities.
ZERO COUPON BONDS
The Portfolio may invest in zero coupon bonds or "strips." Zero coupon
bonds do not make regular interest payments; rather, they are sold at a
discount from face value. Principal and accreted discount (representing
interest accrued but not paid) are paid at maturity. "Strips" are debt
securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value
of "strips" and zero coupon bonds generally fluctuates in response to changes
in interest rates to a greater degree than interest-paying securities of
comparable term and quality. In order for the Portfolio to maintain its
qualification as a regulated investment company, it may be required to
distribute income recognized on zero coupon bonds or "strips" even though no
cash may be paid to the Portfolio until the maturity or call date of the
bond, and any such distribution could reduce the amount of cash available for
investment by the Portfolio. The Portfolio currently does not intend to
invest more than 5% of its respective net assets in zero coupon bonds or
"strips."
RESTRICTED/144A SECURITIES
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act. Institutional
investors generally will not seek to sell these instruments to
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the general public, but instead will often depend on an efficient
institutional market in which such unregistered securities can readily be
resold or on an issuer's ability to honor a demand for repayment. Therefore,
the fact that there are contractual or legal restrictions on resale to the
general public or certain institutions is not dispositive of the liquidity of
such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities that might develop as a result of Rule 144A could provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A-eligible security held by the Portfolio could,
however, adversely affect the marketability of such portfolio security and
the Portfolio might be unable to dispose of such security promptly or at
reasonable prices.
FUTURES, OPTIONS ON FUTURES AND OPTIONS ON SECURITIES
As discussed in the section entitled "The Meridian/INVESCO Global Sector
Portfolio and the Fund" in the Prospectus, the Portfolio may enter into
futures contracts for hedging or other non- speculative purposes, and
purchase and sell ("write") options to buy or sell futures contracts and
other securities. These instruments are sometimes referred to as
"derivatives." The Portfolio will comply with and adhere to all limitations
in the manner and extent to which they effect transactions in futures and
options on such futures currently imposed by the rules and policy guidelines
of the Commodity Futures Trading Commission (the "CFTC") as conditions for
exemption of a mutual fund, or investment advisers thereto, from registration
as a commodity pool operator. Under those restrictions, the Portfolios will
not, as to any positions, whether long, short or a combination thereof, enter
into futures and options thereon for which the aggregate initial margins and
premiums exceed 5% of the fair market value of the Portfolio's total assets
after taking into account unrealized profits and losses on options it has
entered into.
In the case of an option that is "in-the-money" (as defined in the
Commodity Exchange Act (the "CEA")), the in-the-money amount may be excluded
in computing the 5% limitation described above. (In general, a call option on
a future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if
the value of the future that is the subject of the put is exceeded by the
strike price of the put.) As to long positions which are used as part of the
Portfolio's strategies and are incidental to their activities in the
underlying cash market, the "underlying commodity value" of the Portfolio's
futures and options thereon must not exceed the sum of (i) cash set aside in
an identifiable manner, or short-term U.S. debt obligations or other dollar-
denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in
30 days; and (iii) accrued profits held by the futures commission merchant.
The "underlying commodity value" of a future is computed by multiplying the
size of the future by the daily settlement price of the future. For an option
on a future, that value is the underlying commodity value of the future
underlying the option.
A futures contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a futures contract
provides a specified settlement date on which, for the majority of interest
rate and foreign currency futures contracts, the fixed income securities or
currency underlying the contract are delivered by the seller and paid for by
the purchaser, or on which, for stock index futures contracts and certain
interest rate and foreign currency futures contracts, the difference between
the price at which the contract was entered into and the contract's closing
value is settled between the purchaser and seller in cash. Futures contracts
differ from options in that they are bilateral agreements, with both the
purchaser and the seller equally obligated to complete the transaction. In
addition, futures contracts call for settlement only on the expiration date,
and cannot be "exercised" at any other time during their term.
The purchase or sale of a futures contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price
is paid or received. Instead, an amount of cash or
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cash equivalent, which varies but may be as low as 5% or less of the value of
the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or instrument
underlying the futures contract fluctuates, making positions in the futures
contract more or less valuable. This process is known as "marking-to-market."
Initial margin is in the nature of a performance bond or good faith
deposit on the contract. However, because losses on open contracts are
required to be reflected in cash in the form of variation margin payments,
the Portfolio may be required to make additional payments during the term of
the contracts to its broker. Such payments would be required, for example,
when, during the term of an interest rate futures contract purchased by the
Portfolio, there is a general increase in interest rates, thereby making the
Portfolio's portfolio securities less valuable. In all instances involving
the purchase of financial futures contracts by the Portfolio, an amount of
cash, together with such other securities as permitted by applicable
regulatory authorities to be utilized for such purpose at least equal to the
market value of the futures contracts, will be deposited in a segregated
account with the Portfolio's custodian to collateralize the position. At any
time prior to the expiration of a futures contract, the Portfolio may elect
to close its position by taking an opposite position that effectively
operates to terminate the Portfolio's position in the futures contract.
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the CFTC for the trading of such contract,
and only through a registered futures commission merchant which is a member
of such a contract market. A commission must be paid on each completed
purchase and sale transaction. The contract market clearing house guarantees
the performance of each party to a futures contract, by in effect taking the
opposite side of such contract. At any time prior to the expiration of a
futures contract, a trader may elect to close out its position by taking an
opposite position on the contract market on which the position was entered
into, subject to the availability of a secondary market, which will operate
to terminate the initial position. At that time, a final determination of
variation margin is made and any loss experienced by the trader is required
to be paid to the contract market clearing house while any profit due to the
trader must be delivered to it.
When futures are purchased to hedge against a possible increase in the
price of a security before the Portfolio is able in an orderly fashion to
invest in the security, it is possible that the market may decline instead.
If the Portfolio, as a result, concluded not to make the planned investment
at that time because of concern as to possible further market decline or for
other reasons, the Portfolio would realize a loss on the futures contract
that is not offset by a reduction in the price of securities purchased.
In addition to the possibility of an imperfect correlation or no
correlation at all between movements in the futures and the portion of the
Portfolio hedged, the prices of futures may not correlate perfectly with
movements in interest rates or exchange rates due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship between
interest rates or exchange rates and the value of a future. Moreover, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market and may therefore cause increased
participation by speculators in the futures market. Such increased
participation also may cause temporary price distortions. Due to the
possibility of price distortion in the futures market and because of the
imperfect correlation between movements in interest rates or exchange rates
and movements in the prices of futures contacts, the value of futures
contracts as a hedging device may be reduced.
In addition, if the Portfolio has insufficient available cash, it may at
times have to sell securities to meet variation margin requirements. Such
sales may have to be effected at a time when it may be disadvantageous to do
so.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified
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pass-through mortgage-backed securities, U.S. Treasury Bills, bank
certificates of deposit and commercial paper. In addition, interest rate
futures contracts include contracts on indices of municipal securities.
Foreign currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, West German mark and on
Eurodollar deposits.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts solely for bona fide hedging purposes or for other
non-speculative purposes within the meaning and intent of the applicable
provisions of the CEA. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than
ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, when the Portfolio is not fully invested it
may buy a call option on a futures contract to hedge against a market
advance.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price to a stated expiration
date. Upon exercise of the option by the holder, the contract market clearing
house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position, in
the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
futures contracts, such as payment of variation margin deposits. In addition,
the writer of an option on a futures contract, unlike the holder, is subject
to initial and variation margin requirements on the option position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium, which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option the Portfolio has written is exercised, the Portfolio will incur a
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between changes in the value of its
securities and changes in the value of the futures positions, the Portfolio's
losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, the Portfolio may buy a put option on a futures contract to
hedge against the risk of falling prices.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series. (i.e., the
same exercise price and expiration date) as the option previously purchased
or sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of
an option, the exchange or contract market clearing house
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assigns exercise notices on a random basis to those of its members which have
written options of the same series and with the same expiration date. A
brokerage firm receiving such notices then assigns them on a random basis to
those of its customers which have written options of the same series and
expiration date. A writer therefore has no control over whether an option
will be exercised against it, nor over the time of such exercise.
Options on Securities. An option on a security provides the purchaser, or
"holder," with the right, but not the obligation, to purchase, in the case of
a "call" option, or sell, in the case of a "put" option, the security or
securities underlying the option, for a fixed exercise price up to a stated
expiration date. The holder pays a non-refundable purchase price for the
option, known as the "premium." The maximum amount of risk the purchaser of
the option assumes is equal to the premium plus related transaction costs,
although the entire amount may be lost. The risk of the seller, or "writer,"
however, is potentially unlimited, unless the option is "covered," which is
generally accomplished through the writer's ownership of the underlying
security, in the case of a call option, or the writer's segregation of an
amount of cash or securities equal to the exercise price, in the case of a
put option. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option.
Options on securities which have been purchased or written may be closed out
prior to exercise or expiration by entering into an offsetting transaction on
the exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which
are regulated by the SEC. The Options Clearing Corporation ("OCC") guarantees
the performance of each party to an exchange-traded option, by in effect
taking the opposite side of each such option. A holder or writer may engage
in transactions in exchange-traded options on securities and options on
indices of securities only through a registered broker/dealer which is a
member of the exchange on which the option is traded.
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same
series. Although the Portfolio generally will purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option at any particular time. In such event it might not be
possible to effect closing transactions in a particular option with the
result that the Portfolio would have to exercise the option in order to
realize any profit. This would result in the Portfolio incurring brokerage
commissions upon the disposition of underlying securities acquired through
the exercise of a call option or upon the purchase of underlying securities
upon the exercise of a put option. If the Portfolio, as a covered call option
writer, is unable to effect a closing purchase transaction in a secondary
market, unless the Portfolio is required to deliver the securities pursuant
to the assignment of an exercise notice, it will not be able to sell the
underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions, or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not
at all times be adequate to handle current trading volume; or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or particular
class or series of options) in which event the secondary market on that
exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange which had been
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issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at a particular time, render certain of the facilities of
any of the clearing corporations inadequate and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. However, the OCC, based on forecasts
provided by the U.S. exchanges, believes that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and such
exchanges have advised such clearing corporation that they believe their
facilities will also be adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter ("OTC")
through financial institutions dealing in such options as well as the
underlying instruments. OTC options are purchased from or sold (written) to
dealers or financial institutions which have entered into direct agreements
with the Fund on behalf of the Portfolio. With OTC options, such variables as
expiration date, exercise price and premium will be agreed upon between the
Portfolio and the transacting dealer, without the intermediation of a third
party such as the OCC. If the transacting dealer fails to make or take
delivery of the securities underlying an option it has written, in accordance
with the terms of that option as written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolio will engage in OTC option transactions only with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York.
FORWARD FOREIGN CURRENCY CONTRACTS
As discussed in the section of the Portfolio's Prospectus entitled "The
Meridian/INVESCO Global Sector Portfolio and the Fund," the Portfolio may
enter into forward contracts to purchase or sell foreign currencies as a
hedge against possible variations in foreign exchange rates. A forward
foreign currency contract is an agreement between the contracting parties to
exchange an amount of currency at some future time at an agreed upon rate.
The rate can be higher or lower than the spot rate between the currencies
that are the subject of the contract. A forward contract generally has no
deposit requirement, and such transactions do not involve commissions. By
entering into a forward contract for the purchase or sale of the amount of
foreign currency invested in a foreign security transaction, the Portfolio
can hedge against possible variations in the value of the dollar versus the
subject currency either between the date the foreign security is purchased or
sold and the date on which payment is made or received or during the time the
Portfolio holds the foreign security. The Portfolio will not speculate in
forward currency contracts. Although the Portfolio has not adopted any
limitations on its ability to use forward contracts as a hedge against
fluctuations in foreign exchange rates, the Portfolio will not attempt to
hedge all of its foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by Meridian. The
Portfolio will not enter into a forward contract for a term of more than one
year. Forward contracts may, from time to time, be considered illiquid, in
which case they would be subject to the Portfolio's limitation on investing
in illiquid securities, discussed above.
SWAPS AND SWAP-RELATED PRODUCTS
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The exchange
commitments can involve payments to be made in the same currency or in
different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling the interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the party
selling the interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors, which
are included in the types of instruments sometimes known as derivatives, on
either an asset-based or liability-based basis,
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depending upon whether they are hedging their assets or their liabilities,
and usually will enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of the Portfolio's obligations over its entitlement with
respect to each interest rate swap will be calculated on a daily basis, and
an amount of cash or high-grade liquid assets having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by the Portfolio's custodian. If the Portfolio enters into an
interest rate swap on other than a net basis, the Portfolio would maintain a
segregated account in the full amount accrued on a daily basis of the
Portfolio's obligations with respect to the swap. The Portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Co-Sub- Advisers will monitor the creditworthiness
of all counterparties on an ongoing basis. If there is a default by the other
party to such a transaction, the Portfolio would have contractual remedies
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or high-grade liquid assets having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of
the Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some
instances involve the delivery of securities or other underlying assets by
the Portfolio or its counterparty to collateralize obligations under the
swap. The documentation currently used in those markets attempts to limit the
risk of loss with respect to interest rate swaps to the net amount of the
payments that a party is contractually obligated to make. If the other party
to an interest rate swap that is not collateralized defaults, the Portfolio
would anticipate losing the net amount of the payments that the Portfolio
contractually is entitled to receive over the payments that the Portfolio is
contractually obligated to make. The Portfolio may buy and sell (i.e., write)
caps and floors without limitation, subject to the segregated account
requirement described above as well as the Portfolio's other investment
restrictions set forth above.
REPURCHASE AGREEMENTS
As discussed in the Portfolio's Prospectus, the Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for
investment by the Portfolio with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers. A
repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the
period the instrument is held by the Portfolio and is unrelated to the
interest rate on the underlying instrument. In these transactions, the
collateral securities acquired by the Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the
repurchase agreement, and are held as collateral by the Portfolio's custodian
bank until the repurchase agreement is completed.
FOREIGN EXCHANGE TRANSACTIONS
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction
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impossible. This exposes the Portfolio to an increased risk that the
counterparty will be unable to settle the transaction. Although the
counterparty in such transactions is often a bank or other financial
institution, currency transactions are generally not covered by insurance
otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 - 1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1973 - present).
JOHN R. KENNEY (1, 2) , CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President, (1978 - 1987 and December,
1992 - present) Director (1978 - present), Western Reserve Life Assurance Co.
of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 - February, 1991), President (1988 - 1989), Director (1976 - February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 - present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 - present), Chief Financial Officer (1987 - December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 - February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995), Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
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<PAGE>
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor,(August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991), University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the
Co-Sub-Advisers ("disinterested Director"). Each such Director also receives
$500, plus expenses, per each regular and special Board meeting attended.
Because the Portfolio had not commenced operations as of December 31, 1995
the Portfolio did not pay any Directors' fees for the fiscal year ended
December 31, 1995. The following table provides compensation amounts paid to
disinterested Directors of the Fund for the fiscal year ended December 31,
1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS FROM
WRL SERIES FUND, INC.,
IDEX FUND, IDEX II
AGGREGATE COMPENSATION SERIES FUND AND
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. IDEX FUND 3
- ----------------------------------- --------------------------- -----------------------
<S> <C> <C>
Peter R. Brown, Director .......... $9,500 $32,500
Charles C.Harris, Director ........ $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated April 30, 1996, with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
12
<PAGE>
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on December 4, 1995. The
Investment Advisory Agreement provides that subsequent to its approval by the
Portfolio's sole shareholder, it will continue in effect for an initial term
ending April 22, 1998, and from year to year thereafter, if approved annually
(a) by the Board of Directors of the Fund or by a majority of the outstanding
shares of the Portfolio, and (b) by a majority of the Directors who are not
parties to such contract or "interested persons" of any such party. The
Investment Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the
shareholders of the Portfolio and terminates automatically in the event of
its assignment (within the meaning of the 1940 Act)
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Investment Advisory Agreement. For further information about the
management of the Portfolio, see "The Co-Sub-Advisers", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolio for the year ended December 31, 1995 because the Portfolio
had not commenced operations as of that date.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and furnishing office space for officers and employees of the
Investment Adviser connected with investment management of the Portfolio. The
Investment Adviser also pays all expenses incurred in connection with the
formation and organization of the Portfolio including all costs and expenses
of preparing and filing the post-effective amendment to the Fund's
registration statement effecting the registration of the Portfolio and its
shares under the 1940 Act and the Securities Act of 1933. The Portfolio pays
all other expenses incurred in its operation and all of the Portfolio's
general administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses in connection with ongoing
registration or qualification requirements under Federal and state securities
laws, pricing costs (including the daily calculation of net asset value),
interest, certain taxes, charges of the custodian, fees and expenses of Fund
directors who are not "interested persons" of the Fund, legal expenses, state
franchise taxes, cost of auditing services, costs of printing proxies, SEC
fees, advisory fees, certain insurance premiums, costs of corporate meetings,
costs of maintenance of corporate existence, investor services (including
allocable telephone, computers, and personnel expenses), extraordinary
expenses, and other expenses properly payable by the Fund. Depending upon the
nature of the lawsuit, litigation costs may be borne by the Fund.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
THE CO-SUB-ADVISERS
This discussion supplements the information provided about the
Co-Sub-Advisers under the caption "Management of the Fund - The
Co-Sub-Advisers" in the Prospectus.
Meridian Investment Management Corporation ("Meridian") and INVESCO Global
Asset Management Limited ("INVESCO") serve as Co-Sub-Advisers for the
Portfolio pursuant to a Sub- Advisory Agreement dated April 30, 1996, between
Meridian and WRL and a Sub-Advisory Agreement dated April 30, 1996, between
INVESCO and WRL on behalf of the Portfolio. The Sub-Advisory Agreements were
approved by the Board of Directors of the Fund, including a majority of the
Directors who were not "interested persons" of the Fund (as defined in the
1940 Act) on December 4, 1995. The
13
<PAGE>
Sub-Advisory Agreements provide that subsequent to their approval by the
Portfolio's sole shareholder, they will continue in effect for an initial
term ending April 22, 1998, and from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Portfolio and (b) by a majority of the Directors
who are not parties to such Agreements or "interested persons" (as defined in
the 1940 Act) of any such party. The Sub-Advisory Agreements may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminate
automatically in the event of their assignment (within the meaning of the
1940 Act) or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreements, the Co-Sub-Advisers provide
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Co-Sub-
Advisers are responsible for the actual management of the Portfolio and for
making decisions to buy, sell or hold any particular security. As discussed
in the Prospectus, Meridian has the responsibility for allocating the
Portfolio's assets among asset categories, countries and/or industries. After
these allocations have been designated by Meridian, INVESCO will select the
specific securities within each category, country or industry. The
Co-Sub-Advisers bear all of the expenses in connection with the performance
of their respective services under the Sub-Advisory Agreements such as
compensating and furnishing office space for their officers and employees
connected with investment and economic research, trading and investment
management of the Portfolio. The method of computing the Co-Sub- Advisers'
fee is set forth in the Prospectus. Because the Portfolio did not commence
operations until May 1, 1996, no co-sub-advisory fees were paid by the
Investment Adviser to the Co-Sub-Advisers with respect to the Portfolio for
the year ended December 31, 1995.
Meridian, located at 12835 East Arapahoe Road, Tower II, 7th Floor,
Englewood, Colorado 80112, serves as a Co-Sub-Adviser to the Portfolio.
Meridian is a wholly-owned subsidiary of Meridian Management & Research
Corporation (MM&R). Meridian provides investment management and related
services to other mutual fund portfolios and individual, corporate,
charitable and retired accounts.
INVESCO Global Asset Management Limited, located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Portfolio. In performing services under its Sub-Advisory Agreement with WRL,
INVESCO is authorized to use INVESCO-affiliated companies and their
employees, provided that INVESCO supervises and remains fully responsible for
all such services. Pursuant to this authority, INVESCO has entered into
service agreements with INVESCO Asset Management Limited, 11 Devonshire
Square, London, EC2M 4YR England, for assistance in managing the Portfolio's
investments in foreign securities, and with INVESCO Trust Company, 7800 East
Union Avenue, Denver, Colorado 80237, for assistance in managing the
Portfolio's investments in U.S. securities. These agreements were approved by
the Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 18, 1996. INVESCO and its affiliates are indirect wholly-owned
subsidiaries of INVESCO PLC, a global firm that managed approximately $84
billion as of December 31, 1995. INVESCO PLC is headquartered in London, with
money managers located in Europe, North America and the Far East.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Meridian/INVESCO Global Sector
Portfolio and the Fund - Portfolio Turnover" in the Prospectus. In computing
the portfolio turnover rate for the Portfolio, securities whose maturities or
expiration dates at the time of acquisition are one year or less are
excluded. Subject to this exclusion, the turnover rate for the Portfolio is
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities for the fiscal year by (b) the monthly average of portfolio
securities owned by the Portfolio during the fiscal year.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market
14
<PAGE>
circumstances. Higher turnover rates tend to result in higher brokerage fees.
Securities initially satisfying the basic objective and policies of the
Portfolio may be disposed of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund,
INVESCO is primarily responsible for placement of the Portfolio's securities
transactions. In placing orders, it is the policy of the Portfolio to obtain
the most favorable net results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While INVESCO generally will seek
reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of their commissison rates are made by INVESCO,
whose policy is to obtain "best execution" (prompt and reliable execution at
the most favorable security price) of all portfolio transactions. In placing
portfolio transactions, INVESCO may give consideration to brokers who provide
supplemental investment research, in addition to such research obtained for a
flat fee, to INVESCO, and pay spreads or commissions to such brokers or
dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same
transaction.
In selecting brokers and in negotiating commissions, INVESCO considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing
advice, either directly or through publications or writings, as to the value
of securities, the advisability of purchasing or selling specific securities
and the availability of securities or purchasers or sellers of securities and
(ii) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends and portfolio strategy and products
and other services (such as third party publications, reports and analyses,
and computer and electronic access, equipment, software, information and
accessories) that assist INVESCO in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to and not in lieu of the services required to be performed by INVESCO. The
expenses of INVESCO will not necessarily be reduced as a result of the
receipt of such supplemental information. INVESCO may use such research
products and services in servicing other accounts in addition to the
Portfolio. If INVESCO determines that any research product or service has a
mixed use, such that it also serves functions that do not assist in the
investment decision-making process, INVESCO will allocate the costs of such
service or product accordingly. The portion of the product or service that
INVESCO determines will assist it in the investment decision-making process
may be paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for INVESCO. Conversely, such supplemental information
obtained by the placement of business for INVESCO will be considered by and
may be useful to INVESCO in carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of INVESCO, better prices and executions are likely to be achieved
through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Co-Sub-Advisers serve as advisers, or held by the Investment Adviser or
Co-Sub-Advisers for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Co-Sub- Advisers for one or more clients when one or
more clients are selling the same security. If purchases or sales of
securities for the Portfolio or other entities for which INVESCO acts as
investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such
15
<PAGE>
securities will be made, insofar as feasible, for the respective entities and
clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or
Co-Sub-Advisers during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
On occasions when the Investment Adviser or the Co-Sub-Advisers deem the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, INVESCO may to the extent permitted
by applicable laws and regulations, but will not be obligated to, aggregate
the securities to be sold or purchased for the Portfolio with those to be
sold or purchased for such other accounts or companies in order to obtain
favorable execution and lower brokerage commissions. In that event,
allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by INVESCO in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to the Portfolio and to such other accounts or companies. In some cases this
procedure may adversely affect the size of the position obtainable for the
Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of INVESCO on behalf of the Portfolio, and reviews the
prices and commissions, if any, paid by the Portfolio to determine if they
were reasonable.
The Board of Directors of the Fund has authorized INVESCO to consider
sales of the Policies and Annuity Contracts by a broker-dealer as a factor in
the selection of broker-dealers to execute Portfolio transactions. As stated
above, any such placement of Portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of the Portfolio's shares
is ordinarily determined, once daily, as of the close of the regular session
of business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day). The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining asset value, securities listed
on the national securities exchanges and traded on the NASDAQ National Market
are valued at the closing prices on such markets, or if such a price is
lacking for the trading period immediately preceding the time of
determination, such securities are valued at their current bid price. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the Exchange. Other securities which are
traded on the over-the-counter market are valued at bid price. Other
securities for which quotations are not readily available are valued at fair
values as determined in good faith by the Investment Adviser and the
Co-Sub-Advisers under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis. Values of gold bullion held by the Portfolio are based upon daily
quotes provided by banks or brokers dealing in such commodities.
16
<PAGE>
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations for the Portfolio are computed by finding the
average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period).
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies of the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional information regarding the investment performance of the
Portfolio appears in the Prospectus.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Because the Portfolio did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
17
<PAGE>
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months -- options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities by the same issuer.
For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be
18
<PAGE>
included in gross income for purposes of that Limitation. The Portfolio will
consider whether it should seek to qualify for this treatment for its hedging
transactions. To the extent the Portfolio does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures contracts beyond the time when it otherwise would be advantageous to
do so, in order for the Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Equity-Income Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; International Equity Portfolio; Leisure
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio, or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
19
<PAGE>
FINANCIAL STATEMENTS
No financial statements for the Portfolio are available for the year ended
December 31, 1995, because the Portfolio had not commenced operations as of
that date.
20
<PAGE>
APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 edged." 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 or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
A-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 than debt in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit an adequate degree of
protection, 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 higher rated categories.
BB, B, CCC and 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 CCC the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, they are
not likely to have the capacity to pay interest and repay principal.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SHORT-TERM SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a non-negotiable deposit maintained in
a banking institution for a specified period of time at a stated interest
rate. Time deposits maturing in more than seven days will not be purchased by
the Portfolio, and time deposits maturing from two business days through
seven calendar days will not exceed 15% of the total assets of the Portfolio.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolio acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolio, reflecting an agreed upon market rate of interest for
the period from the time of a Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. The Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While the Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the Securities and Exchange Commission has taken
the position that repurchase agreements of greater than seven days together
with other illiquid investments should be limited to an amount not in excess
of 15% of the Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, the Portfolio could
be ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by the Portfolio upon liquidation of
the securities may be limited.
B-1
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [C.A.S.E LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the C.A.S.E. Quality Growth Portfolio,
C.A.S.E. Growth & Income Portfolio and C.A.S.E. Growth Portfolio of the Fund
(collectively, the "Portfolios").
The primary investment objective of the C.A.S.E. Quality Growth Portfolio
is to seek preservation and growth of capital by investing in common stocks
of large, well-managed, well-priced companies with defined markets and
financial strategies which provide the basis for sound future confidence. The
investment objective of the C.A.S.E. Growth & Income Portfolio is to seek
high current income and moderate growth through investments in common stocks
of well-priced, well-managed, large, stable and growing companies. This
Portfolio seeks to invest in companies that make a policy of paying
above-market dividends while their internal growth rates exceed the rate of
inflation. The investment objective of the C.A.S.E. Growth Portfolio is
capital growth through investments in common stocks of small to medium-sized
companies. This Portfolio will generally invest in smaller, less
well-established companies, with limited product lines and financial
resources. This Portfolio, however, seeks to invest in such companies with
above-market growth characteristics in several investment classifications
including sales, earnings, returns and institutional support. There can be,
of course, no assurance that the Portfolios will achieve their objectives.
Shares of the Portfolios are sold only to the WRL Series Annuity Account,
(the "Separate Account"), a separate, segregated asset account of Western
Reserve Life Assurance Co. of Ohio ("WRL"), to fund the benefits under
certain variable annuity contracts (the "Contracts"). The Separate Account,
which is registered with the Securities and Exchange Commission, invests in
shares of one or more of the Portfolios in accordance with the allocation
instructions received from owners of the Contracts (the "Contract Owners").
Such allocation rights are further described in the prospectuses or
disclosure documents for the Contracts.
WRL and C.A.S.E. Management, Inc. serve as the investment adviser
("Investment Adviser") and the sub-adviser ("Sub-Adviser") respectively, to
the Portfolios. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolios bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
FINANCIAL HIGHLIGHTS .................................................... 1
THE C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH & INCOME
PORTFOLIO AND C.A.S.E. GROWTH PORTFOLIO AND THE FUND .................. 4
MANAGEMENT OF THE FUND .................................................. 11
DIVIDENDS AND DISTRIBUTIONS ............................................. 13
TAXES ................................................................... 13
PURCHASE AND REDEMPTION OF SHARES ....................................... 14
VALUATION OF SHARES ..................................................... 14
THE FUND AND ITS SHARES ................................................. 14
PERFORMANCE INFORMATION ................................................. 15
GENERAL INFORMATION ..................................................... 16
i
<PAGE>
C.A.S.E. QUALITY GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the C.A.S.E. Growth Portfolio for the period May 1, 1995
(commencement of operations) through December 31, 1995, is taken from the
Portfolio's audited financial statements as incorporated by reference in the
Statement of Additional Information. The Annual Report contains additional
information for this Portfolio. A copy of the Statement of Additional
Information and Annual Report may be obtained without charge upon request. A
voluntary fee waiver and expense reimbursement applied during the period
shown below. That voluntary fee waiver and expense reimbursement has been
modified with respect to the C.A.S.E. Quality Growth Portfolio. (See
"Management of the Fund--The Investment Adviser," page 11.)
C.A.S.E. QUALITY GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/95 TO
12/31/95
--------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
Income From Investment Operations
Net Investment Income .14
Net Gains or Losses on Securities (both realized and
unrealized) 1.50
--------------
Total Income (Loss) From Investment Operations 1.64
--------------
Less Distributions
Dividends (from net investment income) (.14)
--------------
Distributions (from net realized gains) (.66)
--------------
Total Distributions (.80)
--------------
Net Asset Value, End of Period $ 10.84
==============
Total Return* 13.61%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $ 1,150
Ratio of Expenses to Average Net Assets** 1.00%
Ratio of Net Investment Income to Average Net Assets 1.28%
Portfolio Turnover Rate 119.63%
</TABLE>
- -----------------------------------------------------------------------------
* The total return shown for 1995 is for the eight month period ended December
31, 1995, and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the
applicable Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the period ended
December 31, 1995, for which period the annualized ratio of expenses to
average net assets would have been 5.91% absent the advisory fee waiver by
Western Reserve Life.
1
<PAGE>
C.A.S.E. GROWTH & INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the C.A.S.E. Growth & Income Portfolio for the period May 1,
1995 (commencement of operations) through December 31, 1995, is taken from
the Portfolio's audited financial statements as incorporated by reference in
the Statement of Additional Information. The Annual Report contains
additional information for this Portfolio. A copy of the Statement of
Additional Information and Annual Report may be obtained without charge upon
request. A voluntary fee waiver and expense reimbursement applied during the
period shown below. That voluntary fee waiver and expense reimbursement has
been modified with respect to the C.A.S.E. Growth & Income Portfolio. (See
"Management of the Fund--The Investment Adviser," page 11.)
C.A.S.E. GROWTH & INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/95 TO
12/31/95
--------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
Income From Investment Operations
Net Investment Income .21
Net Gains or Losses on Securities (both realized and
unrealized) 1.38
--------------
Total Income (Loss) From Investment Operations 1.59
--------------
Less Distributions
Dividends (from net investment income) (.21)
--------------
Distributions (from net realized gains) (.10)
--------------
Total Distributions (.31)
--------------
Net Asset Value, End of Period $11.28
==============
Total Return* 14.80%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $1,083
Ratio of Expenses to Average Net Assets** 1.00%
Ratio of Net Investment Income to Average Net Assets 1.94%
Portfolio Turnover Rate 72.73%
</TABLE>
- -----------------------------------------------------------------------------
* The total return shown for 1995 is for the eight month period ended December
31, 1995, and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the
applicable Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the period ended
December 31, 1995, for which period the annualized ratio of expenses to
average net assets would have been 6.17% absent the advisory fee waiver by
Western Reserve Life.
2
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
The information contained in the table below for a share of capital stock
outstanding of the C.A.S.E. Growth Portfolio for the period May 1, 1995
(commencement of operations) through December 31, 1995, is taken from the
Portfolio's audited financial statements as incorporated by reference in the
Statement of Additional Information. The Annual Report contains additional
information for this Portfolio. A copy of the Statement of Additional
Information and Annual Report may be obtained without charge upon request.
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/95 TO
12/31/95
--------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
Income From Investment Operations
Net Investment Income .12
Net Gains or Losses on Securities (both realized and
unrealized) 2.49
--------------
Total Income (Loss) From Investment Operations 2.61
--------------
Less Distributions
Dividends (from net investment income) (.12)
--------------
Distributions (from net realized gains) (.83)
--------------
Total Distributions (.95)
--------------
Net Asset Value, End of Period $ 11.66
==============
Total Return* 20.65%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $ 2,578
Ratio of Expenses to Average Net Assets** 1.00%
Ratio of Net Investment Income to Average Net Assets 1.02%
Portfolio Turnover Rate 121.62%
</TABLE>
- -----------------------------------------------------------------------------
* The total return shown for 1995 is for the eight month period ended December
31, 1995, and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the
applicable Annuity Contract.
** Ratio is annualized and net of advisory fee waiver for the period ended
December 31, 1995, for which period the annualized ratio of expenses to
average net assets would have been 4.15% absent the advisory fee waiver by
Western Reserve Life.
3
<PAGE>
WRL SERIES FUND, INC.
THE C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH & INCOME PORTFOLIO
AND C.A.S.E. GROWTH PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth & Income
Portfolio and C.A.S.E. Growth Portfolio are series of the Fund. The Fund
consists of several series, or separate investment portfolios, which offer
shares for investment by the Separate Account. This Prospectus describes only
the C.A.S.E. Quality Growth, C.A.S.E. Growth & Income and C.A.S.E. Growth
Portfolios.
A particular portfolio of the Fund may not be available under the Contract
you have chosen or may not be available in your state due to certain state
insurance law considerations. The prospectus or disclosure document for the
particular Contract you have chosen will indicate the portfolios that are
generally available under the applicable Contract and should be read in
conjunction with this Prospectus.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
The Portfolios' investment objectives and, unless otherwise noted, their
investment policies and techniques, may be changed by the Board of Directors
of the Fund without shareholder or Contract Owner approval. A change in the
investment objectives or policies of a Portfolio may result in that Portfolio
having an investment objective or policies different from that which a
Contract Owner deemed appropriate at the time of investment.
Each Portfolio invests mainly in common stock and other equity securities
in search of growth, or a combination of growth and income (total return).
Their performance depends heavily on stock market conditions in the U.S. and
abroad, and can also be affected by changes in interest rates or other
economic conditions. Accordingly, the Portfolios are not by themselves a
balanced investment plan.
C.A.S.E. QUALITY GROWTH PORTFOLIO
The primary investment objective of the C.A.S.E. Quality Growth Portfolio
is preservation and growth of capital.
The C.A.S.E. Quality Growth Portfolio seeks long-term appreciation
principally through investment in common stocks of large, well-managed,
well-priced companies with defined markets and financial strategies which
provide the basis for sound future confidence. Stocks of such companies
usually are listed on the New York or American Exchanges. The investments the
Sub-Adviser seeks will, in the opinion of the Sub-Adviser, be under-valued
based upon a broad range of comparative, fundamental values for similar
long-term investments. The large cap stocks which this Portfolio seeks will
generally be less volatile than smaller or mid-capitalization stocks. For
these purposes, the Sub-Adviser considers "large cap" stocks to be stocks
issued by companies with market capitalization at least equal to $1 billion.
The Sub-Adviser considers "mid-capitalization" stocks to be stocks issued by
companies with market capitalization of between $350 million and $3 billion.
(Companies with market capitalization from $1 billion to $3 billion may be
classified by the Sub-Adviser as either medium cap or as large cap, depending
upon the Sub-Adviser's evaluation of the liquidity of trading in the
company's stock.) Companies with larger capitalization frequently have broad
markets and product lines. The dividend component of the Portfolio's
investments should be similar or slightly less than the average for the
market in the identical period. There can be no assurance that the
Portfolio's objectives will be achieved because there are no certainties of
the prevailing market or economic conditions with which the Portfolio will be
confronted.
Although the Portfolio's assets will be invested primarily in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, high grade commercial paper, corporate bonds and debentures,
warrants, preferred stocks or certificates of deposit of commercial banks or
other debt securities when the Sub-Adviser perceives an opportunity for
capital growth from such securities, or so that the Portfolio may receive a
return on
4
<PAGE>
its uninvested cash. See the Statement of Additional Information for further
descriptions of such securities. In the latter case, investment income may
increase and may constitute a larger portion of the return on the Portfolio's
investments, and the Portfolio may not participate in market advances or
declines to the extent it would if the Portfolio were fully invested in
common stocks. The Portfolio may invest up to 15% of its assets in securities
of issuers in a single industry. The Portfolio does not currently intend to
invest more than 5% of its assets in non-investment grade debt securities.
See the Statement of Additional Information for further information
concerning such securities and bond ratings.
The C.A.S.E. Quality Growth Portfolio may invest up to 25% of its net
assets at the time of purchase in the securities of foreign issuers and
obligors, as described below and in the Statement of Additional Information.
(See "Certain Portfolio Practices and Techniques--Foreign Investments and
Special Risks," page 8.) The Portfolio also may invest in repurchase
agreements and reverse repurchase agreements. (See "Certain Portfolio
Practices and Techniques--Repurchase and Reverse Repurchase Agreements," page
7.)
C.A.S.E. GROWTH & INCOME PORTFOLIO
The investment objective of the C.A.S.E. Growth & Income Portfolio is to
seek high current income and moderate growth through investments in
well-priced, well-managed, large, stable and growing companies.
Current income of the Portfolio will vary. It is anticipated that the
current income realized by this Portfolio will, however, generally be
relatively higher than the current income realized by C.A.S.E. Quality Growth
Portfolio or C.A.S.E. Growth Portfolio. The Portfolio invests primarily in
common stocks of companies believed by the Sub-Adviser to have potential for
above-average growth in several fundamental and conditional and market
comparative categories, including sales, earnings (year over year and month
over month), market relative to return-on-equity, market relative cash flow,
institutional and/or insider ownership changes, and price earnings ratios.
The Portfolio seeks to invest in companies that make a policy of paying above
market dividends, and also have positive internal growth rates and
demonstrated capital appreciation over time that exceed the rate of inflation
during the period measured. The Portfolio will generally invest 90% of its
assets in dividend paying stocks.
Total return consists of current income, including dividends, capital
appreciation, and interest and discount accrual. The Portfolio's ability to
achieve its total return objective of both high current income and moderate
growth is a function of the Sub-Adviser's stock selections as well as market
and economic conditions.
Although the Portfolio's assets will be invested primarily in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, high grade commercial paper, corporate bonds and debentures,
warrants, preferred stocks or certificates of deposit of commercial banks or
other debt securities when the Sub-Adviser perceives an opportunity for
capital growth from such securities, or so that the Portfolio may receive a
return on its uninvested cash. See the Statement of Additional Information
for further descriptions of such securities. In the latter case, investment
income may increase and may constitute a larger portion of the return on the
Portfolio's investments, and the Portfolio may not participate in market
advances or declines to the extent it would if the Portfolio were fully
invested in common stocks. The Portfolio may invest up to 15% of its assets
in securities of issuers in a single industry. The Portfolio does not
currently hold or intend to invest more than 5% of its assets in
non-investment grade debt securities. See the Statement of Additional
Information for further information concerning such securities and bond
ratings.
The C.A.S.E. Growth & Income Portfolio may invest up to 25% of its net
assets at the time of purchase in the securities of foreign issuers and
obligors, as described below and in the Statement of Additional Information.
(See "Certain Portfolio Practices and Techniques--Foreign Investments and
Special Risks," page 8.) The Portfolio also may invest in repurchase
agreements and reverse repurchase agreements. (See "Certain Portfolio
Practices and Techniques--Repurchase and Reverse Repurchase Agreements," page
7.)
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C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio's objective is capital growth through
investments in small to medium-sized companies. For these purposes, the
Sub-Adviser considers "small cap" stocks to be stocks issued by companies
with market capitalization of between $50 million and $500 million. As noted
above, the Sub-Adviser considers "mid-capitalization" stocks to be stocks
issued by companies with market capitalization of between $350 million and $3
billion. (Companies with market capitalization from $350 million to $500
million may be classified by the Sub-Adviser as either small cap or medium
cap, depending upon the Sub-Adviser's evaluation of the liquidity of trading
in the company's stock.) This Portfolio will generally invest in smaller,
less well-established companies, with limited product lines and financial
resources. The Portfolio seeks, however, to invest in such companies with
above-market growth characteristics in several investment classifications
including sales, earnings, returns and institutional support. Income derived
is incidental to the Portfolio's investment objective.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the portfolio manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected from industries and companies that the portfolio
manager believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Portfolio invests in common stocks traded on
recognized securities exchanges and in the over-the-counter market. The
Portfolio generally intends to invest in medium to small sized companies
which exhibit sustainable above-market characteristics in sales, earnings,
rates of return, insider and institutional buying. The Sub-Adviser intends to
be aggressive in its efforts to increase shareholders' capital by investing
primarily in companies which are likely to benefit from the comparatively
strong conditional and fundamental circumstances uncovered by the
Sub-Adviser's analysis. The Portfolio will invest in securities of companies
that appear to be under-valued from several vantage points and which, in the
opinion of the Sub-Adviser, demonstrate the characteristics necessary for
significant future growth. As a result of these investment policies, the
market prices of many of the securities purchased by the Portfolio may
fluctuate widely; any income received by the Portfolio from these securities
will be incidental. Investors should be aware that whenever the securities
markets become volatile, secondary growth securities such as those in which
the Portfolio will invest have historically become even more so. The Sub-
Adviser nonetheless believes that small to middle capitalization securities
in emerging markets often have sales and earnings growth rates which exceed
more developed companies. Such growth rates may in turn be reflected in more
rapid share price appreciation.
Although it is the policy of the Portfolio to purchase and hold securities
for long-term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Adviser believes they are advisable, typically 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 ordinarily will be made without reference to the length of
time a security has been held, a significant number of short-term
transactions may result. The rate of portfolio turnover will not be a
limiting factor when changes are deemed to be appropriate. However, certain
tax rules may restrict the Portfolio's ability to sell securities in some
circumstances when the security has been held for an insufficient length of
time. Increased portfolio turnover necessarily results in correspondingly
higher brokerage costs for the Portfolio which are ultimately borne by the
shareholders and Contract Owners.
Although the assets of the Portfolio are ordinarily invested in common
stocks at most times, the Portfolio may increase its cash position when the
Sub-Adviser is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, corporate bonds and debentures, high-grade commercial paper,
preferred stocks, certificates of deposits or other securities of U.S.
issuers when the Sub-Adviser perceives an opportunity for capital growth from
such securities, or so that the Portfolio may receive a competitive return on
its uninvested cash. The Portfolio's investments in debt securities will be
made in securities of U.S. and foreign companies, the U.S. Government,
foreign governments, and U.S. and foreign governmental agencies and
instrumentalities and other governmental entities. The Portfolio may invest
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<PAGE>
up to 15% of its assets in securities of issuers in a single industry. The
Portfolio does not presently intend to invest more than 5% of its assets in
debt securities rated less than investment grade. When the Portfolio invests
in such securities, investment income may increase and may constitute a
larger portion of the return on the Portfolio's investments, and the
Portfolio may not participate in market advances or declines to the extent
that it would if it were fully invested.
The C.A.S.E. Growth Portfolio may invest up to 25% of its net assets at
the time of purchase in the securities of foreign issuers and obligors, as
described below and in the Statement of Additional Information. (See "Certain
Portfolio Practices and Techniques--Foreign Investments and Special Risks,"
page 8.) The Portfolio also may invest in repurchase agreements and reverse
repurchase agreements. (See "Certain Portfolio Practices and
Techniques--Repurchase and Reverse Repurchase Agreements," page 7.)
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER HEDGING STRATEGIES. Subject
to certain limitations, each Portfolio may engage in hedging strategies
involving futures contracts and related options, forward currency contracts,
and interest rate swaps, caps and floors. A put option gives the holder the
right, upon payment of a premium, to deliver a specified amount of a security
to the writer of the option on or before a fixed date at a predetermined
price. A call option gives the holder the right, upon payment of a premium,
to call upon the writer to deliver a specified amount of a security on or
before a fixed date at a predetermined price. A Portfolio may engage in
hedging strategies to attempt to reduce the overall level of investment risk
that normally would be expected to be associated with the Portfolio's
securities, and to attempt to protect the Portfolio against market movements
that might adversely affect the value of the Portfolio's securities or the
price of securities that the Portfolio is considering purchasing. There can
be no assurance, however, that the use of these instruments by a Portfolio
will assist it in achieving its investment objective. Generally, the use of
hedging strategies involves investment risks and transaction costs to which
the Portfolio would not be subject absent the use of these strategies. If the
Sub-Adviser engages in a hedging transaction intended to protect a Portfolio
against potential adverse movements in the securities, foreign currency or
interest rate markets using these instruments, and such markets do not move
in a direction adverse to the Portfolio, the Portfolio could be left in a
less favorable position than if such hedging strategy had not been used. The
use of hedging strategies involves special risks, which include: 1) the risk
that interest rates, securities prices and currency markets will not move in
the directions anticipated; 2) imperfect correlation between the price of the
hedging instruments and movements in the prices of the securities or
currencies underlying the hedging transaction; 3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; 4) the possible absence of a liquid secondary market for any
particular instrument at any time; and 5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. Further
information on these instruments, hedging strategies and risk considerations
relating to them is set forth in the Statement of Additional Information.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. A Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by a Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers
a method of earning income on idle cash. The repurchase agreement is
effectively secured by the value of the underlying security. A risk
associated with repurchase agreements is the failure of the seller to
repurchase the securities as agreed, which may cause a Portfolio to suffer a
loss if the market value of such securities declines before they can be
liquidated on the open market. In the event of bankruptcy or insolvency of
the seller, a Portfolio may encounter delays and incur costs in liquidating
the underlying security. Repurchase agreements not terminable within seven
days are considered illiquid securities and are subject to the limit stated
below.
When a Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a
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future date and price. Reverse repurchase agreements may be used to provide
cash to satisfy unusually heavy redemption requests or for other temporary or
emergency purposes without the necessity of selling portfolio securities or
to earn additional income on portfolio securities, such as Treasury bills and
notes. Reverse repurchase agreements may expose a Portfolio to greater
fluctuations in the value of its assets.
ILLIQUID SECURITIES. A Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions on resale.
However, certain restricted securities that are not registered for sale to
the general public but that can be resold to institutional investors ("Rule
144A Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of a Portfolio's investments could be impaired
if such trading does not further develop or declines. The Sub-Adviser will
determine the liquidity of Rule 144A Securities under guidelines approved by
the Board of Directors of the Fund.
WHEN-ISSUED SECURITIES. A Portfolio may purchase new issues of U.S.
Government securities on a "when-issued" basis. However, a Portfolio does not
intend to invest more than 20% of its assets in when-issued securities.
Because actual payment for and delivery of when-issued securities generally
take place 15 to 45 days after the purchase date, a Portfolio that purchases
when-issued securities bears the risk that interest rates and the security's
value at the time of delivery may have changed prior to delivery of the
when-issued security.
SPECIAL SITUATIONS. The Portfolios may invest in "special situations" from
time to time. A special situation arises when, in the opinion of the
portfolio manager, the securities of a particular issuer will be recognized
and appreciate in value due to a specific development with respect to that
issuer. Developments creating a special situation might include, among
others, a new product or process, a management change, a technological
breakthrough, or other extraordinary corporate event, or differences in
market supply of and demand for the security. 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 impact of this strategy on a Portfolio will depend on a
Portfolio's size and the extent of the holdings of the special situation
issuer relative to its total assets.
LENDING AND BORROWING. Each Portfolio may lend its portfolio securities to
qualified institutional buyers for the purpose of realizing additional
income. Such loans must be continuously secured by liquid assets at least
equal to the market value of the securities loaned and may not together with
any other outstanding loans exceed 25% of a Portfolio's total assets.
Securities lending may involve some credit risk to a Portfolio if the
borrower defaults and the Portfolio is delayed or prevented from recovering
the collateral or is otherwise required to cover a transaction in the
security loaned. To secure borrowings, a Portfolio may not mortgage or pledge
its securities in amounts that exceed 15% of its net assets, at the time the
loan or borrowing is made. If portfolio securities are loaned, collateral
values will be continuously maintained at no less than 100% by
marking-to-market daily. If a material event is to be voted upon affecting a
Portfolio's investment in securities which are on loan, the Portfolio will
take such action as may be appropriate in order to vote its shares.
The Portfolios may also borrow money from banks. Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of a Portfolio's net assets at the time the loan or borrowing is
made. In accordance with the requirements of current California insurance
regulations, each Portfolio will restrict borrowings to no more than 10% of
total assets, except a Portfolio may temporarily borrow amounts equal to as
much as 25% of total assets if such borrowing is necessary to meet
redemptions. If California insurance regulations are changed at some future
time to permit borrowings in excess of 10% of total assets but less than 25%
of net assets, each Portfolio may conduct borrowings in accordance with such
revised limits.
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Portfolios may each invest up
to 25% of net assets at the time of purchase in the securities of foreign
issuers and obligors.
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Investments may be made in both domestic and foreign companies. In
selecting investments in foreign securities for the Portfolios, the
Sub-Adviser considers a variety of factors which may include the political
and economic conditions in a country, the prospect for changes in the value
of its currency and the liquidity of the investment in that country's
securities markets. If appropriate and available, the Sub-Adviser may
purchase foreign securities through dollar-denominated American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other types of receipts or shares evidencing ownership
of the underlying foreign securities. While ADRs are dollar-denominated
receipts that are issued by domestic banks and traded in the United States,
EDRs are typically issued by European banks, and GDRs may be issued by either
domestic or foreign banks. In addition, the Portfolios may invest indirectly
in foreign securities through foreign investment funds or trusts (including
passive foreign investment companies).
Investing in foreign securities involves opportunities and risks that
differ from those involved with investing solely in U.S. markets. The
Sub-Adviser believes that there is substantial opportunity from a
professionally managed portfolio of securities selected from the U.S. and
foreign markets. This investment framework seeks to take advantage of the
investment opportunities created by the global economy. Accordingly, an
investor may benefit from worldwide access to investment opportunities,
without being constrained by the location of a company's headquarters or the
trading market for its shares.
At the same time, these opportunities involve considerations and risks
that may not be encountered in U.S. investments. For example, changes in
currency exchange rates and exchange rate controls may affect the value of
foreign securities and the value of their dividend or interest payments, and
therefore a Portfolio's share prices and returns. Foreign companies generally
are subject to tax laws and accounting, auditing, and financial reporting
standards, practices and requirements that differ from those applicable to
U.S. companies. There is generally less publicly available information about
foreign companies and less securities and other governmental regulation and
supervision of foreign companies, stock exchanges and securities brokers and
dealers. A Portfolio may encounter difficulties in enforcing obligations in
foreign countries and negotiating favorable brokerage commission rates.
Securities of some foreign companies are less liquid, and their prices more
volatile, than securities of comparable U.S. companies. Security trading
practices abroad may offer less protection to investors such as the
Portfolios than the practices of domestic securities trading. Custody charges
are generally higher for foreign securities than for domestic securities.
The considerations noted above may be intensified in the case of
investments in developing countries or countries with limited or developing
capital markets. In particular, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers
located in developing countries may have limited marketability and may be
subject to more abrupt or erratic price fluctuations.
At times, securities held by a Portfolio may be listed on foreign
exchanges or traded in foreign markets which are open on days (such as
Saturday) when a Portfolio does not compute its price or accept orders for
the purchase, redemption or exchange of its shares. As a result, the net
asset value of a Portfolio may be significantly affected by trading on days
when shareholders cannot make transactions.
In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolios; political
or social instability or war; or diplomatic developments which could affect
U.S. investments in those countries. These latter considerations generally
are more of a concern in developing countries. Developing countries may also
have economies that are based on only a few industries. Although investments
in companies domiciled in developing countries may be subject to potentially
greater risk than investments in developed countries, the Portfolios will not
invest in any securities of issuers located in developing countries if the
Sub-Adviser determines these securities to be speculative.
To the extent a Portfolio invests in international foreign securities
markets, changes in the Portfolio's share price may have a reduced
correlation with movements in the U.S. markets. A
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<PAGE>
Portfolio's share price reflects the movements of both the prices of
securities in which the Portfolio is invested and the currencies in which the
investments are denominated. Because the foreign securities in which a
Portfolio may invest include those that are denominated in foreign
currencies, or that otherwise have values that depend on the performance of
foreign currencies relative to the U.S. dollar, the relative strength of the
U.S. dollar may be, to that extent, an important factor in the performance of
a Portfolio. In an effort to manage exchange rate risks, a Portfolio may
enter into foreign currency exchange contracts (agreements to exchange one
currency for another at a future date). A Portfolio may exchange foreign
currencies for U.S. dollars and for other foreign currencies in the normal
course of business, and may purchase and sell currencies through currency
exchange contracts in order to fix a price for securities they have agreed to
buy or sell. The Sub-Adviser may also seek to hedge some or all of a
Portfolio's investments denominated in foreign currency against a decline in
the value of that currency relative to U.S. dollars, by entering into
contracts to exchange that currency for U.S. dollars (not exceeding the value
of the Portfolio's assets denominated in that currency), or by participating
in options or futures contracts with respect to such currency. This type of
hedge may minimize the effect of currency appreciation as well as
depreciation, but does not protect against a decline in the security's value
relative to other securities denominated in that currency.
A Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the
Sub-Adviser believed that a particular currency may decline relative to the
U.S. dollar, a Portfolio could enter into a contract to sell that currency
(up to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable
or to appreciate relative to the U.S. dollar. As a non-fundamental operating
policy, a Portfolio will not enter into currency exchange contracts if, as a
result, more than 10% of its assets would be committed to the consummation of
cross-hedge contracts, and will instruct its custodian bank to set aside
high-grade, liquid assets to cover the Portfolio's purchase obligations under
this type of contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which a Portfolio would not be subject absent the use of
these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect a Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets, and such markets do
not move in a direction adverse to the Portfolio, the Portfolio could be left
in a less favorable position than if such hedging strategy had not been used.
The use of hedging strategies involves special risks, which include: 1) the
risk that interest rates, securities prices and currency markets will not
move in the directions anticipated; 2) imperfect correlation between the
price of the hedging instruments and movements in the prices of the
securities or currencies underlying the hedging transaction; 3) the fact that
the skills needed to use these strategies are different from those needed to
select portfolio securities; 4) the possible absence of a liquid secondary
market for any particular hedging instrument at any time; and 5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. See the Statement of Additional Information for further
information concerning these risks. The Sub-Adviser will bear the costs of
any separately identifiable expenses incurred in connection with consultation
of experts.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to other investment policies and restrictions
which are described in the Statement of Additional Information, some of which
are fundamental policies of the Portfolios and as such may not be changed
without the approval of the shareholders of the Portfolios.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The
Portfolios may engage frequently in short-term trading. High turnover and
short-term trading involve correspondingly greater commission expenses and
transaction costs for the Portfolios. The Sub-Adviser is unable to predict
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precisely the future turnover rate of the Portfolios. However, the annual
portfolio turnover rate for the C.A.S.E. Quality Growth Portfolio is expected
to range between 75% and 100%; the annual portfolio turnover rate for the
C.A.S.E. Growth & Income Portfolio is expected to range between 75% and 100%;
and the annual portfolio turnover rate for the C.A.S.E. Growth Portfolio is
expected to range between 150% and 200% annually. Turnover rates may vary
based on market volatility and economic conditions. The rate of portfolio
turnover will not be a limiting factor when changes in a Portfolio's holdings
are deemed appropriate by the Sub-Adviser. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and C.A.S.E. Management, Inc. as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund. These officers are employees of WRL and
receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group. The Investment Adviser has served as the investment adviser to the
Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in
accordance with the Portfolios' stated investment objectives and policies. As
compensation for its services to the Portfolios, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of each of the Portfolios.
The Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Fund, as well as the fees of all Directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. The Portfolios pay all
other expenses incurred in their operation, including general administrative
expenses. Accounting services are provided for the Portfolios by the
Investment Adviser. The Investment Adviser has voluntarily undertaken, until
at least April 30, 1997, to pay expenses on behalf of the C.A.S.E. Growth
Portfolio to the extent normal operating expenses (including investment
advisory fees but excluding interest, taxes, brokerage fees, commissions and
extraordinary charges) exceed, as a percentage of the Portfolio's average
daily net assets, 1.00%. For the fiscal year ended December 31, 1995, the
actual expenses as a percentage of average daily net assets for the C.A.S.E.
Growth Portfolio were 4.15%.
For the period ended December 31, 1995, the Investment Adviser paid
expenses on behalf of the C.A.S.E. Quality Growth Portfolio in the amount of
$23,966, the C.A.S.E. Growth & Income Portfolio in the amount of $23,049 and
the C.A.S.E. Growth Portfolio in the amount of $23,832. Effective May 1,
1996, the Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the C.A.S.E. Quality Growth Portfolio
and C.A.S.E. Growth and Income Portfolio to the extent that the normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of each Portfolio's average daily net assets, 1.50%.
In the absence of the fee waiver and expense
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reimbursement during 1995, the expenses of the C.A.S.E. Quality Growth
Portfolio would have equaled 5.91% of that Portfolio's net assets on an
annualized basis. The Investment Adviser is not obligated to continue any
voluntary expense limitation beyond April 30, 1997.
THE SUB-ADVISER
C.A.S.E. Management, Inc., located at 2255 Glades Road, Suite 221-A, Boca
Raton, Florida 33431, serves as the Sub-Adviser to the Portfolios. C.A.S.E.
Management, Inc. is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is indirectly controlled by William
Edward Lange, president and chief executive officer of the Sub-Adviser. The
Sub-Adviser provides investment management services to financial
institutions, high net worth individuals, and other professional money
managers. The Sub-Adviser has not previously managed a registered investment
company.
Informally, the Sub-Adviser's Board members confer on a continuous basis,
gathering economic sector, industry and stock specific information from the
Sub-Adviser's research and management resources. Each of the Sub-Adviser's
Board members are individually responsible for the analytical coverage of one
or two of the market's eight economic sectors. The Sub-Adviser's "sector
specialists" are encouraged to maintain contact with counterpart sector
specialists from leading outside research organizations. The information
gathered for consideration by the Board's sector specialists also includes
objective forms of research from various governmental agencies, stock
exchanges and financial capitols. Formally, the Sub-Adviser's Board meets
monthly to formulate overall strategic investment positions. The Board then
formally reviews its current investment focus towards every stock, industry,
and economic sector owned in its overall stock population. When stocks are
sold or removed from the Sub-Adviser's overall population, it is generally
because their investment characteristics have deteriorated to a point deemed
to be unfavorable by the sector specialist or the full membership of the
Board. Stocks which appear to have above-market characteristics may also be
added to the Sub-Adviser's overall population, and to a Portfolio (if
otherwise consistent with the Portfolio's investment objective and
restrictions) by the sector specialist or the collective vote of the
Sub-Adviser's Board members, anytime during the month, or during the
Sub-Adviser's formal month-end Board meeting.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for each Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolios and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolios. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolios.
The Sub-Adviser's investment philosophies reflect fundamental research,
both qualitative and quantitative. It utilizes industry analysts, direct
field investigations, and market relative comparative measures in evaluating
prospective and current investments of the Portfolios. These comparative
measures include, but are not limited to, insider ownership and changes
thereto, institutional ownership and changes thereto, earnings projections
and predictability, return on equity, price/earnings ratios during various
measuring periods, and price to book value. Investment selections are also
influenced by the cyclical aspects of the economy, monetary flows, policies
of the Federal Reserve, and the Sub-Adviser's proprietary comparative
analysis methods. The Sub-Adviser conducts a detailed review of each
Portfolio's investments on a monthly basis, based on comparative and other
research categories. The scope of its research is obtained from governmental
agencies, analyst driven research departments and stock exchanges.
In undertaking its research and conducting its analysis of current and
potential investments for the Portfolios, the Sub-Adviser utilizes complex
proprietary computer-based programs developed by the Sub-Adviser's parent,
C.A.S.E., Inc. These programs are available to the Sub-Adviser by license
from its parent. The Sub-Adviser believes that time and cost efficiencies
associated with these programs
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<PAGE>
permit it to maintain current information on over 4,000 stocks listed on the
major North American exchanges in fifty-seven industries and eight economic
sectors and to evaluate this information on a market comparative basis using
over 30 different strategic and econometric models.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net
assets of the Portfolios.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolios. The Sub-Adviser is
authorized to consider sales of the Contracts described in the accompanying
prospectus by a broker-dealer as a factor in the selection of broker-dealers
to execute portfolio transactions. In placing portfolio business with all
dealers, the Sub-Adviser seeks best execution of each transaction and all
brokerage placement must be consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. In addition, the Sub-
Adviser may occasionally place portfolio business with broker-dealers
affiliated with the Investment Adviser or the Sub-Adviser; in such event, the
Sub-Adviser always will seek best execution.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Codes of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof which may potentially affect the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Portfolios intend to distribute substantially all of the net
investment income, if any. Dividends from investment income, if any, of the
Portfolios normally are declared and paid semi-annually in additional shares
of the Portfolios at net asset value. Distributions of net realized capital
gains from security transactions and net gains from foreign currency
transactions, if any, normally are declared and paid in additional shares of
the Portfolios at the end of the fiscal year.
TAXES
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, a Portfolio is not subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions, and net short-term capital gain, if any) and any net capital
gain (the excess of net long-term capital gain over net short-term capital
loss) that it distributes to its shareholders. It is each Portfolio's
intention to distribute all such income and gains.
Shares of each Portfolio are offered only to the Separate Account (which
is an insurance company separate account that funds the Contracts). Under the
Code, no tax is imposed on an insurance company with respect to income of a
qualifying separate account properly allocable to the value of eligible
variable annuity contracts. For a discussion of the taxation of life
insurance companies and the Separate Account, as well as the tax treatment of
the Contracts and the Contract Owners thereof, see "Federal Tax Matters"
included in the respective prospectuses for the Contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
each Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat each Portfolio's assets as assets of the
related separate account, these limitations also apply to each Portfolio's
assets that may
13
<PAGE>
be invested in securities of a single issuer. Specifically, the regulations
provide that, except as permitted by the "safe harbor" described below, as of
the end of each calendar quarter or within 30 days thereafter no more than
55% of the Portfolio's total assets may be represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of a Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Account, WRL, the Contracts, and tax
consequences to the Contract Owners thereof, other than as described in the
prospectus for the Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting a Portfolio and its shareholders; see
the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Contracts. Such charges are described in the respective
prospectuses for the Contracts.
VALUATION OF SHARES
A Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of each Portfolio by the total number of shares outstanding in
each Portfolio.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolios are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis. (See the Statement of Additional
Information for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers shares of the Portfolios for purchase by the Separate
Account to fund benefits under the Contracts. The Fund also offers shares of
other Fund portfolios, not available under the Contracts, for purchase by
other insurance company separate accounts (the "Other Separate Accounts") of
Western Reserve Life Assurance Company of Ohio ("WRL"), PFL Life Insurance
Company ("PFL"), and AUSA Life Assurance Company, Inc. ("AUSA"), (WRL, PFL
and AUSA together, the "Life Companies"), to fund the benefits under certain
variable life insurance policies and variable annuity contracts (the policies
and contracts together, the "Policies"). The Life Companies are affiliates.
Because shares of all portfolios of the Fund are sold to these various
separate accounts established to receive and invest premiums received under
variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it
14
<PAGE>
may become disadvantageous for such variable life insurance separate accounts
and variable annuity separate accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of shares of the Portfolios by the Separate Account or of shares of other
Fund portfolios by one or more of the Other Separate Accounts, which could
have adverse consequences. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in Federal income tax laws,
or (3) differences in voting instructions between those given by variable
life insurance policyowners and those given by variable annuity
contractowners. If the Board of Directors were to conclude that separate
funds should be established for variable life and variable annuity separate
accounts, the affected Life Companies will bear the attendant expenses, but
variable life insurance policyowners and variable annuity contractowners
would no longer have the economies of scale typically resulting from a larger
combined fund.
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolios and of each of the other portfolios have equal
voting rights, except that only shares of a particular portfolio will be
entitled to vote on matters concerning only that portfolio. Each issued and
outstanding share of a Portfolio is entitled to one vote and to participate
equally in dividends and distributions declared by that Portfolio and, upon
liquidation or dissolution, to participate equally in the net assets of such
Portfolio remaining after satisfaction of outstanding liabilities. The shares
of each Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Account and the Other Separate Accounts of the Life
Companies may hold shares of portfolios of the Fund and are entitled to
exercise the rights directly as described above. If and to the extent
required by law, WRL will vote the Portfolios' shares, and the Life Companies
will vote the shares of the Fund's other portfolios in the Other Separate
Accounts, including shares which are not attributable to Contract Owners and
holders of the Policies, respectively, at meetings of the Fund in accordance
with instructions received from Contract Owners and holders of the Policies,
respectively, having voting interests in the corresponding sub-accounts of
the Separate Account and the Other Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
If the 1940 Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Contract Owners and holders of the Policies
are described in more detail in the prospectuses or disclosure document for
the Contract and the Policies, respectively.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of a Portfolio's total
return or yield in connection with the total return for the corresponding
sub-account of the Separate Account in advertisements, sales literature or
reports to Contract Owners or to prospective investors. Total return and
yield quotations for a Portfolio reflect only the performance of a
hypothetical investment in the Portfolio during the particular time period
shown as calculated based on the historical performance of the Portfolio
during that period. Such quotations do not in any way indicate or project
future performance. Quotations of total return and yield will not reflect
charges or deductions against the Separate Account or charges and deductions
against the Contracts. Where relevant, the prospectus for the Contracts
contains additional performance information.
The total return of a Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five
15
<PAGE>
years, ten years and since the Portfolio began operations, as of a stated
ending date. When a Portfolio has been in operation for these periods, the
total return for such periods will be provided if performance information is
quoted. Total return quotations for a Portfolio are expressed as average
annual compound rates of return for each of the periods quoted, reflect the
deduction of a proportionate share of a Portfolio's investment advisory fees
and Portfolio expenses, and assume that all dividends and capital gains
distributions during the period are reinvested in the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Contract Owners or to prospective investors, total
returns for a Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Fund may also, from time to time, compare performance information for
a Portfolio in advertisements, sales literature and reports to Contract
Owners or to prospective investors to: (1) the Standard & Poor's Index of 500
Common Stocks, the Dow Jones Industrial Average or other widely recognized
indices; (2) other mutual funds whose performance is reported by Lipper
Analytical Services, Inc., ("Lipper"), Variable Annuity Research & Data
Service ("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds according to overall
performance, investment objective, and assets. Unmanaged indices may assume
the reinvestment of dividends but usually do not reflect any "deduction" for
the expense of operating or managing a fund.
(See the Statement of Additional Information for more information about
the Portfolios' performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Contract Owners, at least semi-annually,
reports showing the Portfolios' compositions and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Contract Owners each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolios'
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
16
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
C.A.S.E. Management, Inc.
2255 Glades Road
Suite 221-A
Boca Raton, FL 33431
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES OR
ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00069-05/96
17
<PAGE>
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
C.A.S.E. GROWTH & INCOME PORTFOLIO
C.A.S.E. GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio and
C.A.S.E. Growth Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy
of the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
C.A.S.E. MANAGEMENT, INC.
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00073 -5/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF ADDITIONAL INFORMATION TO PAGE IN PROSPECTUS
------------------------------ --------------------------
<S> <C> <C>
Investment Objective and Policies 1 4-7
Investment Restrictions 1 10
Repurchase and Reverse Repurchase Agreements 3 7
Lending of Portfolio Securities 3 8
Foreign Securities 3 8
Non-Investment Grade Debt Securities 4 7
Investments in Futures, Options and Other
Derivative Instruments 4 7
Management of the Fund 15 11
Directors and Officers 15 11
The Investment Adviser 17 11
The Sub-Adviser 18 11
Portfolio Transactions and Brokerage 19 13
Portfolio Turnover 19 10
Placement of Portfolio Brokerage 19 13
Purchase and Redemption of Shares 21 14
Offering of the Shares and Determination of
Offering Price 21 14
Net Asset Valuation 21 14
Investment Experience Information 22 15
Calculation of Performance Related Information 22 15
Total Return 22 16
Yield Quotations 22 16
Taxes 23 13
Capital Stock of the Fund 24 14
Registration Statement 25 N/A
Financial Statements 25 16
Appendix A - Description of Portfolio Securities A-1 7-10
Appendix B - Description of Selected Corporate Bond
and Commercial Paper Ratings B-1 4
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the C.A.S.E. Quality Growth Portfolio,
C.A.S.E. Growth & Income Portfolio and C.A.S.E. Growth Portfolio (the
"Portfolios") of the Fund are described in the Portfolios' Prospectus. Shares
of the Portfolios are sold only to the WRL Series Annuity Account, a
separate, segregated asset account (the "Separate Account") of Western
Reserve Life Assurance Co. of Ohio ("WRL") to fund the benefits under certain
variable annuity contracts (the "Contracts").
As indicated in the Prospectus, the Portfolios' investment objectives and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of the owners of the
Contracts (collectively, "Contract Owners"). A change in the investment
objectives or policies of a Portfolio may result in the Portfolios having
investment objectives or policies different from those which a Contract Owner
deemed appropriate at the time of investment.
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of a Portfolio are represented or (ii) more than 50% of the
outstanding shares of a Portfolio. A complete statement of all such
fundamental policies is set forth below.
INVESTMENT RESTRICTIONS - ALL PORTFOLIOS
A Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 15% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures
contracts, caps, floors and other derivative instruments, engaging in swap
transactions or investing in securities or other instruments backed by
physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Contract Owner approval:
(A) A Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value
1
<PAGE>
of the Portfolio's net assets, after taking into account unrealized profits
and losses on such contracts it has entered into and (ii) enter into any
futures contracts or options on futures contracts if the aggregate amount of
the Portfolio's commitments under outstanding futures contracts positions and
options on futures contracts would exceed the market value of its total
assets.
(B) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to provide
margin or guarantee positions in options, futures contracts, swaps, forward
contracts or other derivative instruments or the segregation of assets in
connection with such transactions;
(C) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, futures contracts,
swaps, forward contracts and other derivative instruments are not deemed to
constitute selling securities short;
(D) A Portfolio may not purchase securities on margin, except that a
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, forward contracts, and other derivative instruments shall not be
deemed to constitute purchasing securities on margin;
(E) A Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the
value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets
will be reduced within three business days to the extent necessary to comply
with the 25% restriction. This policy shall not prohibit reverse repurchase
agreements or deposits of assets to provide margin or guarantee positions in
connection with transactions in options, future contracts, swaps, forward
contracts, or other derivative instruments or the segregation of assets in
connection with such transactions;
(F) A Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or other securities for which the
Board of Directors or the Sub-Adviser has made a determination of liquidity,
as permitted under the 1940 Act;
(G) A Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not apply
to money market funds or to securities received as dividends, through offers
to exchange, or as a result of reorganization, consolidation, or merger. If
the Portfolio invests in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money
market fund;
(H) A Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(I) A Portfolio may not invest more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors;
(J) A Portfolio may not invest in companies for the purpose of exercising
control or management; and
(K) A Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of a
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowings,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolios'
investments in foreign securities to meet additional diversification and
other requirements.
2
<PAGE>
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, a Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation
is in effect secured by the value (at least equal to the amount of the agreed
upon resale price and marked-to-market daily) of the underlying security. A
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to a Portfolio in connection with bankruptcy
proceedings), it is the policy of each Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by the Sub-Adviser.
In a reverse repurchase agreement, a Portfolio sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and
agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, a Portfolio will maintain cash
and appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. A Portfolio will enter into reverse
repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
LENDING OF PORTFOLIO SECURITIES
Each of the Portfolios may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
of the Portfolios must receive any dividends or interest paid by the issuer
on such securities; (c) each of the Portfolios must have the right to call
the loan and obtain the securities loaned at any time upon notice of not more
than five business days, including the right to call the loan to permit
voting of the securities; and (d) each of the Portfolios must receive either
interest from the investment of collateral or a fixed fee from the borrower.
Securities loaned by a Portfolio remain subject to fluctuations in market
value. A Portfolio may pay reasonable finders, custodian and administrative
fees in connection with a loan. Securities lending, as with other extensions
of credit, involves the risk that the borrower may default. Although
securities loans will be fully collateralized at all times, a Portfolio may
experience delays in, or be prevented from, recovering the collateral. During
the period that the Portfolio seeks to enforce its rights against the
borrower, the collateral and the securities loaned remain subject to
fluctuations in market value. A Portfolio may also incur expenses in
enforcing its rights. If a Portfolio has sold a loaned security, it may not
be able to settle the sale of the security and may incur potential liability
to the buyer of the security on loan for its costs to cover the purchase.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolios may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These
considerations include changes in currency rates, currency exchange control
regulations, the possibility of expropriation, the unavailability of
financial information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It is possible that market quotations for foreign
securities will not be readily available. In such event, these securities
shall be valued at fair market value as determined in good faith by the
Sub-Adviser under the supervision of the Board of Directors. If it should
become necessary, a Portfolio could encounter greater difficulties in
invoking legal processes
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abroad than would be the case in the United States. Transaction costs with
respect to foreign securities may be higher. The Investment Adviser and the
Sub-Adviser will consider these and other factors before investing in foreign
securities. The Portfolios will not concentrate their investments in any
particular foreign country.
To the extent a Portfolio invests directly in foreign securities, a
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that a Portfolio is subject to
the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, a Portfolio
may be required to complete a currency exchange transaction at a time outside
of normal business hours in the counterparty's location, making prompt
settlement of such transaction impossible. This exposes a Portfolio to an
increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions. For a more
detailed explanation regarding the special risks of investing in foreign
securities, see "Foreign Investments and Special Risks" in the Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES
A Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities")
as determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or
Standard & Poor's ("S&P") (BBB). The Portfolios do not currently intend to
invest more than 5% of their assets in non-investment grade securities.
Before investing in any lower-grade debt securities, the Sub-Adviser will
determine that such investments meet the Portfolio's investment objectives
and that the lower-grade debt securities' ratings are supported by an
internal credit review, which the Sub-Adviser will conduct in each such
instance. Lower-grade debt securities usually have moderate to poor
protection of principal and interest payments, have certain speculative
characteristics (see Appendix B for a description of the ratings), and
involve greater risk of default or price declines due to changes in the
issuer's creditworthiness than investment-grade debt securities. Because the
market for lower-grade debt securities may be thinner and less active than
for investment grade debt securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Market
prices for lower-grade debt securities may decline significantly in periods
of general economic difficulty or rising interest rates. Through portfolio
diversification and credit analysis, investment risk can be reduced, although
there can be no assurance that losses will not occur.
The quality limitation set forth in the Portfolios' investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. Each Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies or contracts based on financial indices including interest rates
or indices of U.S. Government or foreign government securities or equity or
fixed-income securities ("futures contracts"). U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Since all transactions in the futures market are
made through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, a Portfolio
will incur brokerage fees when it buys or sells futures contract.
When a Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
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specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against
potential changes in interest or currency exchange rates or the price of a
security or a securities index which might correlate with or otherwise
adversely affect either the value of a Portfolio's securities or the prices
of securities which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the
delivery date. However, both the buyer and seller are required to deposit
"initial margin" for the benefit of a FCM when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be maintained in
cash or certain high-grade liquid assets. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments with a FCM to settle the change in value on a daily basis.
The party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments are similar to good faith
deposits or performance bonds, unlike margin extended by a securities broker,
and initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Portfolio's investment limitations.
In the event of the bankruptcy of an FCM that holds margin on behalf of a
Portfolio, the Portfolio may be entitled to return of margin owed to the
Portfolio only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser will attempt to minimize the risk by careful
monitoring of the creditworthiness of the FCM's with which the Portfolios do
business and by depositing margin payments in a segregated account with the
custodian when practical or otherwise required by law.
Although a Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost
of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
a Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. The Portfolio also could seek
to protect against potential price declines by selling portfolio securities
and investing in money market instruments. However, since the futures market
is more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility
of having to buy equity securities at higher prices. This technique is
sometimes known as an anticipatory hedge. Since the fluctuations in the value
of futures contracts should be similar to those of equity securities, a
Portfolio could take advantage of the potential rise in the value of equity
securities without buying them until the market has stabilized. At that time,
the futures contracts could be liquidated and the Portfolio could buy equity
securities on the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to futures
contracts will consist of high-grade liquid assets from its portfolio in an
amount equal to the difference between the contract price and the aggregate
value of the initial and variation margin payments made by the Portfolio with
respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are
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subject to initial margin and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close out
futures contracts through offsetting transactions which could distort the
normal price relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced and prices in the futures market distorted. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the Sub-Adviser
still may not result in a successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolios, if the Sub-Adviser's investment
judgment is incorrect, a Portfolio's overall performance could be worse than
if the Portfolio had not entered into futures contracts. For example, if a
Portfolio has attempted to hedge against the effects of a possible decrease
in prices of securities held by the Portfolio and prices increase instead,
the Portfolio may lose part or all of the benefit of the increased value of
these securities because of offsetting losses in the Portfolio's futures
positions. In addition, if the Portfolio has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may, but will not necessarily, be at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to a Portfolio will not match exactly the Portfolio's current or
potential investments. A Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests - for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities - which involves a risk that the futures position will not
correlate precisely with the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with a Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the
underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between a Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. A Portfolio may buy or sell futures
contracts with a greater or lesser value than the securities it wishes to
hedge or is considering purchasing in order to attempt to compensate for
differences in historical volatility between the futures contract and the
securities, although this may not be successful in all cases. If price
changes in a Portfolio's futures positions are poorly correlated with its
other investments, its futures positions may fail to produce desired gains or
result in losses that are not offset by the gains in the Portfolio's other
investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached, it may be
impossible for a Portfolio to enter into new positions or close out existing
positions. If the secondary market for a futures contract is not liquid
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because of price fluctuation limits or otherwise, a Portfolio may not be able
to promptly liquidate unfavorable positions and potentially be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets
held to cover its futures positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
Each of the Portfolios intend to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. Such guidelines presently require that to the extent that a
Portfolio enters into futures contracts or options on a futures position that
are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.
Options on Futures Contracts. A Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a
futures contract at a specified price on or before a specified date. The
purchase and writing of options on futures contracts is similar in some
respects to the purchase and writing of options on individual securities. See
"Options on Securities" below. Transactions in options on futures contracts
will not be made for speculation and will not be made other than to attempt
to hedge against potential changes in interest rates or currency exchange
rates or the price of a security or a securities index which might correlate
with or otherwise adversely affect either the value of the Portfolio's
securities or the prices of securities which the Portfolio is considering
buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when a Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at the expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract may
constitute a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option a Portfolio has written is exercised, the Portfolio will incur a
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, a
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities.
For example, a Portfolio may buy a put option on a futures contract to
attempt to hedge the Portfolio's securities against the risk of falling
prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs.
In addition to the correlation risks discussed
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above, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the options bought.
Forward Contracts. Each Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed
price (which may be in U.S. dollars or a foreign currency) at a future date
which is individually negotiated between currency traders and their
customers. A Portfolio may invest in forward currency contracts with stated
contract values of up to the value of the Portfolio's assets.
A Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell
a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward currency
contract to sell an amount of that foreign currency (or a proxy currency
whose performance is expected to replicate the performance of that currency)
for U.S. dollars approximating the value of some or all of the portfolio
securities denominated in that currency (not exceeding the value of the
Portfolio's assets denominated in that currency) or by participating in
options or futures contracts with respect to the currency, or, when the
Sub-Adviser believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, the Portfolios may enter into a forward currency
contract to buy that foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge seeks to minimize the effect of
currency appreciation as well as depreciation, but does not protect against a
decline in the security's value relative to other securities denominated in
the foreign currency.
A Portfolio also may enter into a forward currency contract with respect
to a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances a Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, a
Portfolio could enter into a contract to sell that currency or a proxy
currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting the
Portfolio's currency exposure from one foreign 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 to the Portfolio if
the Sub-Adviser's projection of future exchange rates is inaccurate.
A Portfolio also may enter into forward contracts to buy or sell at a
later date instruments in which a Portfolio may invest directly or on
financial indices based on those instruments. The market for those types of
forward contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the
Fund's custodian will place cash or high-grade liquid assets in a segregated
account of a Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in
the segregated account declines, additional cash or high-grade liquid assets
will be placed in the account on a daily basis so that the value of the
account will be equal to the amount of the Portfolio's commitments with
respect to such contracts. As an alternative to maintaining all or part of
the segregated account, a Portfolio may
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buy call options permitting the Portfolio to buy the amount of foreign
currency subject to the hedging transaction by a forward sale contract or the
Portfolio may buy put options permitting the Portfolio to sell the amount of
foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event a Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unforeseen changes in currency prices may
result in poorer overall performance for a Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent
value of the proceeds of or rates of return on the Portfolio's foreign
currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedging transaction generally
will not be precise. In addition, a Portfolio may not always be able to enter
into forward contracts at attractive prices and accordingly may be limited in
its ability to use these contracts in seeking to hedge the Portfolio's
assets.
Also, with regard to a Portfolio's use of cross-hedging transactions,
there can be no assurance that historical correlations between the movement
of certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are subject of the cross-
hedging transaction are denominated.
Options on Foreign Currencies. A Portfolio may buy put and call options
and may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in
the U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. 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, a Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to a
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to a Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs.
Each of the Portfolios may write options on foreign currencies for the
same types of hedging purposes. For example, in attempting to hedge against a
potential decline in the U.S. dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates, a Portfolio could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities will be offset
by the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. 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 the Portfolio
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to hedge the increased cost up to the amount of premium. 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
received, and only if exchange rates move in the expected direction. If that
does not occur, the option may be exercised and the Portfolio would be
required to buy 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 lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
Each of the Portfolios may write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign
currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other foreign currency held in its portfolio. A call option is
also covered if the Portfolio has a call on the same foreign currency and in
the same principal amount as the call written if the exercise price of the
call held (i) is equal to or less than the exercise price of the call written
or (ii) is greater than the exercise price of the call written, and if the
difference is maintained by the Portfolio in cash or high-grade liquid assets
in a segregated account with the Fund's custodian.
Each of the Portfolios may also write call options on foreign currencies
for cross-hedging purposes that may not be deemed to be covered. A call
option on a foreign currency is for cross-hedging purposes if it is not
covered but is designed to provide a hedge against a decline due to an
adverse change in the exchange rate in the U.S. dollar value of a security
which the Portfolio owns or has the right to acquire and which is denominated
in the currency underlying the option. In such circumstances, the Portfolio
collateralizes the option by maintaining, in a segregated account with the
Fund's custodian, cash or high-grade liquid assets in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked-to-market
daily.
A Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in
which the Portfolio is permitted to invest directly. A Portfolio will effect
such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions)
deemed creditworthy, and only pursuant to procedures adopted by the
Sub-Adviser for monitoring the creditworthiness of those entities. To the
extent that an option bought or written by a Portfolio in a negotiated
transaction is illiquid, the value of an option bought or the amount of the
Portfolio's obligations under an option written by the Portfolio, as the case
may be, will be subject to the Portfolio's limitation on illiquid
investments. In the case of illiquid options, it may not be possible for the
Portfolio to effect an offsetting transaction at the time when the
Sub-Adviser believes it would be advantageous for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, a Portfolio may write covered put and call options and may buy put and
call options and warrants on securities that are traded on United States and
foreign securities exchanges and over-the-counter. A Portfolio also may write
call options that are not covered for cross-hedging purposes. A Portfolio may
write and buy options on the same types of securities that the Portfolio
could buy directly and may buy options on financial indices as described
above with respect to futures contracts. There are no specific limitations on
the Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by a Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with
a value equal to the exercise price in a segregated account with its
custodian or (ii) holds a put on the same security and in the same principal
amount as the put written and the exercise price of the put held is equal to
or greater than the exercise price of the put
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written. The premium paid by the buyer of an option will reflect, among other
things, the relationship of the exercise price to the market price and the
volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.
A call option written by a Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid
assets in a segregated account with its custodian.
A Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. A Portfolio
would write a call option for cross-hedging purposes, instead of writing a
covered call option, when the premium to be received from the cross-hedge
transaction would exceed that which would be received from writing a covered
call option and the Sub-Adviser believes that writing the option would
achieve the desired hedge.
If a put or call option written by a Portfolio was exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction". This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit a Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to
the option to be used for other portfolio investments. If a Portfolio desires
to sell a particular security on which the Portfolio has written a call
option, the Portfolio will effect a closing transaction prior to or
concurrent with the sale of the security.
11
<PAGE>
A Portfolio may realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing
the option or the price received from a sale transaction is more than the
premium paid to buy the option; a Portfolio may realize a loss from a closing
transaction if the price of the purchase transaction is more than the premium
received from writing the option or the price received from a sale
transaction is less than the premium paid to buy the option. Because
increases in the market of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options with the result that a Portfolio would have to exercise the options
in order to realize any profit. If a Portfolio is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or the Portfolio delivers the
underlying security upon exercise. Reasons for the absence of a liquid
secondary market may include the following: (i) there may be insufficient
trading interest in certain options, (ii) restrictions may be imposed by a
national securities exchange on which the option is traded ("Exchange") on
opening or closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or
series of options or underlying securities, (iv) unusual or unforeseen
circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation ("OCC") may not
at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC
as a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Each of the Portfolios may write options in connection with buy-and-write
transactions; that is, a Portfolio may buy a security and then write a call
option against that security. The exercise price of the call a Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when
it is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in
the price of the underlying security alone. If the call options are exercised
in such transactions, a Portfolio's maximum gain will be the premium received
by it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset by the amount of
premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus
the amount by which the market price of the security is below the exercise
price.
12
<PAGE>
A Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, a Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
A Portfolio may buy call options to attempt to hedge against an increase
in the price of securities that the Portfolio may buy in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Portfolio.
In purchasing an option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option brought by a Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to
protect the value of a Portfolio's investments from interest rate or currency
exchange rate fluctuations, the Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. The Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. A Portfolio
also may enter into these transactions to attempt to protect against any
increase in the price of securities the Portfolios may consider buying at a
later date. The Portfolio does not intend to use these transactions as a
speculative investment. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments. The exchange commitments can involve payments to be made in the
same currency or in different currencies. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter
instruments and their use involves risks specific to the markets in which
they are entered into. A Portfolio will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap
will be calculated on a daily basis and an amount of cash or high-grade
liquid assets having an aggregate net asset value of at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If a Portfolio enters into an interest rate swap on other than a
net basis, the Portfolio would maintain a segregated account in the full
amount accrued on a daily basis of the Portfolio's obligations with respect
to the swap. A Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest
rating categories of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. The Sub-Adviser
will monitor the creditworthiness of all counterparties on an ongoing basis.
If there is a default by the other party to such a transaction, the Portfolio
will have contractual remedies pursuant to the agreements related to the
transaction.
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
13
<PAGE>
documentation. The Sub-Adviser has determined that, as a result, the swap
market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. To the extent a Portfolio
sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or high-grade liquid assets having an aggregate net asset value
at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by a Portfolio; although a Portfolio does not presently
intend to engage in such transactions in excess of 5% of its total assets.
These transactions may in some instances involve the delivery of securities
or other underlying assets by a Portfolio or its counterparty to
collateralize obligations under the swap. Under the documentation currently
used in those markets, the risk of loss with respect to interest rate swaps
is limited to the net amount of the interest payments that a Portfolio is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, a Portfolio would risk the loss of the
net amount of the payments that the Portfolio contractually is entitled to
receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques, that become
available as the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. The Sub-Adviser may use these
opportunities to the extent they are consistent with the each Portfolio's
respective investment objectives and are permitted by each Portfolio's
respective investment limitations and applicable regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which Portfolios invest. Should interest or exchange rates or
the prices of securities or financial indices move in an unexpected manner, a
Portfolio may not achieve the desired benefits of futures, options, swaps and
forwards or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts
and options on futures contracts, there are no daily price fluctuation limits
with respect to options on currencies, forward contracts and other negotiated
or over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
A Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to a Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that a Portfolio will be able to use those instruments effectively
for the purposes set forth above.
In connection with certain of its hedging transactions, a Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be
disposed of for so long as the Portfolio maintains the positions giving rise
to the segregation
14
<PAGE>
requirement. Segregation of a large percentage of the Portfolio's assets
could impede implementation of the Portfolio's investment policies or the
Portfolio's ability to meet redemption requests or other current obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation. Similarly,
options on currencies may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the buyer of an option
cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, an option writer and a
buyer or seller of futures or forward contracts could lose amounts
substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result,
the OCC may, if it determines that foreign government restrictions or taxes
would prevent the orderly settlement of foreign currency option exercises, or
would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in
the mechanics of delivery of currency, the fixing of dollar settlement prices
or prohibitions, on exercise.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in
foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a Portfolio's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) low trading
volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
15
<PAGE>
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer, (1968 - 1988), Director (1968 -1987), Pioneer Western
Corporation; Vice President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (1)(2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present) President (1978 - 1987 and December, 1992
- present), Director (1978 -present), Western Reserve Life Assurance Co. of
Ohio; Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President (1988 - 1989), Director (1976 - February, 1991),
Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 -present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present) Chairman
(December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 - September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1)(2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1)(2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 - present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 -February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1)(2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present)
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995), Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992
-August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 -June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 -July, 1991), University of
South Florida.
ALAN M. YAEGER (1)(2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
16
<PAGE>
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. For the period May 1,
1995 - December 31, 1995, the C.A.S.E. Quality Growth, C.A.S.E. Growth &
Income and C.A.S.E. Growth Portfolio share of Directors' fees and expenses
paid by the Fund were $1, $1, and $3, respectively.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Contracts indirectly invested in the Fund. The Board of Directors has
established an Audit Committee consisting of Messrs. Brown, Harris and
Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio ("WRL" or the "Investment
Adviser") serves as the investment adviser to the Portfolios pursuant to an
Investment Advisory Agreement dated February 6, 1995 with the Fund on behalf
of the Portfolios. The Investment Adviser is a wholly-owned subsidiary of
First AUSA Life Insurance Company ("First AUSA"), a stock life insurance
company which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a
financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 18,
1996. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolios, and
(b) by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of a Portfolio and terminate
automatically in the event of assignment (within the meaning of the 1940
Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by
17
<PAGE>
the Board of Directors, is responsible for the actual management of the
Portfolios and has responsibility for making decisions to buy, sell or hold
any particular security. The Investment Adviser also is obligated to provide
all the office space, facilities, equipment and personnel necessary to
perform its duties under the Agreement. For further information about the
management of the Portfolios, see "The Sub-Adviser", page 18.
Advisory Fee. The method of computing the investment advisory fee is
described in the Prospectus. For the period from May 1, 1995 to December 31,
1995, the Investment Adviser was paid fees for its services on behalf of the
C.A.S.E. Quality Growth Portfolio in the amount of $3,871, the C.A.S.E.
Growth & Income Portfolio in the amount of $3,453 and the C.A.S.E. Growth
Portfolio in the amount of $5,519.
Payment of Expenses. The Investment Adviser provides investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolios, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolios by the Investment Adviser. The Fund pays all
other expenses incurred in its operation and all of the Portfolios' general
administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses of registering the shares under
Federal and state securities laws, pricing costs (including the daily
calculation of net asset value), interest, certain taxes, charges of the
custodian, fees and expenses of Fund non-interested directors, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, SEC fees, advisory fees, certain insurance premiums, costs of
corporate meetings, costs of maintenance of corporate existence, investor
services (including allocable telephone and personnel expenses),
extraordinary expenses, and other expenses properly payable by the Fund.
Depending upon the nature of the lawsuit, litigation costs may be borne by
the Fund.
Expenses that relate exclusively to a particular Portfolio, such as
brokerage commissions, custodian fees, and registration fees for shares, are
paid by that Portfolio. Other expenses are allocated to the Portfolios in an
equitable manner determined by the Portfolios' Investment Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the C.A.S.E. Growth Portfolio to the
extent normal operating expenses (including investment advisory fees but
excluding interest, taxes, brokerage fees, commissions and extraordinary
charges) exceed, as a percentage of each Portfolio's average daily net
assets, 1.00%. For the period May 1, 1995 to December 31, 1995, the
Investment Adviser paid expenses on behalf of the C.A.S.E. Quality Growth,
C.A.S.E. Growth & Income and C.A.S.E. Growth Portfolios in the amounts of
$23,966, $23,049 and $23,832, respectively. Effective May 1, 1996, the
Investment Adviser has voluntarily undertaken, until at least April 30, 1997,
to pay on behalf of the C.A.S.E. Quality Growth Portfolio and the C.A.S.E.
Growth & Income Portfolio to the extent normal operating expenses (including
investment advisory fees but excluding interest, taxes, brokerage fees,
commissions and extraordinary charges) exceed, as a percentage of a
Portfolio's average daily net assets, 1.50%. In the absence of the fee waiver
and expense reimbursement during 1995, the expenses of the C.A.S.E. Quality
Growth Portfolio would have equaled 5.91% of that Portfolio's net assets on
an annualized basis. In the absence of the fee waiver and expense
reimbursement during 1995, the expenses of the C.A.S.E. Growth & Income
Portfolio would have equaled 6.17% of that Portfolio's net assets on an
annualized basis. The Investment Adviser is not obligated to continue any
voluntary expense limitation beyond April 30, 1997.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
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C.A.S.E. Management, Inc. (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolios pursuant to a Sub-Advisory Agreement dated February 6,
1995 on behalf of the Portfolios. The Sub-Advisory Agreement was most
recently approved by the Board of Directors of the Fund, including a majority
of the Directors who were not "interested persons" of the Fund (as defined in
the 1940 Act), on March 18, 1996. The Sub-Advisory Agreement provides that it
will continue in effect from year to year if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding shares of
the Portfolios, and (b) by a majority of the Directors who are not parties to
such Agreement or "interested persons" (as defined in the 1940 Act) of any
such party. The Sub-Advisory Agreement may be terminated without penalty on
60 days' written notice at the option of either party or by the vote of the
shareholders of the Portfolios and terminate automatically in the event of
assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolios. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolios and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolios. Such managers consider
analyses from various sources, make the necessary decisions and effect
transactions accordingly. The Sub-Adviser bears all of its expenses in
connection with the performance of its services under the Sub-Advisory
Agreement, such as compensating and furnishing office space for its officers
and employees connected with investment and economic research, trading and
investment management of the Portfolios. The method of computing the
Sub-Adviser's fee is set forth in the Prospectus. For the period May 1, 1995
(commencement of operations) to December 31, 1995, the Sub-Adviser was paid
fees for the C.A.S.E. Quality Growth Portfolio in the amount of $1,895, the
C.A.S.E. Growth & Income Portfolio in the amount of $1,726 and the C.A.S.E.
Growth Portfolio in the amount of $2,759.
The Sub-Adviser, located at 2255 Glades Road, Suite 221-A, Boca Raton,
Florida 33431, is a registered investment advisory firm and a wholly-owned
subsidiary of C.A.S.E., Inc. The Sub-Adviser provides investment management
services to financial institutions, high net worth individuals, and other
professional money managers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Fund Portfolios - Portfolio
Turnover" in the Prospectus. In computing the portfolio turnover rate for
each Portfolio, securities whose maturities or expiration dates at the time
of acquisition are one year or less are excluded. Subject to this exclusion,
the turnover rate for a Portfolio is calculated by dividing (a) the lesser of
purchases or sales of portfolio securities for the fiscal year by (b) the
monthly average of portfolio securities owned by the Portfolio during the
fiscal year. For the period May 1, 1995 to December 31, 1995, the Portfolio
turnover rates were 119.63% for the C.A.S.E. Quality Growth Portfolio, 72.73%
for the C.A.S.E. Growth & Income Portfolio and 121.62% for the C.A.S.E.
Growth Portfolio.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Securities
initially satisfying the basic policies and objectives of each Portfolio may
be disposed of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolios'
securities transactions. In placing orders, it is the policy of the
Portfolios to obtain the most favorable net results, taking into account
various factors, including price, dealer spread or commissions, if any, size
of the transaction and difficulty of execution. While the Sub-Adviser
generally will seek reasonably competitive spreads or commissions, the
Portfolios will not
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necessarily be paying the lowest spread or commission available. The
Portfolios do not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolios and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser and/or
the Sub-Adviser's parent, and pay spreads or commissions to such brokers or
dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same
transaction. Supplemental investment research provided to the Sub-Adviser's
parent, C.A.S.E., Inc., is available to the Sub-Adviser pursuant to the
Sub-Adviser's license agreement with its parent. (See "Management of the Fund
- - The Sub-Adviser" in the Prospectus.)
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security traded; the size
and type of the transaction; the nature and character of the markets for the
security purchased or sold; the desired timing of the trade; the activity
existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement
services; financial stability; the existence of actual or apparent
operational problems of any broker or dealer; and research products or
services to be provided.
These products and services may include furnishing advice, either directly
or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio strategy;
access to research analysts, corporate management personnel, industry
experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services, and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information), including the research described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt by the Sub-Adviser or its parent of such
supplemental information. The Sub-Adviser may use such research products and
services in servicing other accounts in addition to the Portfolios. If the
Sub-Adviser determines that any research product or service has a mixed use,
such that it also serves functions that do not assist in the investment
decision-making process, the Sub-Adviser will allocate the costs of such
service or product accordingly. The portion of the product or service that a
Sub-Adviser determines will assist it in the investment decision-making
process may be paid for in brokerage commission dollars. Such allocation may
create a conflict of interest for the Sub-Adviser. Conversely, such
supplemental information obtained by the placement of business for the
Sub-Adviser will be considered by and may be useful to the Sub-Adviser in
carrying out its obligations to the Portfolios.
When a Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by one or more of the Portfolios may also be held by other
separate accounts, mutual funds or other accounts for which the Investment
Adviser or Sub-Adviser serves as an adviser, or held by the Investment
Adviser or Sub-Adviser for their own accounts. Because of different
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investment objectives or other factors, a particular security may be bought
by the Investment Adviser or Sub-Adviser for one or more clients when one or
more clients are selling the same security. If purchases or sales of
securities for one or more of the Portfolios or other entities for which they
act as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Sub-Adviser during the same
period may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of a Portfolio as
well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio(s) with those to be sold
or purchased for such other accounts or companies in order to obtain
favorable execution and lower brokerage commissions. In that event,
allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Sub-Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to a Portfolio and to such other accounts or companies. In some cases this
procedure may adversely affect the size of the position obtainable for a
Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolios, and
reviews the prices and commissions, if any, paid by the Portfolios to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Contracts by a broker-dealer as a factor in the
selection of broker-dealers to execute Portfolio transactions. As stated
above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
For the period May 1, 1995 to December 31, 1995, the C.A.S.E. Quality
Growth, C.A.S.E. Growth & Income and C.A.S.E. Growth Portfolios paid
aggregate commissions in the amount of $3,875, $2,403 and $8,662,
respectively. For the same period, the C.A.S.E. Quality Growth, C.A.S.E.
Growth & Income and C.A.S.E. Growth Portfolios paid no commissions to
C.A.S.E. Management, Inc.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts
to fund the benefits under the Contracts. The Portfolio may, in the future,
offer its shares to other insurance company separate accounts. The Separate
Accounts invests in shares of one or more of the Portfolios in accordance
with the allocation instructions received from Contracts. Such allocation
rights are further described in the prospectuses and disclosure documents for
the Policies and Annuity Contracts. Shares of the Portfolios are sold and
redeemed at their respective net asset values as described in the Prospectus.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares of the
Portfolio outstanding.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of a Portfolio's shares
ordinarily is determined, once daily, as of the close of the regular session
of business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time), on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of each Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities of that Portfolio,
by the total number of shares of that Portfolio outstanding. In determining
asset value, securities listed on the national securities exchanges and the
NASDAQ National Market are valued at
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the closing prices on such markets, or if such a price is lacking for the
trading period immediately preceding the time of determination, such
securities are valued at their current bid price. Foreign securities and
currencies are converted to U.S. dollars using the exchange rate in effect at
the close of the Exchange. Other securities which are traded on the
over-the-counter market are valued at bid price. Other securities for which
quotations are not readily available are valued at fair values as determined
in good faith by the Sub-Adviser under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis discussed above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios. It does not represent or project future
investment performance.
The Portfolios commenced operations on May 1, 1995. The rate of return
indicated below depicts the actual investment experience of each Portfolio
for the period shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief discussion of how performance is
calculated.
TOTAL RETURN
The rate of return is based on the actual investment performance, after
deduction of investment advisory fees and direct Portfolio expenses. The rate
is an average annual compounded rate of return for the period May 1, 1995
(commencement of operations) through December 31, 1995. The C.A.S.E. Quality
Growth, C.A.S.E. Growth & Income and C.A.S.E. Growth Portfolios' rate of
return for the period May 1, 1995 to December 31, 1995 was 13.61%, 14.80% and
20.65%, respectively.
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period)
The total return quotation calculations for a Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
The rates of return do not reflect charges or deductions against the
Separate Account, or charges and deductions against the Contracts.
Accordingly, these rates of return do not illustrate how actual investment
performance will affect benefits under the Contracts. Where relevant, the
prospectus for the Contracts contain performance information. Moreover, these
rates of return are not an estimate, projection or guarantee of future
performance.
YIELD QUOTATIONS
The yield quotations for a Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
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Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
TAXES
Shares of the Portfolios are offered only to the Separate Account that
funds the Contracts. See the prospectus for the Contracts for a discussion of
the special taxation of insurance companies with respect to the Separate
Account and the Contracts, and the owners thereof.
Each Portfolio has qualified and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Contract Owners for each taxable year at
least 90% of its investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from
certain foreign currency transactions) ("Distribution Requirement") and must
meet several additional requirements. These requirements include the
following: (1) the Portfolio must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options, futures
or forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months - options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the Portfolio's
principal business of investing in securities (or options and futures with
respect thereto) ("Short-Short Limitation"); (3) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs, and other securities that, with respect
to any one issuer, do not exceed 5% of the value of the Portfolio's total
assets and that do not represent more than 10% of the outstanding voting
securities of the issuer; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while a particular
foreign government and its agencies, instrumentalities and political
subdivisions all are considered the same issuer. For information concerning
the consequences of failure to meet the requirements of section 817(h), see
the respective prospectuses for the Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
Dividends and interest received by each Portfolio may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes
on capital gains in respect of investments by foreign investors.
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The Portfolios may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolios will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if a
Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in a
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation,
the Portfolio will be required to include in income each year its pro rata
share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), even if they are not distributed to the Portfolio; those
amounts would be subject to the Distribution Requirement. In most instances
it will be very difficult, if not impossible, to make this election because
of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolios. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by a Portfolio
with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to a
Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Portfolio
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
limitation. The Portfolio intends that, when it engages in hedging
transactions, they will qualify for this treatment, but at the present time
it is not clear whether this treatment will be available for all of the
Portfolio's hedging transactions. To the extent this treatment is not
available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
Contract Owners. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Contracts are not intended as a substitute for careful
tax planning. Accordingly, potential investors are urged to consult their own
tax advisors for more detailed information and for information regarding any
state, local, or foreign taxes applicable to the Contracts and their Contract
Owners.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each Portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Aggressive Growth Portfolio, Balanced
Portfolio, Utility Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth &
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Income Portfolio, C.A.S.E. Growth Portfolio, International Equity Portfolio,
Leisure Portfolio, Janus Balanced Portfolio, Value Equity Portfolio,
Meridian/INVESCO Global Sector Portfolio, Meridian/ INVESCO US Sector
Portfolio and Meridian/INVESCO Foreign Sector Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolios or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio of the Fund for the
year ended December 31, 1995 and the report of the Fund's independent
accountants are included in the 1995 Annual Report, and are incorporated
herein by reference to such report.
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APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolios will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which the Portfolios acquire ownership of a debt security and the seller
agrees to repurchase the obligation at a mutually agreed upon time and price.
The total amount received on repurchase is calculated to exceed the price
paid by the Portfolios, reflecting an agreed upon market rate of interest for
the period from the time of a Portfolio's purchase of the security to the
settlement date (i.e., the time of repurchase), and would not necessarily
relate to the interest rate on the underlying securities. A Portfolio will
only enter into repurchase agreements with underlying securities consisting
of U.S. Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While a Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the SEC has taken the position that repurchase
agreements of greater than seven days together with other illiquid
investments should be limited to an amount not in excess of 15% of a
Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, a Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, a Portfolio could be
ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by a Portfolio upon liquidation of the
securities may be limited.
9. Reverse Repurchase Agreement. A reverse repurchase agreement involves
the sale of securities held by the Portfolios, with an agreement to
repurchase the securities at an agreed upon
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price, date and interest payment. The Portfolios will use the proceeds of the
reverse repurchase agreements to purchase other money market securities
maturing, or under an agreement to resell, at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. The Portfolios
will utilize reverse repurchase agreements when the interest income to be
earned from the investment of the proceeds from the transaction is greater
than the interest expense of the reverse repurchase transaction.
10. Asset-Backed Securities. The Portfolios may invest in securities
backed by automobile receivables and credit-card receivables and other
securities backed by other types of receivables or other assets. Credit
support for asset-backed securities may be based on the underlying assets
and/or provided through credit enhancements by a third party. Credit
enhancement techniques include letters of credit, insurance bonds, limited
guarantees (which are generally provided by the issuer), senior-subordinated
structures and over-collateralization. The Portfolios will only purchase an
asset-backed security if it is rated at least "A" by S&P or Moody's.
11. Mortgage-Backed Securities. The Portfolios may purchase
mortgage-backed securities issued by government and non-government entities
such as banks, mortgage lenders, or other financial institutions.
Mortgage-backed securities include mortgage pass-through securities,
mortgage-backed bonds, and mortgage pay-through securities. A mortgage
pass-through security is a pro-rata interest in a pool of mortgages where the
cash flow generated from the mortgage collateral is passed through to the
security holder. Mortgage-backed bonds are general obligations of their
issuers, payable out of the issuers' general funds and additionally secured
by a first lien on a pool of mortgages. Mortgage pay-through securities
exhibit characteristics of both pass-through and mortgage-backed bonds.
Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolios may invest in them if it is determined they are consistent with a
Portfolio's investment objective and policies.
12. Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13. Stripped Mortgage-Backed Securities. Stripped mortgage backed
securities are created when the principal and interest payments of a
mortgage-backed security are separated by a U.S. Government agency or a
financial institution. The holder of the "principal-only" security receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security receives interest payments from
the same underlying security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market
in general may be adversely affected by regulatory or tax changes.
Non-governmental mortgage-backed securities may offer a higher yield than
those issued by government entities but also may be subject to greater price
change than government securities.
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities
of those securities and may lower their total returns. Furthermore, the
prices of stripped mortgage-backed securities can be significantly affected
by changes in interest rates as well. As interest rates fall, prepayment
rates tend to increase, which in turn tends to reduce prices of
"interest-only" securities and increase prices of "principal-only"
securities. Rising interest rates can have the opposite effect.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 edged". 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 on 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, or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
B-1
<PAGE>
CORPORATE BONDS - STANDARD & POOR'S
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 exhibit an adequate degree of
protection, 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 and 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
B-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
MERIDIAN/INVESCO US SECTOR PORTFOLIO
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
[MERIDIAN LOGO]
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [INVESCO LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Meridian/INVESCO Global Sector,
Meridian/INVESCO US Sector and Meridian/INVESCO Foreign Sector Portfolios of
the Fund (collectively, the "Portfolios" and, individually, a "Portfolio").
The investment objective of the Meridian/INVESCO Global Sector Portfolio
(the "Global Sector Portfolio") is growth of capital. The Global Sector
Portfolio seeks to achieve its objective by following an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors.
The investment objective of the Meridian/INVESCO US Sector Portfolio (the
"US Sector Portfolio") is growth of capital. The US Sector Portfolio seeks to
achieve its objective by investing, under normal circumstances, at least 65%
of its total assets in the equity securities of United States issuers.
The investment objective of the Meridian/INVESCO Foreign Sector Portfolio
(the "Foreign Sector Portfolio") is growth of capital. The Foreign Sector
Portfolio seeks to achieve its objective by investing, under normal
circumstances, at least 65% of its total assets in the equity securities of
foreign issuers.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the Portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL, Meridian Investment Management Corporation ("Meridian") and INVESCO
Global Asset Management Limited ("INVESCO") serve as the investment adviser
(the "Investment Adviser") and the co-sub-advisers (the "Co-Sub-Advisers"),
respectively, to the Portfolios. See "The Investment Adviser" and "The
Co-Sub-Advisers."
This Prospectus sets forth concisely the information about the Portfolios
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolios and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the
Portfolios bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Dated May 1, 1996
1 Registered service mark of INVESCO PLC.
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
MERIDIAN/INVESCO US SECTOR PORTFOLIO
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Meridian/INVESCO Global Sector Portfolio, Meridian/INVESCO US Sector Portfolio and
Meridian/INVESCO Foreign Sector Portfolio and the Fund ............................. 1
Management of the Fund ............................................................... 6
Dividends and Other Distributions .................................................... 8
Taxes ................................................................................ 8
Purchase and Redemption of Shares .................................................... 9
Valuation of Shares .................................................................. 9
The Fund and Its Shares .............................................................. 9
Performance Information .............................................................. 10
General Information .................................................................. 10
</TABLE>
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THE MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO, MERIDIAN/INVESCO US SECTOR
PORTFOLIO AND MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolios are series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment
by the Separate Accounts. This Prospectus describes only the Portfolios.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
There can be, of course, no assurance that the Portfolios will achieve
their investment objectives. The Portfolios' investment objectives and,
unless otherwise noted, their investment policies and techniques, may be
changed by the Board of Directors of the Fund without shareholder or
Policyholder approval. A change in the investment objectives or policies of
the Portfolios may result in the Portfolios having investment objectives or
policies different from those which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT OBJECTIVES AND POLICIES
GLOBAL SECTOR PORTFOLIO
The investment objective of the Global Sector Portfolio is growth of
capital.
The Portfolio seeks to achieve this objective by following an asset
allocation strategy that shifts among a wide range of asset categories and
within them, market sectors. The Portfolio will invest in the following asset
categories: equity securities of domestic and foreign issuers, including
common stocks, preferred stocks, convertible securities and warrants; debt
securities of domestic and foreign issuers, including mortgage-related and
other asset-backed securities and securities rated below investment grade;
exchange-traded or over-the-counter real estate investment trusts (REITS);
equity securities of companies involved in the exploration, mining,
processing, or dealing or investing in gold ("gold stocks"); gold bullion;
and domestic money market instruments. Market sectors within the asset
categories include the industry, country or bond markets available for
investment. See "Certain Portfolio Policies and Techniques," page 2 and "Risk
Factors," page 5 for a discussion of the additional risks associated with
investments in foreign securities, lower-rated debt securities, REITs, gold
stocks and gold bullion.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in securities of issuers domiciled in at least three countries,
one of which may be the United States, although the Co-Sub-Advisers expect
the Portfolio's investments to be allocated among a larger number of
countries. The percentage of the Portfolio's assets invested in securities of
U.S. issuers normally will be higher than that invested in securities of
issuers domiciled in any other single country. However, it is possible that
at times the Portfolio may have 65% or more (but not more than 80%) of its
total assets invested in foreign securities.
The Portfolio is not required to maintain a portion of its assets in each
of the permitted asset categories. The Portfolio, however, under normal
circumstances, will maintain a minimum of 20% of its total assets in equity
securities and 10% in debt securities. The Portfolio may, however, invest up
to 100% of its total assets in equity securities and up to 70% in debt
securities. For temporary defensive purposes, during times of unusual market
conditions, the Portfolio may invest 100% of its assets in short-term
securities. (See Appendix B in the Statement of Additional Information for a
detailed description of these instruments.) The Portfolio will not invest
more than 20% of its total assets in gold stocks. The Portfolio will not
invest more than 25% of its total assets in the securities of any single
country, other than the United States, or in securities of issuers in any one
industry. In accordance with the requirements of current California insurance
regulations, the Portfolio will have no more than 20% of its net assets
invested in securities of issuers located in any one foreign country, but may
have an additional 5% of its net assets invested in securities of issuers
located in any one of the following countries: Australia, Canada, France,
Japan, the United Kingdom or West Germany. If California's insurance
regulations are changed at some future time to permit a larger percentage of
the Portfolio's net assets to be invested in a single foreign country, the
Portfolio may invest more of its net assets in a single foreign country, in
accordance with the Portfolio's investment objective and investment
restrictions. Meridian determines the allocation of the Portfolio's assets
among the asset categories described above based on proprietary quantitative
research.
1
<PAGE>
After asset allocations and relative portfolio weightings of such
allocations have been designated by Meridian, INVESCO will select the
specific securities within each asset allocation category and market sector
therein in which the Portfolio will invest. See "Certain Portfolio Policies
and Techniques," page 2.
US SECTOR PORTFOLIO
The investment objective of the US Sector Portfolio is growth of capital.
Under normal circumstances, the Portfolio will invest at least 65% of its
total assets in the equity securities of United States issuers. Equity
investments are first selected based on industry attractiveness. In
attempting to determine industry attractiveness, Meridian uses its
proprietary valuation model to analyze approximately 1,200 domestic stocks
based on the following factors: historical and estimated future earnings;
long-term earnings growth projections; risk; current and future interest rate
conditions; and current price. Meridian then groups stocks into approximately
71 industry classifications in order to determine those industries Meridian
deems to
1
<PAGE>
be attractive relative to other industries. The Portfolio, under normal
market conditions, will invest in securities of 10 to 20 industries that are
deemed to be attractive based on Meridian's quantitative research. The
Portfolio will not invest more than 25% of its total assets in any one
industry.
After industry selections and relative portfolio weightings of such
industries have been designated by Meridian, INVESCO will select the specific
securities within each industry in which the Portfolio will invest. See
"Certain Portfolio Policies and Techniques," page 2. The Portfolio may invest
up to 25% of its total assets, measured at the time of purchase, in foreign
securities. Industry definitions will be coordinated between the
Co-Sub-Advisers. INVESCO will select securities primarily in companies
principally engaged in business in the industries designated for investment
by Meridian. A particular company will be deemed by INVESCO to be principally
engaged in business in the industry designated for investment by Meridian if,
in the determination of INVESCO, more than 50% of its gross income or net
sales is derived from activities in such industry or more than 50% of its
assets are dedicated to the production of revenues from such industry. In
circumstances where, based on available financial information, a question
exists whether a company meets one of these standards, the Portfolio may
invest in the securities of such a company only if INVESCO determines, after
review of information describing the company and its business activities,
that the company's primary business is within the industry.
FOREIGN SECTOR PORTFOLIO
The investment objective of the Foreign Sector Portfolio is growth of
capital.
Under normal circumstances, the Portfolio will invest at least 65% (but
may invest up to 100%) of its total assets in the equity securities of
foreign issuers. Investments are first selected based on country
attractiveness. In attempting to determine country attractiveness, Meridian
uses its proprietary valuation model to analyze approximately 800 foreign and
U.S. stocks based on the following factors: historical and estimated future
earnings; long-term earnings growth projections; risk; current and future
interest rate condition; and current price. Meridian groups stocks into
approximately 24 country classifications, in order to determine which
countries are deemed to be attractive relative to other countries. The
Portfolio, under normal conditions, will invest in securities of issuers in 6
to 14 countries that Meridian deems to be attractive based on Meridian's
quantitative research.
After country selections and relative portfolio weightings for issuers of
each country in which the Portfolio will invest have been designated by
Meridian, INVESCO will select the specific securities within each country.
See "Certain Portfolio Policies and Techniques," below. The Portfolio will
not invest more than 25% of its total assets in securities of issuers of any
one country (with the exception of Japan; total assets invested in securities
of Japanese issuers may be up to 65%). In accordance with the requirements of
current California insurance regulations, the Portfolio will have no more
than 20% of its net assets invested in securities of issuers located in any
one foreign country, but may have an additional 5% of its net assets invested
in securities of issuers located in any one foreign country, but may have an
additional 5% of its net assets invested in securities of issuers located in
any one of the following countries: Australia, Canada, France, Japan, the
United Kingdom or West Germany. If California's insurance regulations are
changed at some future time to permit a larger percentage of the Portfolio's
net assets to be invested in a single foreign country, the Portfolio may
invest more of its net assets in a single foreign country, in accordance with
the Portfolio's investment objective and investment restrictions. INVESCO
will invest the Portfolio's assets primarily in securities of companies
principally engaged in business within the countries designated for
investment by Meridian. A foreign issuer is a company that, in the opinion of
INVESCO, has one or more of the following characteristics: (i) its principal
securities trading market is in a foreign country; (ii) the company derives
50% or more of its annual revenue from either goods produced, sales made or
services performed in foreign countries; or (iii) the company is organized
under the laws of, or has its principal office in, a foreign country. INVESCO
will base its determination of whether a company will be deemed to be a
foreign issuer on publicly available information or inquiries made to the
company.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES
Each Portfolio's investment in stocks, bonds and cash securities may vary
from time to time, depending upon Meridian's assessment of business, economic
and market conditions. In periods of abnormal economic and market conditions,
as determined by Meridian, the Portfolios may depart from their basic
investment objectives and assume a temporary defensive position, with up to
100% of their assets invested in U.S. government and agency securities,
investment grade corporate bonds or cash securities such as domestic
certificates of deposit and bankers' acceptances, repurchase agreements and
commercial paper. (See Appendix B in the Statement of Additional Information
for a description of these securities.) The Portfolios reserve the right to
2
<PAGE>
hold equity, debt and cash securities in whatever proportion is deemed
desirable at any time for defensive purposes. While a Portfolio is in a
defensive position, the opportunity to achieve capital growth will be
limited; however, the ability to maintain a defensive position enables the
Portfolios to seek to avoid capital losses during market downturns. Under
normal market conditions, the Portfolios do not expect to have a substantial
portion of their assets invested in cash securities.
EQUITY SECURITIES (ALL PORTFOLIOS). Each Portfolio may invest in equity
securities (common stocks and, to a lesser degree, preferred stocks and
securities convertible into common stocks, such as rights, warrants and
convertible debt securities). In selecting the equity securities in which the
Portfolios invest, INVESCO attempts to identify companies that have
demonstrated or, in INVESCO's opinion, are likely to demonstrate in the
future, strong earnings growth relative
2
<PAGE>
to other companies in the same industry or country. The dividend payment
records of companies are also considered. Equity securities may be issued by
either established, well-capitalized companies or newly-formed, small-cap
companies, and may trade on regional or national stock exchanges or in the
over-the-counter market. The risks of investing in small capitalization
companies are discussed on page 5 under "Risk Factors - Small Capitalization
Companies."
DEBT SECURITIES (ALL PORTFOLIOS). Consistent with their investment
objectives, the Portfolios also may invest in debt securities (corporate
bonds, commercial paper, debt securities issued by the U.S. government, its
agencies and instrumentalities, or foreign governments, asset-backed
securities and zero coupon bonds). Each Portfolio may invest no more than 15%
of its total assets in debt securities that are rated below BBB by Standard &
Poor's or Baa by Moody's Investors Service, Inc. ("Moody's") or, if unrated,
are judged by INVESCO to be of equivalent quality to debt securities having
such ratings (commonly referred to as "junk bonds"). In no event will a
Portfolio ever invest in a debt security rated below CCC by Standard & Poor's
or Caa by Moody's. The risks of investing in lower rated debt securities are
discussed on page 5 under "Risk Factors - Equity and Debt Securities."
The Portfolios may hold certain cash and cash equivalent securities as
cash reserves ("cash securities"), as described above.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS). Each Portfolio may invest in
convertible securities. Convertible securities may include corporate notes or
preferred stock, but ordinarily are a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As
with all debt securities, the market value of convertible debt securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. 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. For additional information regarding
convertible securities, see the Statement of Additional Information.
FOREIGN SECURITIES (ALL PORTFOLIOS). Consistent with their investment
objectives, the Portfolios may invest in foreign securities. Foreign
securities may also be purchased by means of American Depositary Receipts
("ADRs"). ADRs that may be purchased by a Portfolio are receipts, typically
issued by a U.S. bank or trust company, evidencing ownership of the
underlying foreign equity securities. ADRs are denominated in U.S. dollars
and trade in the U.S. securities markets. ADRs may be issued in sponsored or
unsponsored programs. In sponsored programs, the issuer makes arrangements to
have its securities traded in the form of ADRs; in unsponsored programs, the
issuer may not be directly involved in the creation of the program.
Investments in foreign securities involve certain risks that are not
associated with investments in domestic issuers. These risks are discussed on
page 5 under "Risk Factors."
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS (ALL PORTFOLIOS). In
order to hedge their portfolios, the Portfolios may purchase and write
options on securities (including index options and options on foreign
securities), and may invest in futures contracts for the purchase or sale of
debt securities and instruments based on financial indices (collectively,
"futures contracts"), options on futures contracts and interest rate swaps
and swap-related products. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments. These practices and securities and their risks are discussed on
page 5 under "Risk Factors" and in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY CONTRACTS (ALL PORTFOLIOS). Each Portfolio may
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") as a hedge against fluctuations in foreign exchange
rates pending the settlement of transactions in foreign securities or during
the time the Portfolio holds foreign securities. A forward contract, which is
also included in the types of instruments commonly known as derivatives, is
an agreement between contracting parties to exchange an amount of currency at
some future time at an agreed upon rate. A Portfolio will not enter into a
forward contract for a term of more than one year or for purposes of
speculation. Investors should be aware that hedging against a decline in the
value of a currency in the foregoing manner does not eliminate fluctuations
in the prices of portfolio securities or prevent losses if the prices of such
securities decline. Furthermore, such hedging transactions preclude the
opportunity for gain if the value of the hedging currency should rise.
Forward contracts may, from time to time, be considered illiquid, in which
case they would be subject to a Portfolio's limitation on investing in
illiquid securities, discussed on page 4. For additional information
regarding forward contracts, see the Statement of Additional Information.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES (ALL PORTFOLIOS). Each
Portfolio may make commitments to purchase or sell equity or debt securities
on a when-issued or delayed delivery basis (i.e., securities may be purchased
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<PAGE>
or sold by the Portfolio with settlement taking place in the future, often a
month or more later). The payment obligation and, in the case of debt
securities, the interest rate that will be received on the securities,
generally are fixed at the time the Portfolio enters into the commitment.
During the period between purchase and settlement, no payment is made by the
Portfolio and no interest accrues to the Portfolio. At the time of
settlement, the market value of the security may be more or less than the
purchase price, and the Portfolio bears the risk of such market value
fluctuations. Each Portfolio maintains in a segregated account cash, U.S.
government securities, or other high-grade debt obligations readily
convertible
3
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into cash having an aggregate value at least equal to the amount of such
purchase commitments.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS). Investments in short-term
securities may include repurchase agreements. Each Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for
investment by the Portfolio. These agreements are entered into with member
banks of the Federal Reserve System, registered broker-dealers, and
registered government securities dealers, which are deemed creditworthy. A
repurchase agreement is a means of investing monies for a short period. In a
repurchase agreement, which may be considered a loan under the 1940 Act, the
Portfolio acquires a debt instrument (generally a security issued by the U.S.
government or an agency thereof, a bankers' acceptance, or a certificate of
deposit) subject to resale to the seller at an agreed upon price and date
(normally, the next business day). In the event that the original seller
defaults on its obligation to repurchase the security, the Portfolio could
incur costs or delays in seeking to sell such a security. To minimize risk,
the securities underlying each repurchase agreement will be maintained with
the Portfolio's custodian in an amount at least equal to the repurchase price
under the agreement (including accrued interest), and such agreements will be
effected only with parties that meet certain creditworthiness standards
established by the Fund's Board of Directors. A Portfolio will not enter into
a repurchase agreement maturing in more than seven days if as a result more
than 15% of its net assets would be invested in such repurchase agreements
and other illiquid securities. The Portfolios have not adopted any limit on
the amount of their net assets that may be invested in repurchase agreements
maturing in seven days or less.
ILLIQUID AND RULE 144A SECURITIES (ALL PORTFOLIOS). Each Portfolio is
authorized to invest in securities that are considered illiquid because of
the absence of a readily available market or due to legal or contractual
restrictions on resale. However, a Portfolio will not purchase any such
security if the purchase would cause the Portfolio to invest more than 15% of
its net assets in illiquid securities. Repurchase agreements maturing in more
than seven days will be considered as illiquid for purposes of this
restriction. Investments in illiquid securities involve certain risks to the
extent that a Portfolio may be unable to dispose of such securities at the
time desired or at a reasonable price. In addition, in order to resell a
restricted security, a Portfolio might have to bear the expense and incur the
delays associated with effecting a registration required in order to qualify
for resale.
Certain restricted securities that are not registered for sale to the
general public, but that can be resold to dealers or institutional investors
("Rule 144A Securities"), may be purchased without regard to the foregoing
limitation if a liquid institutional trading market exists. The liquidity of
a Portfolio's investments in Rule 144A Securities could be impaired if
dealers or institutional investors become uninterested in purchasing these
securities. The Fund's Board of Directors has delegated to the
Co-Sub-Advisers the authority to determine the liquidity of Rule 144A
Securities pursuant to guidelines approved by the Board. For more information
concerning Rule 144A Securities, see the Statement of Additional Information.
GOLD STOCKS AND GOLD BULLION (ALL PORTFOLIOS). Due to monetary and
political policies on a national and international level, the price of gold
is subject to substantial fluctuations, which will have an effect on the
profitability of issuers of gold stocks and the market value of their
securities. Changes in the political or economic climate for the two largest
producers - South Africa and the Commonwealth of Independent States (the
former Soviet Union) - may have a direct impact on the price of gold
worldwide. The Portfolios' investments in gold bullion will earn no income
return. Appreciation in the market price of gold is the sole manner in which
a Portfolio would be able to realize gains on such investments. Furthermore,
the Portfolios may encounter storage and transaction costs in connection with
their ownership of gold bullion that may be higher than those associated with
the purchase, holding and disposition of more traditional types of
investments. In order to help reduce these risks, no Portfolio will invest
more than 10% of its total assets in gold bullion.
REAL ESTATE SECURITIES (ALL PORTFOLIOS). Although the Portfolios will not
invest in real estate directly, they may invest in exchange-traded or
over-the-counter equity securities of real estate investment trusts ("REITs")
and other real estate industry companies. Therefore, each Portfolio may be
subject to certain risks associated with the direct ownership of real estate.
These risks include, among others: possible declines in the value of real
estate; possible lack of availability of mortgage funds; extended vacancies
of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and
liability to third parties for damages resulting from, environmental
problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; limitations on and variations in
rents; and changes in interest rates. (See page 6 under "Risk Factors" for a
discussion of risks of investing in REITs.)
REITs are pooled investment vehicles which invest primarily in income
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producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Hybrid REITs
invest their assets in both real property and mortgages. REITs are not taxed
on income distributed to shareholders provided they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
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LENDING AND BORROWING
Each Portfolio is authorized to lend its securities to qualified brokers,
dealers, banks, or other financial institutions. Loans of securities will be
collateralized by cash, letters of credit, or securities issued or guaranteed
by the U.S. government or its agencies equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. Each Portfolio
monitors the creditworthiness of borrowers in order to minimize such risks.
The Portfolios do not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. A Portfolio will not lend any
security if, as a result of such loan, the aggregate value of securities then
on loan would exceed 33 1/3 % of the Portfolio's total assets (taken at
market value).
Each Portfolio may only borrow money from banks for temporary or emergency
purposes (not for leverage or investment) in an amount not exceeding 33 1/3 %
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Reverse repurchase agreements are
deemed to be borrowings for purposes of this limitation. In accordance with
the requirements of current California insurance regulations, a Portfolio
will restrict borrowings to no more than 10% of total assets, except that the
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 33 1/3 % of total assets, a Portfolio may conduct
borrowings in accordance with such revised limits.
RISK FACTORS
EQUITY AND DEBT SECURITIES. There can be no assurance that the Portfolios
will achieve their investment objectives. The Portfolios' investments in
common stocks and other equity securities may, of course, decline in value.
The Portfolios' investments in debt securities generally are subject to
both credit risk and market risk. Credit risk relates to the ability of the
issuer to meet interest or principal payments, or both, as they come due.
Market risk relates to the fact that the market values of the debt securities
in which a Portfolio invests generally will be affected by changes in the
level of interest rates. An increase in interest rates will tend to reduce
the market values of debt securities, whereas a decline in interest rates
will tend to increase their values.
Although INVESCO limits the Portfolios' investments in debt securities to
securities it believes are not highly speculative, both kinds of risk are
increased by investing in debt securities rated below the top three grades by
Standard & Poor's or Moody's or, if unrated, securities determined by INVESCO
to be of equivalent quality. Although bonds in the lowest investment grade
debt category (those rated BBB by Standard & Poor's or Baa by Moody's) are
regarded as having adequate capability to pay principal and interest, they
have speculative characteristics. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher rated bonds.
Lower rated bonds by Moody's (categories Ba, B, Caa) are of poorer quality
and also have speculative characteristics. Bonds rated Caa may be in default
or there may be present elements of danger with respect to principal or
interest. Lower rated bonds by Standard & Poor's (categories BB, B, CCC)
include those which are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; BB indicates the lowest degree of speculation
and CCC a high degree of speculation. While such bonds likely will have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. For a specific
description of each corporate bond rating category, see Appendix A to the
Statement of Additional Information.
When a Portfolio invests in debt securities, investment income may
increase and may constitute a larger portion of the return on the Portfolio's
investments, and the Portfolio may not participate in stock market advances
or declines to the extent that it would if it were fully invested in equity
securities.
FOREIGN SECURITIES. For U.S. investors, the returns on foreign securities
are influenced not only by the returns on the foreign investments themselves,
but also by currency risk (i.e., changes in the value of the currencies in
which the securities are denominated relative to the U.S. dollar). In a
period when the U.S. dollar generally rises against foreign currencies, the
returns on foreign securities for a U.S. investor are diminished. By
contrast, in a period when the U.S. dollar generally declines, the returns on
foreign securities generally are enhanced.
Other risks and considerations of investing in foreign securities include
the following: differences in accounting, auditing and financial reporting
standards which may result in less publicly available information than is
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generally available with respect to U.S. issuers; generally higher commission
rates on foreign portfolio transactions and longer settlement periods; higher
custodial expenses; the smaller trading volumes and generally lower liquidity
of foreign stock markets, which may result in greater price volatility;
foreign withholding taxes payable on a Portfolio's foreign securities, which
may reduce dividend income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in investment or
exchange control regulations; less stringent or different regulations than
those applicable to U.S. issuers; political instability which could affect
U.S. investment in foreign countries; potential restrictions on the flow of
international capital; and the possibility of the Portfolio experiencing
difficulties in pursuing legal remedies and collecting judgments. A
Portfolio's investments in foreign securities may include investments in
developing countries. Many of these
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securities are speculative and their prices may be more volatile than those
of securities issued by companies located in more developed countries.
ADRs are subject to certain of the same risks as direct investments in
foreign securities, including the risk that changes in the value of the
currency in which the security underlying an ADR is denominated relative to
the U.S. dollar may adversely affect the value of the ADR. The regulatory
requirements with respect to ADRs that are issued in sponsored and
unsponsored programs are generally similar but the issuers of unsponsored
ADRs are not obligated to disclose material information in the United States
and, therefore, such information may not be reflected in the market value of
the ADRs.
SMALL CAPITALIZATION COMPANIES. The Portfolios may invest in equity
securities issued by small-cap companies. For these purposes, the
Co-Sub-Advisers consider small-cap companies to be companies with market
capitalizations of up to $1 billion. The Portfolios' investments in small
capitalization stocks may include companies that have limited operating
histories, product lines, and financial and managerial resources. These
companies may be subject to intense competition from larger companies, and
their stocks may be subject to more abrupt or erratic market movements than
the stocks of larger, more established companies. Due to these and other
factors, small cap companies may suffer significant losses as well as realize
substantial growth.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. The use of futures,
options, forward contracts and swaps exposes the Portfolios to additional
investment risks and transaction costs. If the Co-Sub-Advisers seek to
protect the Portfolios against potential adverse movements in the securities,
foreign currency or interest rate markets using these instruments, and such
markets do not move in a direction adverse to the Portfolios, the Portfolios
could be left in a less favorable position than if such strategies had not
been used. Risks inherent in the use of futures, options, forward contracts
and swaps include (1) the risk that interest rates, securities prices and
currency markets will not move in the directions anticipated; (2) imperfect
correlation between the prices of futures, options and forward contracts and
movements in the prices of the securities or currencies hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; and (5) the possible need
to defer closing out certain hedged positions to avoid adverse tax
consequences. Further information on the use of futures, options, forward
foreign currency contracts and swaps and swap-related products, and the
associated risks, is contained in the Statement of Additional Information.
REAL ESTATE INVESTMENT TRUSTS. Investing in REITs involves certain unique
risks in addition to those risks associated with investing in the real estate
industry in general. Equity REITs may be affected by changes in the value of
the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified, and are subject to the risks of
financing projects. REITs are subject to 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. REITs
(especially mortgage REITs) are also subject to interest rate risk. (i.e., as
interest rates rise, the value of the REIT may decline).
OTHER INVESTMENT POLICIES AND RESTRICTIONS
Each Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover. Although the
Portfolios do not trade for short-term profits, securities may be sold
without regard to the time they have been held in a Portfolio when, in the
opinion of the Co-Sub-Advisers, investment considerations warrant such
action. In addition, portfolio turnover rates may increase as a result of
large amounts of purchases or redemptions of Portfolio shares due to
economic, market or other factors that are not within the control of the
Co-Sub-Advisers. As a result, under certain market conditions, the portfolio
turnover rate for a Portfolio may exceed 100%, and may be higher than that of
other investment companies seeking growth of capital. Increased portfolio
turnover would cause a Portfolio to incur greater brokerage costs than would
otherwise be the case.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
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the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and Meridian and INVESCO as Co-Sub-Advisers, the Fund requires no
employees other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of WRL and receive
no compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolios' Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and
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investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolios in
accordance with the Portfolios' stated investment objectives and policies. As
compensation for its services to the Portfolios, the Investment Adviser
receives monthly compensation at the annual rate of 1.10% of the average
daily net assets of each of the Portfolios.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolios the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolios' custodian. The Investment
Adviser also assists the Portfolios in maintaining communications and
relations with the shareholders of the Portfolios, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and organization of the Portfolios, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments, and any registration or
qualification under state securities laws required in connection with the
Portfolios' offering of shares. The Investment Adviser will also pay all
reasonable compensation and related expenses of the officers and Directors of
the Fund, except for such Directors who are not interested persons (as that
term is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolios pay all other expenses incurred in their operations,
including general administrative expenses. Accounting services are provided
for the Portfolios by the Investment Adviser.
THE CO-SUB-ADVISERS
Meridian Investment Management Corporation ("Meridian"), located at 12835
East Arapahoe Road, Tower II, 7th Floor, Englewood Colorado 80112, serves as
a Co-Sub-Adviser to the Portfolios. Meridian is a wholly-owned subsidiary of
Meridian Management & Research Corporation ("MM&R"). Michael J. Hart and Dr.
Craig T. Callahan each own 50% of MM&R. Meridian provides investment
management and related services to other mutual fund portfolios and
individual, corporate, charitable and retirement accounts. Meridian manages
seven mutual fund wrap-fee programs which, as of March 1, 1996, had aggregate
assets of approximately $500 million.
Meridian's Investment Committee determines guidelines for asset, country
and industry weightings based on Meridian's proprietary quantitative methods.
The Committee is comprised of Dr. Craig T. Callahan, Michael J. Hart, Patrick
S. Boyle and Bryan M. Ritz.
Bryan M. Ritz, C.F.A., serves as Portfolio Manager of the Meridian Sector
Portfolios. Mr. Ritz is also a Portfolio Manager for Meridian's Premier
private accounts, and previously served as a research analyst for Meridian
beginning in 1992. Prior to entering the investment management industry, Mr.
Ritz was a research and teaching assistant in the Finance Department at the
University of Denver. His educational background is B.S.B.A., M.B.A.,
University of Denver. Mr. Ritz is a Chartered Financial Analyst.
Meridian provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Portfolios. Meridian also provides
quantitative investment research and portfolio management advice to the
Investment Adviser for the Portfolios. Subject to review and supervision by
the Investment Adviser and the Board of Directors of the Fund, Meridian is
responsible for making decisions and recommendations as to asset allocation
and industry and country selections for the Portfolios. Meridian bears all of
its expenses in connection with the performance of its services, such as
compensating and furnishing office space for its officers and employees
connected with the investment and economic research and investment management
of the Portfolios.
INVESCO Global Asset Management Limited, located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Portfolios. INVESCO is an indirect wholly-owned subsidiary of INVESCO PLC, a
global firm that managed approximately $84 billion as of December 31, 1995.
INVESCO PLC is headquartered in London, with money managers located in
Europe, North America and the Far East.
INVESCO provides investment advisory assistance and portfolio management
advice to the Investment Adviser for the Portfolios. Subject to review and
supervision by the Investment Adviser and the Board of Directors of the Fund,
INVESCO is responsible for actual security selection for the Portfolios
(within the constraints of Meridian's asset, industry, and country
selections). INVESCO's services are provided by a team of portfolio managers.
Individual industry and country specialists are responsible for managing
security selection for their assigned shares of the asset, industry and
country allocations established by Meridian. In performing these services,
INVESCO is authorized to draw upon the resources of certain
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INVESCO-affiliated companies and their employees, provided that INVESCO
supervises and remains fully responsible for all such services. Pursuant to
this authority, INVESCO has entered into agreements with INVESCO Asset
Management Limited ("IAML"), 11 Devonshire Square, London, EC2M 4YR England,
for assistance in managing the Portfolios' investments in foreign securities,
and with INVESCO Trust Company ("ITC"), 7800 East Union Avenue, Denver,
Colorado 80237, for assistance in managing the Portfolios' investments in
U.S. securities. IAML is an indirect wholly-owned subsidiary of INVESCO PLC
and a registered investment adviser. IAML provided investment advisory
services to five U.S. mutual funds distributed by INVESCO affiliates, as well
as a number of offshore funds, as of December 31, 1995. ITC is an indirect
wholly-owned subsidiary of INVESCO PLC and a registered investment
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adviser. ITC provided investment advisory or sub-advisory services to 41
investment portfolios as of December 31, 1995.
For its services, Meridian receives monthly compensation from the
Investment Adviser, as a percentage of each Portfolio's average daily net
assets, at an annual rate of 0.30% of the first $100 million of assets and
0.35% of assets in excess of $100 million. For its services, INVESCO receives
monthly compensation from the Investment Adviser, as a percentage of each
Portfolio's average daily net assets, at an annual rate of 0.40% of the first
$100 million of assets and 0.35% of assets in excess of $100 million. Neither
IAML nor ITC receive any compensation from the Portfolios; IAML and ITC are
compensated for their services by INVESCO. Neither IAML nor ITC receives any
compensation from the Portfolios; IAML and ITC are compensated for their
services by INVESCO. With respect to the Foreign Sector Portfolio, INVESCO
pays 60% of the compensation it receives from the Investment Adviser with
respect to the Foreign Sector Portfolio to IAML for investment advisory
services, and 30% to ITC for administrative assistance. With respect to the
US Sector Portfolio, INVESCO pays 90% of the compensation it receives from
the Investment Adviser with respect to the US Sector Portfolio to ITC for
investment advisory services and administrative assistance. With respect to
the Global Sector Portfolio, INVESCO pays 50% of the compensation it receives
from the Investment Adviser with respect to the Global Sector Portfolio to
IAML for investment advisory services, and 40% to ITC for investment advisory
services and administrative assistance. IAML and ITC each pay their own
expenses relating to personnel, office space and equipment.
INVESCO is also responsible for selecting the broker-dealers who execute
the portfolio transactions for the Portfolios. INVESCO is authorized to
consider sales of the Policies or Annuity Contracts described in the
accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. In placing portfolio
business with all dealers, INVESCO seeks best execution of each transaction
and all brokerage placement must be consistent with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with
all personal securities transactions and are subject to certain prohibitions
on personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and
other applicable laws, and pursuant to the terms of the Ethics Policy, must
adopt and enforce their own Code of Ethics and Insider Trading Policies
appropriate to their operations. Each Sub-Adviser is required to report to
the Board of Directors on a quarterly basis with respect to the
administration and enforcement of such Ethics Policy, including any
violations thereof whch may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolios intend to distribute substantially all of their net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolios
at net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolios at the
end of the fiscal year.
TAXES
Each Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, a Portfolio is not subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, net gains from certain foreign currency
transactions, and net short-term capital gain, if any) and any net capital
gain (the excess of net long-term capital gain over net short-term capital
loss) that it distributes to its shareholders. It is the Portfolios'
intention to distribute all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
Each Portfolio intends to comply with the diversification requirements
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imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolios by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat each Portfolio's assets as assets of the
related separate account, these limitations also apply to each Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of each of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
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Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolios to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolios and their shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolios are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
Each Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of each Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolios are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Investment Adviser and Co-Sub-Advisers under
the supervision of the Fund's Board of Directors. Money market instruments
maturing in 60 days or less are valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to separate accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of common stock for each Portfolio. All
shares of the Portfolios and of each of the other portfolios have equal
voting rights, except that only shares of a particular portfolio are entitled
9
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to vote on matters concerning only that portfolio. Each issued and
outstanding share of the Portfolios is entitled to one vote and to
participate equally in dividends and distributions declared by the Portfolios
and, upon liquidation or dissolution, to participate equally in the net
assets of the Portfolios remaining after satisfaction of outstanding
liabilities. The shares of the Portfolios, when issued, will be fully paid
and nonassessable, have no preference, preemptive, conversion, exchange or
similar rights, and will be freely transferable. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of
the Fund voting for the election of directors can elect all of the directors
of the Fund if they choose to do so and, in such event, holders of the
remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, the Life Companies will vote the Fund's
shares in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from Policyholders having voting interests in the
corresponding sub-accounts of
9
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the Separate Accounts. Except as required by the 1940 Act, the Fund does not
hold regular or special shareholder meetings. If the 1940 Act or any
regulation thereunder should be amended or if present interpretation thereof
should change, and as a result it is determined that the Life Companies are
permitted to vote Fund shares in their own right, they may elect to do so.
The rights of Policyholders are described in more detail in the prospectuses
or disclosure documents for the Policies and the Annuity Contracts,
respectively.
PERFORMANCE INFORMATION
Each Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for the corresponding
Sub-accounts of the Separate Account in advertisements, sales literature or
reports to Policyholders or to prospective investors. Total return and yield
quotations reflect only the performance of a hypothetical investment in the
Portfolios during the particular time period shown as calculated based on the
historical performance of the Portfolios during that period. Such quotations
do not in any way indicate or project future performance. Quotations of total
return and yield regarding the Portfolios do not reflect charges and
deductions against the Separate Accounts or charges and deductions against
the Policies or the Annuity Contracts. Where relevant, the prospectuses for
the Policies and the Annuity Contracts contain additional performance
information.
The total return of the Portfolios refers to the average annual percentage
change in value of an investment in the Portfolios held for various periods
of time, including, but not limited to, one year, five years, ten years and
since the Portfolios began operations, as of a stated ending date. When the
Portfolios have been in operation for these periods, the total return for
such periods will be provided if performance information is quoted. Total
return quotations are expressed as average annual compound rates of return
for each of the periods quoted, reflect the deduction of a proportionate
share of each Portfolio's investment advisory fee and Portfolio expenses and
assume that all dividends and capital gains distributions during the period
are reinvested in the Portfolio when made.
The Portfolios may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolios for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
A Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance, and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, a
Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
A Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolios' performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolios ends on December 31 of each year. The
Fund will send to the Portfolios' Policyholders, at least semi-annually,
reports showing each Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
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Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of each Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
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<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
MERIDIAN/INVESCO US SECTOR PORTFOLIO
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
CO-SUB-ADVISERS:
Meridian Investment Management Corporation
12835 East Arapahoe Road
Tower II, 7th Floor
Englewood, CO 80112
INVESCO Global Asset Management Limited
Rosebank, 12 Bermudiana Road
Hamilton, Bermuda HM11
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00100-05/96
11
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
MERIDIAN/INVESCO US SECTOR PORTFOLIO
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Meridian/INVESCO Global Sector Portfolio, Meridian/ INVESCO US Sector
Portfolio and Meridian/INVESCO Foreign Sector Portfolio of the WRL Series
Fund, Inc. (the "Fund"). A copy of the Prospectus may be obtained from the
Fund by writing the Fund at 201 Highland Avenue, Largo, Florida 34640 or by
calling the Fund at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Co-Sub-Advisers
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00101-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objectives and Policies 1 1
Investment Restrictions 1 6
Lending of Portfolio Securities 3 4
Convertible Securities 3 3
Mortgage-Backed Securities 4 1
Asset-Backed Securities 4 2
Zero Coupon Bonds 4 2
Restricted/144A Securities 5 4
Futures, Options on Futures and Options on
Securities 5 3
Forward Foreign Currency Contracts 9 3
Swaps and Swap-Related Products 9 3
Repurchase Agreements 10 3
Foreign Exchange Transactions 10 3
Management of the Fund 11 6
Directors and Officers 11 6
The Investment Adviser 12 6
The Co-Sub-Advisers 14 7
Portfolio Transactions and Brokerage 15 7
Portfolio Turnover 15 6
Placement of Portfolio Brokerage 15 7
Purchase and Redemption of Shares 16 8
Determination of Offering Price 16 8
Net Asset Valuation 16 8
Calculation of Performance Related Information 17 9
Total Return 17 9
Yield Quotations 17 10
Taxes 18 8
Capital Stock of the Fund 19 9
Registration Statement 20 N/A
Financial Statements 20 10
Appendix A - Description of
Selected Corporate Bond Ratings A-1 2
Appendix B - Description of
Short-Term Securities B-1 2
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Meridian/INVESCO Global Sector Portfolio,
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio (collectively, the "Portfolios" and, individually, a "Portfolio")
of the Fund are described in the Portfolios' Prospectus. Shares of the
Portfolios are sold only to the separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolios' investment objectives and,
unless otherwise noted, their investment policies and techniques may be
changed by the Board of Directors of the Fund without approval of
shareholders or holders of the Policies or of the Annuity Contracts
(collectively, ("Policyholders"). A change in the investment objectives or
policies of a Portfolio may result in the Portfolio having an investment
objective or policies different from that which a Policyholder deemed
appropriate at the time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
A Portfolio may not, as a matter of fundamental policy:
1. With respect to seventy-five percent (75%) of the Portfolio's total
assets, purchase the securities of any one issuer, except cash items and
"government securities" as defined under the 1940 Act, if the purchase would
cause the Portfolio to have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more than 10% of the
outstanding voting securities of such issuer.
2. Borrow money from banks or issue senior securities (as defined in the
1940 Act), except that a Portfolio may borrow money from banks for temporary
or emergency purposes (not for leveraging or investment) and may enter into
reverse repurchase agreements in an aggregate amount not exceeding 33 1/3 %
of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed 33
1/3 % of the value of a Portfolio's total assets by reason of a decline in
net assets will be reduced within three business days to the extent necessary
to comply with the 33 1/3 % limitation. This restriction shall not prohibit
deposits of assets to margin or guarantee positions in futures, options,
swaps or forward contracts, or the segregation of assets in connection with
such contracts.
3. Invest directly in real estate or interests in real estate; however, a
Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
4. Purchase or sell physical commodities other than gold or foreign
currencies unless acquired as a result of ownership of securities (but this
shall not prevent a Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities).
5. Lend any security or make any other loan if, as a result, more than 33
1/3 % of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.
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7. Invest more than 25% of the value of its total assets in any particular
industry (other than government securities).
With respect to restriction no. 2, above, in accordance with the
requirements of current California insurance regulations, a Portfolio will
restrict borrowings to no more than 10% of total assets, except that a
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 33 1/3 % of total assets, a Portfolio may conduct
borrowings in accordance with such revised limits.
Furthermore, the Portfolios have adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) A Portfolio will not (i) enter into any futures contracts or options
on futures contracts if immediately thereafter the aggregate margin deposits
on all outstanding futures contracts positions held by the Portfolio and
premiums paid on outstanding options on futures contracts, after taking into
account unrealized profits and losses, would exceed 5% of the market value of
the total assets of the Portfolio, or (ii) enter into any futures contracts
if the aggregate net amount of the Portfolio's commitments under outstanding
futures contracts positions of the Portfolio would exceed the market value of
the total assets of the Portfolio.
(B) A Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short without the payment of any additional consideration therefor, and
provided that transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short.
(C) A Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits in connection with transactions in options, futures, swaps and
forward contracts shall not be deemed to constitute purchasing securities on
margin.
(D) A Portfolio may not (i) purchase securities of closed-end investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds, funds that are the only practical means, or one of the
few practical means, of investing in a particular emerging country, or to
securities received as dividends, through offers of exchange, or as a result
of a reorganization, consolidation, or merger.
(E) A Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed
in a segregated account in connection with such contracts.
(F) A Portfolio may not purchase securities of any issuer with a record of
less than three years' continuous operation, including that of predecessors
(other than U.S. government agencies and instrumentalities or instruments
guaranteed by an entity with a record of more than three years' continuous
operation, including that of predecessors), if such purchase would cause the
Portfolio's investments in all such issuers to exceed 5% of the Portfolio's
total assets taken at market value at the time of such purchase.
(G) A Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses.
(H) A Portfolio may not purchase any security or enter into a repurchase
agreement if, as a result, more than 15% of its net assets would be invested
in any combination of: (i) repurchase agreements not entitling the holder to
payment of principal and interest within seven days, and (ii) securities that
2
<PAGE>
are illiquid by virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Board of Directors, or the
Portfolio's Co-Sub-Advisers acting pursuant to authority delegated by the
Board of Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, or any successor to such rule. According to the determination, such
securities would not be subject to the foregoing limitation.
(I) A Portfolio may not invest in companies for the purpose of exercising
control or management, except to the extent that exercise by the Fund of its
rights under agreements related to Portfolio securities would be deemed to
constitute such control.
With respect to investment restriction (I) above, the Fund's Board of
Directors has delegated to the Co-Sub-Advisers the authority to determine
that a liquid market exists for securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended (the "1993 Act"), or
any successor to such rule and that such securities are not subject to such
restriction. Under guidelines established by the Board of Directors, the
Co-Sub-Advisers will consider the following factors, among others, in making
this determination: (1) the frequency of trades and quotes for the security;
(2) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
security and the nature of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer).
Except as otherwise required by law, if a percentage limitation is
complied with at the time of the investment, a subsequent change in the
percentage resulting from any change in value or of a Portfolio's net assets
will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowing, lending, and the
use of options, futures, and other derivative instruments. In addition, such
laws and regulations may require the Portfolio's investments in foreign
securities to meet additional diversification and other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to investment restriction 5 above, each Portfolio, from time to
time, may lend its securities to qualified brokers, dealers, banks, or other
financial institutions. This practice permits a Portfolio to earn income,
which, in turn, can be invested in additional securities of the type
described below in pursuit of a Portfolio's investment objective. Loans of
securities by a Portfolio will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. government or its agencies
equal to at least 100% of the current market value of the loaned securities,
determined on a daily basis. Lending securities involves certain risks, the
most significant of which is the risk that a borrower may fail to return a
portfolio security. A Portfolio monitors the creditworthiness of borrowers in
order to minimize such risks. A Portfolio will not lend any security if, as a
result of such loan, the aggregate value of securities then on loan would
exceed 33 1/3 % of the Portfolio's total assets (taken at market value).
While voting rights may pass with the loaned securities, if a material event
(e.g., proposed merger, sale of assets, or liquidation) is to occur affecting
an investment on loan, the loan must be called and the securities voted.
Loans of securities made by a Portfolio will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange
and the requirements of the 1940 Act and the rules of the Securities and
Exchange Commission ("SEC") thereunder.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in convertible securities. Convertible
securities may include corporate notes or preferred stock, but ordinarily are
a long-term debt obligation of the issuer convertible 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
3
<PAGE>
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. In evaluating investment in a
convertible security, primary emphasis will be given to the attractiveness of
the underlying common stock. The convertible debt securities in which the
Portfolios may invest are subject to the same rating criteria as the
Portfolios' investment in non-convertible debt securities.
MORTGAGE-BACKED SECURITIES (ALL PORTFOLIOS)
The Portfolios may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
institutions such as banks, insurance companies, and savings and loans. Some
of these securities, such as Government National Mortgage Association
("GNMA") certificates, are backed by the full faith and credit of the U.S.
Treasury while others, such as Federal Home Loan Mortgage Corporation
("Freddie Mac") certificates, are not. The Portfolios currently do not intend
to invest more than 5% of their respective net assets in mortgage-backed
securities.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Portfolios. Unscheduled prepayments
of principal shorten the securities' weighted average life and may lower
their total return. The value of these securities also may change because of
changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
ASSET-BACKED SECURITIES (ALL PORTFOLIOS)
Asset-backed securities represent interests in pools of consumer loans
(generally unrelated to mortgage loans) and most often are structured as
pass-through securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the securities may
be supported by letters of credit or other credit enhancements. The
underlying assets (e.g., loans) are subject to prepayments which shorten the
securities' weighted average life and may lower their returns. If the credit
support or enhancement is exhausted, losses or delays in payment may result
if the required payments of principal and interest are not made. The value of
these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement. The Portfolios currently do not intend to invest more
than 5% of their respective net assets in asset-backed securities.
ZERO COUPON BONDS (ALL PORTFOLIOS)
The Portfolios may invest in zero coupon bonds or "strips." Zero coupon
bonds do not make regular interest payments; rather, they are sold at a
discount from face value. Principal and accreted discount (representing
interest accrued but not paid) are paid at maturity. "Strips" are debt
securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value
of "strips" and zero coupon bonds generally fluctuates in response to changes
in interest rates to a greater degree than interest-paying securities of
comparable term and quality. In order for a Portfolio to maintain its
qualification as a regulated investment company, it may be required to
distribute income recognized on zero coupon bonds or "strips" even though no
cash may be paid to the Portfolio until the maturity or call date of the
bond, and any such distribution could reduce the amount of cash available for
investment by the Portfolio. The Portfolios currently do not intend to invest
more than 5% of their respective net assets in zero coupon bonds or "strips."
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RESTRICTED/144A SECURITIES (ALL PORTFOLIOS)
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend on an efficient institutional market in
which such unregistered securities can readily be resold or on an issuer's
ability to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities that might develop as a result of Rule 144A could provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A-eligible security held by a Portfolio could, however,
adversely affect the marketability of such portfolio security and the
Portfolio might be unable to dispose of such security promptly or at
reasonable prices.
FUTURES, OPTIONS ON FUTURES AND OPTIONS ON SECURITIES (ALL PORTFOLIOS)
As discussed in the section entitled "The Meridian/INVESCO Global Sector
Portfolio, Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign
Sector Portfolio and the Fund" in the Prospectus, each Portfolio may enter
into futures contracts for hedging or other non-speculative purposes, and
purchase and sell ("write") options to buy or sell futures contracts and
other securities. These instruments are sometimes referred to as
"derivatives." The Portfolios will comply with and adhere to all limitations
in the manner and extent to which they effect transactions in futures and
options on such futures currently imposed by the rules and policy guidelines
of the Commodity Futures Trading Commission (the "CFTC") as conditions for
exemption of a mutual fund, or investment advisers thereto, from registration
as a commodity pool operator. Under those restrictions, the Portfolios will
not, as to any positions, whether long, short or a combination thereof, enter
into futures and options thereon for which the aggregate initial margins and
premiums exceed 5% of the fair market value of a Portfolio's total assets
after taking into account unrealized profits and losses on options it has
entered into.
In the case of an option that is "in-the-money" (as defined in the
Commodity Exchange Act (the "CEA")), the in-the-money amount may be excluded
in computing the 5% limitation described above. (In general, a call option on
a future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if
the value of the future that is the subject of the put is exceeded by the
strike price of the put.) As to long positions which are used as part of the
Portfolios' strategies and are incidental to their activities in the
underlying cash market, the "underlying commodity value" of the Portfolios'
futures and options thereon must not exceed the sum of (i) cash set aside in
an identifiable manner, or short-term U.S. debt obligations or other dollar-
denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in
30 days; and (iii) accrued profits held by the futures commission merchant.
The "underlying commodity value" of a future is computed by multiplying the
size of the future by the daily settlement price of the future. For an option
on a future, that value is the underlying commodity value of the future
underlying the option.
A futures contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a futures contract
provides a specified settlement date on which, for the majority of interest
rate and foreign currency futures contracts, the fixed income securities or
currency underlying the contract are delivered by the seller and paid for by
the purchaser, or on which, for stock index futures contracts and certain
interest rate and foreign currency futures contracts, the difference between
the price at which the contract was entered into and the contract's closing
value is settled between the purchaser and seller in cash.
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Futures contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. In addition, futures contracts call for settlement only on the
expiration date, and cannot be "exercised" at any other time during their
term.
The purchase or sale of a futures contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price
is paid or received. Instead, an amount of cash or cash equivalent, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin." Subsequent payments to and
from the broker, referred to as "variation margin," are made on a daily basis
as the value of the index or instrument underlying the futures contract
fluctuates, making positions in the futures contract more or less valuable.
This process is known as "marking-to-market."
Initial margin is in the nature of a performance bond or good faith
deposit on the contract. However, because losses on open contracts are
required to be reflected in cash in the form of variation margin payments, a
Portfolio may be required to make additional payments during the term of the
contracts to its broker. Such payments would be required, for example, when,
during the term of an interest rate futures contract purchased by a
Portfolio, there is a general increase in interest rates, thereby making the
Portfolio's portfolio securities less valuable. In all instances involving
the purchase of financial futures contracts by a Portfolio, an amount of
cash, together with such other securities as permitted by applicable
regulatory authorities to be utilized for such purpose at least equal to the
market value of the futures contracts, will be deposited in a segregated
account with the Portfolio's custodian to collateralize the position. At any
time prior to the expiration of a futures contract, the Portfolio may elect
to close its position by taking an opposite position that effectively
operates to terminate the Portfolio's position in the futures contract.
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the CFTC for the trading of such contract,
and only through a registered futures commission merchant which is a member
of such a contract market. A commission must be paid on each completed
purchase and sale transaction. The contract market clearing house guarantees
the performance of each party to a futures contract, by in effect taking the
opposite side of such contract. At any time prior to the expiration of a
futures contract, a trader may elect to close out its position by taking an
opposite position on the contract market on which the position was entered
into, subject to the availability of a secondary market, which will operate
to terminate the initial position. At that time, a final determination of
variation margin is made and any loss experienced by the trader is required
to be paid to the contract market clearing house while any profit due to the
trader must be delivered to it.
When futures are purchased to hedge against a possible increase in the
price of a security before a Portfolio is able in an orderly fashion to
invest in the security, it is possible that the market may decline instead.
If the Portfolio, as a result, concluded not to make the planned investment
at that time because of concern as to possible further market decline or for
other reasons, the Portfolio would realize a loss on the futures contract
that is not offset by a reduction in the price of securities purchased.
In addition to the possibility of an imperfect correlation or no
correlation at all between movements in the futures and the portion of a
Portfolio hedged, the prices of futures may not correlate perfectly with
movements in interest rates or exchange rates due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship between
interest rates or exchange rates and the value of a future. Moreover, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market and may therefore cause increased
participation by speculators in the futures market. Such increased
participation also may cause temporary price distortions. Due to the
possibility of price distortion in the futures market and because of the
imperfect correlation between movements in interest rates or exchange rates
and movements in the prices of futures contacts, the value of futures
contracts as a hedging device may be reduced.
6
<PAGE>
In addition, if a Portfolio has insufficient available cash, it may at
times have to sell securities to meet variation margin requirements. Such
sales may have to be effected at a time when it may be disadvantageous to do
so.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. In addition, interest rate futures contracts include
contracts on indices of municipal securities. Foreign currency futures
contracts currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc, West German mark and on Eurodollar deposits.
Options on Futures Contracts. Each Portfolio may buy and write options on
futures contracts solely for bona fide hedging purposes or for other
non-speculative purposes within the meaning and intent of the applicable
provisions of the CEA. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than
ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, when a Portfolio is not fully invested it may
buy a call option on a futures contract to hedge against a market advance.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price to a stated expiration
date. Upon exercise of the option by the holder, the contract market clearing
house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position, in
the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
futures contracts, such as payment of variation margin deposits. In addition,
the writer of an option on a futures contract, unlike the holder, is subject
to initial and variation margin requirements on the option position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, a
Portfolio will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, a Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities
which the Portfolio is considering buying. If a call or put option a
Portfolio has written is exercised, the Portfolio will incur a loss which
will be reduced by the amount of the premium it received. Depending on the
degree of correlation between changes in the value of its securities and
changes in the value of the futures positions, the Portfolio's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of its securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, a Portfolio may buy a put option on a futures contract to hedge
against the risk of falling prices.
The amount of risk a Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs.
In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid
7
<PAGE>
secondary market, which is the purchase or sale of an option of the same
series. (i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid and
received represents the trader's profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of
an option, the exchange or contract market clearing house assigns exercise
notices on a random basis to those of its members which have written options
of the same series and with the same expiration date. A brokerage firm
receiving such notices then assigns them on a random basis to those of its
customers which have written options of the same series and expiration date.
A writer therefore has no control over whether an option will be exercised
against it, nor over the time of such exercise.
Options on Securities. An option on a security provides the purchaser, or
"holder," with the right, but not the obligation, to purchase, in the case of
a "call" option, or sell, in the case of a "put" option, the security or
securities underlying the option, for a fixed exercise price up to a stated
expiration date. The holder pays a non-refundable purchase price for the
option, known as the "premium." The maximum amount of risk the purchaser of
the option assumes is equal to the premium plus related transaction costs,
although the entire amount may be lost. The risk of the seller, or "writer,"
however, is potentially unlimited, unless the option is "covered," which is
generally accomplished through the writer's ownership of the underlying
security, in the case of a call option, or the writer's segregation of an
amount of cash or securities equal to the exercise price, in the case of a
put option. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option.
Options on securities which have been purchased or written may be closed out
prior to exercise or expiration by entering into an offsetting transaction on
the exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which
are regulated by the SEC. The Options Clearing Corporation ("OCC") guarantees
the performance of each party to an exchange-traded option, by in effect
taking the opposite side of each such option. A holder or writer may engage
in transactions in exchange-traded options on securities and options on
indices of securities only through a registered broker/dealer which is a
member of the exchange on which the option is traded.
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same
series. Although a Portfolio generally will purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option at any particular time. In such event it might not be
possible to effect closing transactions in a particular option with the
result that the Portfolio would have to exercise the option in order to
realize any profit. This would result in the Portfolio incurring brokerage
commissions upon the disposition of underlying securities acquired through
the exercise of a call option or upon the purchase of underlying securities
upon the exercise of a put option. If a Portfolio, as a covered call option
writer, is unable to effect a closing purchase transaction in a secondary
market, unless the Portfolio is required to deliver the securities pursuant
to the assignment of an exercise notice, it will not be able to sell the
underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions, or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options
8
<PAGE>
or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or particular class or series of options) in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on that exchange which had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at a particular time, render certain of the facilities of
any of the clearing corporations inadequate and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. However, the OCC, based on forecasts
provided by the U.S. exchanges, believes that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and such
exchanges have advised such clearing corporation that they believe their
facilities will also be adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter ("OTC")
through financial institutions dealing in such options as well as the
underlying instruments. OTC options are purchased from or sold (written) to
dealers or financial institutions which have entered into direct agreements
with the Fund on behalf of the Portfolios. With OTC options, such variables
as expiration date, exercise price and premium will be agreed upon between a
Portfolio and the transacting dealer, without the intermediation of a third
party such as the OCC. If the transacting dealer fails to make or take
delivery of the securities underlying an option it has written, in accordance
with the terms of that option as written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolios will engage in OTC option transactions only with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York.
FORWARD FOREIGN CURRENCY CONTRACTS (ALL PORTFOLIOS)
As discussed in the section of the Portfolio's Prospectus entitled "The
Meridian/INVESCO Global Sector Portfolio, Meridian/INVESCO US Sector
Portfolio and Meridian/INVESCO Foreign Sector Portfolio and the Fund," each
Portfolio may enter into forward contracts to purchase or sell foreign
currencies as a hedge against possible variations in foreign exchange rates.
A forward foreign currency contract is an agreement between the contracting
parties to exchange an amount of currency at some future time at an agreed
upon rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract. A forward contract generally
has no deposit requirement, and such transactions do not involve commissions.
By entering into a forward contract for the purchase or sale of the amount of
foreign currency invested in a foreign security transaction, a Portfolio can
hedge against possible variations in the value of the dollar versus the
subject currency either between the date the foreign security is purchased or
sold and the date on which payment is made or received or during the time the
Portfolio holds the foreign security. The Portfolios will not speculate in
forward currency contracts. Although the Portfolios have not adopted any
limitations on their ability to use forward contracts as a hedge against
fluctuations in foreign exchange rates, the Portfolios will not attempt to
hedge all of their foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by Meridian. The
Portfolios will not enter into a forward contract for a term of more than one
year. Forward contracts may, from time to time, be considered illiquid, in
which case they would be subject to the Portfolios' limitation on investing
in illiquid securities, discussed above.
SWAPS AND SWAP-RELATED PRODUCTS (ALL PORTFOLIOS)
Interest rate swaps involve the exchange by a Portfolio with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The exchange commitments
can involve payments to be made in the same currency or in different
currencies. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a
9
<PAGE>
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the party selling the interest rate floor.
The Portfolios may enter into interest rate swaps, caps and floors, which
are included in the types of instruments sometimes known as derivatives, on
either an asset-based or liability-based basis, depending upon whether they
are hedging their assets or their liabilities, and usually will enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with a Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. 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 calculated on a daily basis, and an amount of cash or
high-grade liquid assets having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by the
Portfolios' custodian. If a Portfolio enters into an interest rate swap on
other than a net basis, the Portfolio would maintain a segregated account in
the full amount accrued on a daily basis of the Portfolio's obligations with
respect to the swap. The Portfolios will not enter into any interest rate
swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in one of the three
highest rating categories of at least one nationally recognized statistical
rating organization at the time of entering into such transaction. The
Co-Sub-Advisers will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to such a
transaction, a Portfolio would have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent a
Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or high-grade liquid assets having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of
the Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by a Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by a Portfolio
or its counterparty to collateralize obligations under the swap. The
documentation currently used in those markets attempts to limit the risk of
loss with respect to interest rate swaps to the net amount of the payments
that a party is contractually obligated to make. If the other party to an
interest rate swap that is not collateralized defaults, the Portfolio would
anticipate losing the net amount of the payments that the Portfolio
contractually is entitled to receive over the payments that the Portfolio is
contractually obligated to make. The Portfolios may buy and sell (i.e.,
write) caps and floors without limitation, subject to the segregated account
requirement described above as well as the Portfolios' other investment
restrictions set forth above.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
As discussed in the Portfolios' Prospectus, a Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for
investment by the Portfolio with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers. A
repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the
period the instrument is held by a Portfolio and is unrelated to the interest
rate on the underlying instrument. In these transactions, the collateral
securities acquired by a Portfolio (including accrued interest earned
thereon) must have a total value in excess of the value of the repurchase
agreement, and are held as collateral by the Portfolios' custodian bank until
the repurchase agreement is completed.
FOREIGN EXCHANGE TRANSACTIONS (ALL PORTFOLIOS)
To the extent a Portfolio invests directly in foreign securities, a
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government
10
<PAGE>
regulation, and such transactions generally occur directly between parties
rather than on an exchange or in an organized market. This means that a
Portfolio is subject to the full risk of default by a counterparty in such a
transaction. Because such transactions often take place between different
time zones, a Portfolio may be required to complete a currency exchange
transaction at a time outside of normal business hours in the counterparty's
location, making prompt settlement of such transaction impossible. This
exposes a Portfolio to an increased risk that the counterparty will be unable
to settle the transaction. Although the counterparty in such transactions is
often a bank or other financial institution, currency transactions are
generally not covered by insurance otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1973 - present).
JOHN R. KENNEY (1, 2) , CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President, (1978 - 1987 and December,
1992 - present) Director (1978 - present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 - February, 1991), President (1988 - 1989), Director (1976 - February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida; President and Director (1985 -
September, 1990) and Director (December, 1990 -present); Idex Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present),
Chairman (December, 1989 - September, 1990 and November, 1990 - present) and
President and Chief Executive Officer (November, 1986 -September, 1990),
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies), all
of Largo, Florida.
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 - February, 1991), Pioneer
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
11
<PAGE>
Western Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September,
1995), Secretary, Vice President and Counsel (September, 1995 - present) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991), University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 -present), Chief Financial Officer (December,
1995 -present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the
Co-Sub-Advisers ("disinterested Director"). Each such Director also receives
$500, plus expenses, per each regular and special Board meeting attended.
Because the Portfolios had not commenced operations as of December 31, 1995
the Portfolios did not pay any Directors' fees for the fiscal year ended
December 31, 1995. The following table provides compensation amounts paid to
disinterested Directors of the Fund for the fiscal year ended December 31,
1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS FROM
WRL SERIES FUND, INC.,
IDEX FUND, IDEX II
AGGREGATE COMPENSATION SERIES FUND AND
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. IDEX FUND 3
- ----------------------------------- --------------------------- -----------------------
<S> <C> <C>
Peter R. Brown, Director .......... $9,500 $32,500
Charles C.Harris, Director ........ $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
12
<PAGE>
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolios pursuant to an Investment
Advisory Agreement dated April 30, 1996, with the Fund. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on December 4, 1995. The
Investment Advisory Agreement provides that subsequent to its approval by the
Portfolios' sole shareholder, it will continue in effect for an initial term
ending April 22, 1998, and from year to year thereafter, if approved annually
(a) by the Board of Directors of the Fund or by a majority of the outstanding
shares of a Portfolio, and (b) by a majority of the Directors who are not
parties to such contract or "interested persons" of any such party. The
Investment Advisory Agreement may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the
shareholders of a Portfolio and terminates automatically in the event of its
assignment (within the meaning of the 1940 Act)
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Investment Advisory Agreement. For further information about the
management of the Portfolios, see "The Co-Sub-Advisers", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolios for the year ended December 31, 1995 because the Portfolios
had not commenced operations as of that date.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and furnishing office space for officers and employees of the
Investment Adviser connected with investment management of the Portfolios.
The Investment Adviser also pays all expenses incurred in connection with the
formation and organization of the Portfolios including all costs and expenses
of preparing and filing the post-effective amendment to the Fund's
registration statement effecting the registration of the Portfolios and their
shares under the 1940 Act and the Securities Act of 1933. Each Portfolio pays
all other expenses incurred in its operation and all of the Portfolio's
general administrative expenses.
Expenses that are borne directly by the Fund include redemption expenses,
expenses of portfolio transactions, expenses in connection with ongoing
registration or qualification requirements under Federal and state securities
laws, pricing costs (including the daily calculation of net asset value),
interest, certain taxes, charges of the custodian, fees and expenses of Fund
directors who are not "interested persons" of the Fund, legal expenses, state
franchise taxes, cost of auditing services, costs of printing proxies, SEC
fees, advisory fees, certain insurance premiums, costs of corporate meetings,
costs of maintenance of corporate existence, investor services (including
allocable telephone, and personnel expenses), extraordinary expenses, and
other expenses properly payable by the Fund. Depending upon the nature of the
lawsuit, litigation costs may be borne by the Fund.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolios' Investment
Adviser.
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THE CO-SUB-ADVISERS
This discussion supplements the information provided about the
Co-Sub-Advisers under the caption "Management of the Fund - The
Co-Sub-Advisers" in the Prospectus.
Meridian Investment Management Corporation ("Meridian") and INVESCO Global
Asset Management Limited ("INVESCO") serve as Co-Sub-Advisers for the
Portfolios pursuant to a Sub-Advisory Agreement dated April 30, 1996,
between Meridian and WRL and a Sub-Advisory Agreement dated April 30, 1996,
between INVESCO and WRL on behalf of the Portfolios. The Sub-Advisory
Agreements were approved by the Board of Directors of the Fund, including a
majority of the Directors who were not "interested persons" of the Fund (as
defined in the 1940 Act) on December 4, 1995. The Sub-Advisory Agreements
provide that subsequent to their approval by the Portfolios' sole
shareholder, they will continue in effect for an initial term ending April
22, 1998, and from year to year thereafter if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding shares of
each Portfolio and (b) by a majority of the Directors who are not parties to
such Agreements or "interested persons" (as defined in the 1940 Act) of any
such party. The Sub-Advisory Agreements may be terminated without penalty on
60 days' written notice at the option of either party or by the vote of the
shareholders of each Portfolio and terminate automatically in the event of
their assignment (within the meaning of the 1940 Act) or termination of the
Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreements, the Co-Sub-Advisers provide
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolios. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Co-Sub-
Advisers are responsible for the actual management of the Portfolios and for
making decisions to buy, sell or hold any particular security. As discussed
in the Prospectus, Meridian has the responsibility for allocating the
Portfolios' assets among asset categories, countries and/or industries. After
these allocations have been designated by Meridian, INVESCO will select the
specific securities within each category, country or industry. The
Co-Sub-Advisers bear all of the expenses in connection with the performance
of their respective services under the Sub-Advisory Agreements such as
compensating and furnishing office space for their officers and employees
connected with investment and economic research, trading and investment
management of the Portfolios. The method of computing the Co-Sub-Advisers'
fee is set forth in the Prospectus. Because the Portfolios did not commence
operations until May 1, 1996, no co-sub-advisory fees were paid by the
Investment Adviser to the Co-Sub-Advisers with respect to the Portfolios for
the year ended December 31, 1995.
Meridian, located at 12835 East Arapahoe Road, Tower II, 7th Floor,
Englewood, Colorado 80112, serves as a Co-Sub-Adviser to the Portfolios.
Meridian is a wholly-owned subsidiary of Meridian Management & Research
Corporation (MM&R). Meridian provides investment management and related
services to other mutual fund portfolios and individual, corporate,
charitable and retired accounts.
INVESCO Global Asset Management Limited, located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Portfolios. In performing services under its Sub-Advisory Agreement with WRL,
INVESCO is authorized to use INVESCO-affiliated companies and their
employees, provided that INVESCO supervises and remains fully responsible for
all such services. Pursuant to this authority, INVESCO has entered into
service agreements with INVESCO Asset Management Limited, 11 Devonshire
Square, London, EC2M 4YR England, for assistance in managing the Portfolios'
investments in foreign securities, and with INVESCO Trust Company, 7800 East
Union Avenue, Denver, Colorado 80237, for assistance in managing the
Portfolios' investments in U.S. securities. These agreements were approved by
the Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 18, 1996. INVESCO and its affiliates are indirect wholly-owned
subsidiaries of INVESCO PLC, a global firm that managed approximately $84
billion as of December 31, 1995. INVESCO PLC is headquartered in London, with
money managers located in Europe, North America and the Far East.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Meridian/INVESCO Global Sector
Portfolio, Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign
Sector Portfolio and the Fund - Portfolio Turnover" in the Prospectus. In
computing the portfolio turnover rate for each Portfolio, securities whose
maturities or expiration dates at the time of acquisition are one year or
less are excluded. Subject to this exclusion, the turnover rate for a
Portfolio is calculated by dividing (a) the lesser of purchases or sales of
portfolio securities for the fiscal year by (b) the monthly average of
portfolio securities owned by the Portfolio during the fiscal year.
There are no fixed limitations regarding the portfolio turnover of the
Portfolios. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of each Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund,
INVESCO is primarily responsible for placement of the Portfolios' securities
transactions. In placing orders, it is the policy of the Portfolios to obtain
the most favorable net results, taking into account various factors,
including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While INVESCO generally will seek
reasonably competitive spreads or commissions, the Portfolios will not
necessarily be paying the lowest spread or commission available. The
Portfolios do not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolios and negotiation of their commissison rates are made by INVESCO,
whose policy is to seek to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, INVESCO may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to INVESCO, and pay
spreads or commissions to such brokers or dealers furnishing such services
which are in excess of spreads or commissions which another broker or dealer
may charge for the same transaction.
In selecting brokers and in negotiating commissions, INVESCO considers
such factors as: the broker's reliability; the quality of its execution
services on a continuing basis; the financial condition of the firm; and
research products and services provided, which include: (i) furnishing
advice, either directly or through publications or writings, as to the value
of securities, the advisability of purchasing or selling specific securities
and the availability of securities or purchasers or sellers of securities and
(ii) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends and portfolio strategy and products
and other services (such as third party publications, reports and analyses,
and computer and electronic access, equipment, software, information and
accessories) that assist INVESCO in carrying out its responsibilities.
Supplemental research obtained through brokers or dealers will be in addition
to and not in lieu of the services required to be performed by INVESCO. The
expenses of INVESCO will not necessarily be reduced as a result of the
receipt of such supplemental information. INVESCO may use such research
products and services in servicing other accounts in addition to the
Portfolios. If INVESCO determines that any research product or service has a
mixed use, such that it also serves functions that do not assist in the
investment decision-making process, INVESCO will allocate the costs of such
service or product accordingly. The portion of the product or service that
INVESCO determines will assist it in the investment decision-making process
may be paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for INVESCO. Conversely, such supplemental information
obtained by the placement of business for INVESCO will be considered by and
may be useful to INVESCO in carrying out its obligations to the Portfolios.
15
<PAGE>
When a Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of INVESCO, better prices and executions are likely to be achieved
through the use of a broker.
Securities held by one or more of the Portfolios may also be held by other
separate accounts, mutual funds or other accounts for which the Investment
Adviser or Co-Sub-Advisers serve as advisers, or held by the Investment
Adviser or Co-Sub-Advisers for their own accounts. Because of different
investment objectives or other factors, a particular security may be bought
by the Investment Adviser or Co-Sub-Advisers for one or more clients when one
or more clients are selling the same security. If purchases or sales of
securities for one or more of the Portfolios or other entities for which
INVESCO acts as investment adviser or for its advisory clients arise for
consideration at or about the same time, transactions in such securities will
be made, insofar as feasible, for the respective entities and clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Investment Adviser or Co-Sub-Advisers during the
same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or the Co-Sub-Advisers deem the
purchase or sale of a security to be in the best interests of a Portfolio as
well as other accounts or companies, INVESCO may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolios with those to be sold
or purchased for such other accounts or companies in order to obtain
favorable execution and lower brokerage commissions. In that event,
allocation of the securities purchased or sold, as well as the expenses
incurred in the transaction, will be made by INVESCO in the manner it
considers to be most equitable and consistent with its fiduciary obligations
to a Portfolio and to such other accounts or companies. In some cases this
procedure may adversely affect the size of the position obtainable for a
Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of INVESCO on behalf of the Portfolios, and reviews the
prices and commissions, if any, paid by the Portfolios to determine if they
were reasonable.
The Board of Directors of the Fund has authorized INVESCO to consider
sales of the Policies and Annuity Contracts by a broker-dealer as a factor in
the selection of broker-dealers to execute Portfolio transactions. As stated
above, any such placement of Portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolios are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolios may, in the future, offer their shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolios
in accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolios are sold and redeemed at
their respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of a Portfolio's shares
is ordinarily determined, once daily, as of the close of the regular session
of business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day). The per
share net asset value of a Portfolio is
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<PAGE>
determined by dividing the total value of the securities and other assets,
less liabilities, by the total number of shares outstanding. In determining
asset value, securities listed on the national securities exchanges and
traded on the NASDAQ National Market are valued at the closing prices on such
markets, or if such a price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their
current bid price. Foreign securities and currencies are converted to U.S.
dollars using the exchange rate in effect at the close of the Exchange. Other
securities which are traded on the over-the-counter market are valued at bid
price. Other securities for which quotations are not readily available are
valued at fair values as determined in good faith by the Investment Adviser
and the Co-Sub-Advisers under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis. Values of gold bullion held by the Global Sector
Portfolio are based upon daily quotes provided by banks or brokers dealing in
such commodities.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations for each of the Portfolios are computed by finding
the average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable period
of a hypothetical $1,000 payment made at the beginning of the
applicable period).
The total return quotation calculations reflect the deduction of a
proportionate share of a Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies of the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional information regarding the investment performance of the
Portfolios appear in the Prospectus.
YIELD QUOTATIONS
The yield quotations for a Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- cd + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the
Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
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Because the Portfolios did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
Each Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, a Portfolio
must distribute to its Policyholders for each taxable year at least 90% of
its investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the
Portfolio must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of securities or foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months -- options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities by the same issuer.
For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
A Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by a
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by a
Portfolio with respect to its business of investing in securities or foreign
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<PAGE>
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to a
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during
the period of the hedge for purposes of determining whether the Portfolio
satisfies the Short-Short Limitation. Thus, only the net gain (if any) from
the designated hedge will be included in gross income for purposes of that
Limitation. A Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent a Portfolio does
not qualify for this treatment, it may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolios may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on its securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes
on capital gains in respect of investments by foreign investors.
The Portfolios may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolios will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolios' investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolios invest in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolios will be required to include in income each year
their pro rata share of the qualified electing fund's annual ordinary
earnings and net capital gain (the excess of net long-term capital gain over
net short-term capital loss), even if they are not distributed to the
Portfolios; those amounts would be subject to the Distribution Requirement.
In most instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Equity-Income Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth &
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Income Portfolio; C.A.S.E. Growth Portfolio; Janus Balanced Portfolio;
International Equity Portfolio; Leisure Portfolio; Value Equity Portfolio;
Meridian/INVESCO Global Sector Portfolio; Meridian/ INVESCO US Sector
Portfolio and Meridian/INVESCO Foreign Sector Portfolio.
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolios, or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
No financial statements for the Portfolios are available for the year
ended December 31, 1995, because the Portfolios had not commenced operations
as of that date.
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APPENDIX A
DESCRIPTION OF SELECTED CORPORATE BOND RATINGS
CORPORATE BONDS - MOODY'S INVESTORS SERVICE, INC.
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 edged." 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 or 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 and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both 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 a 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.
Unrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
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CORPORATE BONDS - STANDARD & POOR'S
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 high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
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 than debt in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit an adequate degree of
protection, 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 higher rated categories.
BB, B, CCC and 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 CCC the
highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, they are
not likely to have the capacity to pay interest and repay principal.
Plus (+) or Minus (-) - The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Unrated - Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF SHORT-TERM SECURITIES
The following is intended only as a supplement to the information
contained in the Prospectus and should be read only in conjunction with the
Prospectus. Terms defined in the Prospectus and not defined herein have the
same meanings as those in the Prospectus.
1. Certificate of Deposit. A certificate of deposit generally is a
short-term, interest bearing negotiable certificate issued by a commercial
bank or savings and loan association against funds deposited in the issuing
institution.
2. Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit
is a short-term obligation of a foreign subsidiary of a U.S. bank payable in
U.S. dollars.
3. Floating Rate Note. A floating rate note is debt issued by a
corporation or commercial bank that is typically several years in term but
whose interest rate is reset every one to six months.
4. Time Deposit. A time deposit is a non-negotiable deposit maintained in
a banking institution for a specified period of time at a stated interest
rate. Time deposits maturing in more than seven days will not be purchased by
the Portfolio, and time deposits maturing from two business days through
seven calendar days will not exceed 15% of the total assets of the Portfolio.
5. Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage
of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the
maturity date. Most acceptances have maturities of six months or less and are
traded in secondary markets prior to maturity.
6. Variable Amount Master Demand Note. A variable amount master demand
note is a note which fixes a minimum and maximum amount of credit and
provides for lending and repayment within those limits at the discretion of
the lender. Before investing in any variable amount master demand notes, the
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. Commercial Paper. Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
8. Repurchase Agreement. A repurchase agreement is an instrument under
which a Portfolio acquires ownership of a debt security and the seller agrees
to repurchase the obligation at a mutually agreed upon time and price. The
total amount received on repurchase is calculated to exceed the price paid by
a Portfolio, reflecting an agreed upon market rate of interest for the period
from the time of a Portfolio's purchase of the security to the settlement
date (i.e., the time of repurchase), and would not necessarily relate to the
interest rate on the underlying securities. A Portfolio will only enter into
repurchase agreements with underlying securities consisting of U.S.
Government or government agency securities, certificates of deposit,
commercial paper or bankers' acceptances, and will be entered only with
primary dealers. While a Portfolio may invest in repurchase agreements for
periods up to 30 days, it is expected that typically such periods will be for
a week or less. The staff of the Securities and Exchange Commission has taken
the position that repurchase agreements of greater than seven days together
with other illiquid investments should be limited to an amount not in excess
of 15% of a Portfolio's net assets.
Although repurchase transactions usually do not impose market risks on the
purchaser, a Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, a Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and
bankruptcy proceedings are commenced, under current law, a Portfolio could be
ordered by a court not to liquidate the securities for an indeterminate
period of time and the amount realized by a Portfolio upon liquidation of the
securities may be limited.
B-1
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
JANUS BALANCED PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [JANUS SYMBOL]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Janus Balanced Portfolio of the Fund
(the "Portfolio").
The investment objective of the Janus Balanced Portfolio is long-term
growth, consistent with preservation of capital and balanced by current
income. The Janus Balanced Portfolio is designed for investors who want to
participate in the equity markets through a more moderate investment than a
pure growth fund. The Portfolio normally invests 40%-60% of its assets in
securities selected primarily for their growth potential and 40%-60% of its
assets in securities selected primarily for their income potential. There can
be, of course, no assurance that the Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under the certain individual variable life insurance policies (the
"Policies") and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Janus Capital Corporation serve as the investment adviser
("Investment Adviser") and the sub-adviser ("Sub-Adviser") respectively, to
the Portfolio. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolio
that prospective investors ought to know before investing. Investors should
read this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and other portfolios
of the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolio bears the
same date as this Prospectus and is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
The Janus symbol is a service mark of Janus Capital Corporation.
<PAGE>
WRL SERIES FUND, INC.
JANUS BALANCED PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE JANUS BALANCED PORTFOLIO AND THE FUND ... 1
MANAGEMENT OF THE FUND ....................... 5
DIVIDENDS AND DISTRIBUTIONS .................. 7
TAXES ........................................ 7
PURCHASE AND REDEMPTION OF SHARES ............ 8
VALUATION OF SHARES .......................... 8
THE FUND AND ITS SHARES ...................... 8
PERFORMANCE INFORMATION ...................... 8
GENERAL INFORMATION .......................... 9
</TABLE>
i
<PAGE>
THE JANUS BALANCED PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Portfolio is a series of the Fund. The Fund consists of several
series, or separate investment portfolios, which offer shares for investment
by the Separate Accounts. This Prospectus describes only the Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE
The investment objective of the Portfolio is long-term capital growth,
consistent with preservation of capital and balanced by current income. The
Portfolio is designed for investors who want to participate in the equity
markets through a more moderate investment than a pure growth fund.
Investments in income-producing securities are intended to result in a
portfolio that provides a more consistent total return than may be attainable
through investing solely in growth stocks. The Portfolio is not designed for
investors who desire a consistent level of income.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
CERTAIN POLICIES AND TECHNIQUES
The Portfolio normally invests 40-60% of its assets in securities selected
primarily for growth potential and 40-60% of its assets in securities
selected primarily for their income potential. At least 25% of its assets
will normally be invested in fixed income senior securities, which include
corporate debt and preferred stocks. The Portfolio may shift assets between
the growth and income portions of its portfolio based on its portfolio
manager's analysis of the relevant market, financial and economic conditions.
If the portfolio manager believes that growth securities will provide better
returns than the yields then available or expected on income-producing
securities, then the Portfolio will place a greater emphasis on that
component.
The growth component of the Portfolio is expected to consist primarily of
common stocks. Common stocks are selected in industries and companies that
the portfolio manager believes are experiencing favorable demand for their
products and services, and operating in a favorable competitive environment
and regulatory climate. The portfolio manager's analysis and selection
process focuses on stocks with earnings growth potential that may not be
recognized by the market. The Portfolio may invest for capital growth in any
type of equity security that its portfolio manager believes will benefit from
economic trends, promising technologies, products or other opportunities.
Although the growth component of the Portfolio's assets will be invested
primarily in common stocks at most times, the cash position of the growth
component of the Portfolio may increase when the portfolio manager is unable
to locate investment opportunities with desirable risk/reward
characteristics. The Portfolio may invest in U.S. Government securities, high
grade commercial paper, corporate bonds and debentures, warrants, preferred
stocks, certificates of deposit of commercial banks, other debt securities or
repurchase agreements when the portfolio manager perceives an opportunity for
capital growth from such securities, or so that the Portfolio may receive a
return on its uninvested cash. When the Portfolio invests in such securities,
investment income will likely increase and may constitute a larger portion of
the return on the Portfolio's investments than if the Portfolio were fully
invested in common stocks. (See "Dividends and Distributions," page 7.)
The income component of the Portfolio may consist of all types of
income-producing securities, including common stocks selected primarily for
their dividend payments, preferred stocks, convertible securities and debt
securities of corporate and government issuers. Because income is a
consideration in selecting securities, the Portfolio may select equity
securities on the basis of growth potential, dividend-paying properties, or
some combination of both. To the extent that the Portfolio invests in debt
securities, such securities will primarily be of "investment grade."
Investment grade debt securities are considered to be securities rated Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("S&P"), and unrated debt securities that are
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<PAGE>
of comparable quality based on the credit analysis of the Portfolio's Sub-
Adviser. Unrated debt securities are not necessarily of lower grade than
rated securities, but they may not be as attractive to many buyers. The
Portfolio relies more on the credit analysis of its Sub-Adviser when
investing in debt securities that are unrated. The considerations discussed
in the Statement of Additional Information for lower rated debt securities
also apply to lower quality unrated debt securities of all types.
The Portfolio may invest in both domestic and foreign companies, although
the Portfolio will not invest more than 25% of its assets at the time of
purchase in the securities of foreign issuers and obligors. The selection
criteria for domestic issuers apply equally to securities of foreign issuers.
In addition, factors such as expected levels of inflation, government
policies influencing business conditions, the outlook for currency
relationships, and prospects for relative economic growth among countries,
regions or geographic areas may
1
<PAGE>
warrant greater consideration in selecting foreign stocks. (See "Types of
Securities - Foreign Investments and Special Risks," below and "Risk Factors
- - Foreign Securities," page 3.)
The Portfolio may also invest in futures, options and other derivative
instruments. (See "Types of Securities - Futures, Options and Other
Derivative Instruments," below and "Risk Factors - Futures, Options and Other
Derivative Instruments," page 4.) For further information about the
Portfolio's investment policies, see "Types of Securities" and the Statement
of Additional Information.
TYPES OF SECURITIES
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Portfolio may invest up to 25%
of its assets directly or indirectly, in foreign securities. Subject to this
limitation, the Portfolio may invest directly in foreign securities
denominated in a foreign currency and not publicly traded in the United
States. If appropriate and available, in addition to investing directly in
foreign securities, and subject to the Portfolio's investment objective,
policies and practices, the Sub-Adviser may purchase foreign securities
through dollar-denominated American Depositary Receipts ("ADRs"), or American
Depositary Shares ("ADSs") which are dollar-denominated receipts that are
issued by domestic banks or securities firms, are publicly traded in the
United States, and may not involve the same direct currency and liquidity
risks as securities denominated in foreign currency. The Portfolio may also
indirectly invest in foreign securities through European Depositary Receipts
("EDRs"), which are typically issued by European banks, Global Depositary
Receipts ("GDRs"), which may be issued by either domestic or foreign banks,
and other types of receipts evidencing ownership of the underlying foreign
securities. Investments in foreign securities involve risks that are
different in some respects from investments in securities of U.S. issues.
(See "Risk Factors - Foreign Securities," page 3.)
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. Subject to certain
limitations described in the Statement of Additional Information, the
Portfolio may write and purchase options on securities as well as engage in
transactions involving options on securities or foreign currencies, futures
contracts, options on futures contracts, forward currency contracts, and
interest rate swaps, caps and floors for hedging and other appropriate
purposes. The Portfolio may engage in hedging strategies to attempt to reduce
the overall level of investment risk that normally would be expected to be
associated with the Portfolio's securities and, in particular, to attempt to
manage the Portfolio's foreign currency exposure and to attempt to protect
the Portfolio against market movements that might adversely affect the value
of the Portfolio's securities or the price of securities that the Portfolio
is considering purchasing. The Portfolio will limit its use of futures
contracts and related options for purposes other than bona fide hedging such
that the aggregate initial margin and premiums required to establish any
non-hedging positions will not exceed 5% of the fair market value of the
Portfolio's net assets. There can be no assurance that the use of these
instruments by the Portfolio will assist it in achieving its investment
objective. The use of futures contracts, options and other derivative
instruments also involves certain risks. (See "Risk Factors - Futures,
Options and Other Derivative Instruments," page 4.) Further information on
these instruments, hedging strategies and risk considerations relating to
them is set forth in the Statement of Additional Information.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by the Portfolio and a simultaneous agreement
(generally by a bank or broker-dealer) to repurchase that security back from
the Portfolio at a specified price and date or upon demand. This technique
offers a method of earning income on idle cash. The repurchase agreement is
effectively secured by the value of the underlying security. A risk
associated with repurchase agreements is the failure of the seller to
repurchase the securities as agreed, which may cause the Portfolio to suffer
a loss if the market value of such securities declines before they can be
liquidated on the open market. In the event of bankruptcy or insolvency of
the seller, the Portfolio may encounter delays and incur costs in liquidating
the underlying security. Repurchase agreements not terminable within seven
days are considered illiquid securities and are subject to the limit stated
below.
When the Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests or for other temporary or emergency
purposes without the necessity of selling portfolio securities or to earn
additional income on portfolio securities, such as Treasury bills and notes.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions on
resale. The sale of illiquid securities often requires more time and results
in higher brokerage charges or dealer discounts and other selling expenses
2
<PAGE>
than does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. The Portfolio may be restricted
in its ability to sell such securities at a time when the Sub-Adviser deems
it advisable to do so. In addition, in order to meet redemption requests, the
Portfolio may have to sell other assets, rather than such illiquid
securities, at a time which is not advantageous. Certain restricted
securities that are not registered for sale to the general public but that
can be resold to institutional investors ("Rule 144A Securities") may not be
considered illiquid, provided that a dealer or institutional trading market
exists. Securities eligible for resale under Rule 144A of the Securities Act
of 1933 may be determined to be liquid by the Portfolio's Sub-Adviser
pursuant to guidelines approved by the Board of Directors of the Fund.
Securities previously determined to be
2
<PAGE>
liquid pursuant to these guidelines may be subsequently deemed to be
illiquid, and investment in Rule 144A securities could have the effect of
increasing portfolio illiquidity.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD TRANSACTIONS. The Portfolio may
purchase securities on a when-issued or delayed delivery basis and may enter
into contracts to purchase securities for a fixed price at a future date
beyond normal settlement time ("forward commitments"). The Portfolio bears
the risk that the value of such securities may change prior to delivery of
the security and the risk that the seller may not complete the transaction.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES. The Portfolio may
invest up to 10% of its assets in zero coupon bonds, step coupon bonds,
pay-in-kind securities or strips. Zero coupon bonds do not make regular
interest payments; rather, they are sold at a discount from face value.
Principal and accreted discount (representing interest accrued but not paid)
are paid at maturity. Step coupon bonds sell at a discount and pay a low
coupon rate for an initial period and a higher coupon rate thereafter.
Pay-in-kind securities may pay interest in cash or a similar bond. Strips are
debt securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value
of zero coupon bonds, step coupon bonds, pay-in-kind securities and strips
generally fluctuates in response to changes in interest rates to a greater
degree than interest-paying securities of comparable term and quality. The
Portfolio may realize greater gains or losses as a result of such
fluctuations. In order to pay cash distributions from income earned on zero
coupon bonds, step coupon bonds, pay-in-kind securities and strips, the
Portfolio may sell certain portfolio securities and may incur a gain or loss
on such sales. For a description of these securities, see "Zero Coupon,
Pay-In-Kind and Step Coupon Securities" in the Statement of Additional
Information.
MORTGAGE- AND OTHER ASSET-BACKED SECURITIES. The Portfolio may invest up
to 25% of its net assets in mortgage- and other asset-backed securities.
These securities are subject to prepayment risk, that is, the possibility
that prepayments on the underlying mortgages or other loans will cause the
principal and interest on the securities to be paid prior to their stated
maturities. Unscheduled prepayments are more likely to accelerate during
periods of declining long-term interest rates. In the event of a prepayment
during a period of declining interest rates, the Portfolio may be required to
invest the unanticipated proceeds at a lower interest rate. Prepayments
during such periods will also limit the Portfolio's ability to participate in
a large market gain as may be experienced with a comparable government
security not subject to prepayment.
LENDING AND BORROWING. The Portfolio may lend its portfolio securities to
qualified broker-dealers and financial institutions for the purpose of
realizing additional income. As a fundamental policy, the Portfolio will not
lend securities or other assets if, as a result, more than 25% of its total
assets would be lent to other parties. Securities lending may involve some
credit risk to the Portfolio if the borrower defaults and the Portfolio is
delayed or prevented from recovering the collateral or is otherwise required
to cover a transaction in the security loaned. If portfolio securities are
loaned, collateral values will be continuously maintained at no less than
100% by marking-to-market daily. If a material event is to be voted upon
affecting the Portfolio's investment in securities which are on loan, the
Portfolio will take such action as may be appropriate in order to vote its
shares.
The Portfolio may borrow money from banks for temporary or emergency
purposes in an amount not to exceed 25% of its total assets at the time the
borrowing is made. To secure borrowings, the Portfolio may not mortgage or
pledge its securities in amounts that exceed 15% of its net assets. In
addition, the Portfolio may borrow money from or lend money to other funds
that permit such transactions and are advised or sub-advised by the
Sub-Adviser, provided that the Portfolio seeks and obtains permission to do
so from the Securities and Exchange Commission ("SEC"). There is no assurance
that such permission will be sought or granted. In accordance with the
requirements of current California insurance regulations, the Portfolio will
restrict borrowings to no more than 10% of total assets, except that the
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 25% of total assets, the Portfolio may conduct
borrowings in accordance with such revised limits. For further information
about the Portfolio's policies relating to borrowing and lending, see the
Statement of Additional Information.
SHORT SALES. The Portfolio may sell securities "short against the box".
While a short sale is the sale of a security that the Portfolio does not own,
it is "against the box" if at all times when the short position is open, the
Portfolio owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the
same issue as the securities sold short.
HIGH-YIELD/HIGH-RISK BONDS. High-yield/high-risk bonds, below investment
3
<PAGE>
grade securities (commonly known as "junk bonds") involve significant credit
and liquidity concerns and fluctuating yields and are not suitable for
short-term investing. The Portfolio may not invest more than 5% of its net
assets in junk bonds. See the Statement of Additional Information for further
information concerning the risks associated with investing in junk bonds.
DIVERSIFICATION AND CONCENTRATION. The Portfolio is diversified as a
fundamental policy. As an additional fundamental policy, the Portfolio will
not invest more than 25% of the value of its total assets in any particular
industry (other than U.S. Government securities). For more specific
information concerning the diversification policies of the Portfolio, see the
Statement of Additional Information.
RISK FACTORS
FOREIGN SECURITIES. Investments in foreign securities involve risks that
are different in some respects from investments in securities of U.S.
issuers. For example, changes in
3
<PAGE>
currency exchange rates and exchange rate controls may affect the value of
foreign securities and the value of their dividend or interest payments and,
therefore, the Portfolio's share price and returns. Foreign companies
generally are subject to tax laws and accounting, auditing, and financial
reporting standards, practices and requirements that differ from those
applicable to U.S. companies. There is generally less publicly available
information about foreign companies and less securities and other
governmental regulation and supervision of foreign companies, stock exchanges
and securities brokers and dealers. The Portfolio may encounter difficulties
in enforcing obligations in foreign countries and in negotiating favorable
brokerage commission rates. Securities of some foreign companies are less
liquid, and their prices more volatile, than securities of comparable U.S.
companies. Delays may be encountered in settling securities transactions in
certain foreign markets and the Portfolio will incur costs in converting
foreign currencies into U.S. dollars. Custody charges are generally higher
for foreign securities than for domestic securities. In addition, with
respect to some foreign countries, there is the possibility of expropriation
or confiscatory taxation, limitations on the removal of securities, property
or other assets of the Portfolio, political or social instability or war, or
diplomatic developments, any or all of which could affect U.S. investments in
those countries. ADRs do not involve the same direct currency and liquidity
risks as securities denominated in foreign currency.
The considerations noted above may be intensified in the case of
investment in developing countries or countries with limited or developing
capital markets. In particular, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers
located in developing countries may have limited marketability and may be
subject to more abrupt or erratic price fluctuations.
At times, securities held by the Portfolio may be listed on foreign
exchanges or traded in foreign markets which are open on days (such as
Saturday) when the Portfolio does not compute a price or accept orders for
the purchase, redemption or exchange of shares. As a result, the net asset
value of the Portfolio may be significantly affected by trading on days when
shareholders cannot make transactions.
To the extent that the Portfolio invests in foreign securities, its share
price reflects the movements of both the prices of securities in which it is
invested and the currencies in which the investments are denominated.
Accordingly, changes in the Portfolio's share price may have a low
correlation with movements in the U.S. markets. If most of the foreign
securities in which the Portfolio invests are denominated in foreign
currencies, or otherwise have values that depend on the performance of
foreign currencies relative to the U.S. dollar, the relative strength of the
U.S. dollar may be an important factor in the performance of the Portfolio.
To the extent that the Portfolio invests in foreign securities, it may
employ certain strategies in order to manage exchange rate risks. For
example, the Portfolio may seek to hedge some or all of its investments
denominated in a foreign currency against a decline in the value of that
currency. The Portfolio may exchange foreign currencies for U.S. dollars and
for other foreign currencies in the normal course of business and may buy or
sell securities through forward currency contracts in order to fix a price
for securities it has agreed to buy or sell ("transaction hedge"). The
Portfolio may also enter into contracts to sell that foreign currency for
U.S. dollars (not exceeding the value of the Portfolio's assets denominated
in that currency) or by participating in options or futures contracts with
respect to such currency ("position hedge"). The Portfolio could also seek to
hedge that position by selling a second currency, which is expected to
perform similarly to the currency in which portfolio investments are
denominated, for U.S. dollars ("proxy hedge"). The Portfolio may also enter
into a forward contract to sell the currency in which the security is
denominated for a second currency that is expected to perform better relative
to the U.S. dollar if the portfolio manager believes there is a reasonable
degree of correlation between movements in the two currencies ("cross-
hedge"). As an operating policy, the Portfolio will not commit more than 10%
of its assets to the consummation of cross-hedge contracts and will either
cover such transactions with liquid portfolio securities denominated in the
applicable currency or segregate high-grade, liquid assets in the amount of
such commitments. In addition, when the Portfolio anticipates purchasing
securities denominated in a particular currency, it may enter into a forward
contract to purchase such currency in exchange for the dollar or another
currency ("anticipatory hedge").
These strategies seek to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, such strategies may reduce or
eliminate the opportunity to profit from increases in the value of the
original currency and may adversely impact the Portfolio's performance if the
portfolio manager's projection of future exchange rates is inaccurate.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. Generally, the use of
strategies involving options, futures contracts, forward contracts and
swap-related products ("derivative instruments") involves additional
4
<PAGE>
investment risks and transaction costs, and draws upon skills and experience
which are different from those needed to select the other instruments in
which the Portfolio invests. If the portfolio manager seeks to protect the
Portfolio against potential adverse movements in the securities, foreign
currency or interest rate markets using these instruments, and if such
markets do not move in a direction adverse to the Portfolio, the Portfolio
may not achieve the desired benefits of the foregoing instruments, and could
be left in a less favorable position than if such strategies had not been
used. The use of such strategies involves special risks, which include: 1)
the risk that interest rates, securities prices and currency markets will not
move in the directions anticipated by the portfolio manager; 2) imperfect
4
<PAGE>
correlation between the price of the instruments and movements in the prices
of the securities, interest rates or currencies being hedged; 3) the fact
that there are not daily price fluctuation limits with respect to options on
currencies, forward contracts and other negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time; 4) the possible absence of a liquid
secondary market for any particular instrument at any time, and thus the
Portfolio being unable to control losses by closing out a position; and 5)
the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. As a result, the use of these derivative
instruments as hedging techniques may fail and losses may result. The loss
from investing in futures is potentially unlimited. See the Statement of
Additional Information for further information concerning the use of options,
futures and other derivative instruments, and the associated risks.
FIXED-INCOME INVESTING. The performance of the debt component of the
Portfolio depends primarily on interest rate changes, the average weighted
maturity of the Portfolio and the quality of the securities held. The debt
component of the Portfolio will tend to decrease in value when interest rates
rise and increase when interest rates fall. The Portfolio may vary the
average maturities of its portfolio based on the portfolio manager's analysis
of interest rate trends and other factors. Generally, shorter term securities
are less sensitive to interest rate changes, but longer term securities offer
higher yields. The Portfolio's share price and yield also depend, in part, on
the quality of its investments in debt securities. For example, while U.S.
Government securities generally are of high quality, government securities
that are not backed by the full faith and credit of the United States and
other debt securities, including those of foreign governments, may be
affected by changes in the creditworthiness of the issuer of the security.
The extent that such changes are reflected in the Portfolio's share price
will depend upon the extent of the Portfolio's investment in such securities.
For further information about the Portfolio's policies relating to
fixed-income investing, see the Statement of Additional Information.
SPECIAL SITUATIONS. The Portfolio may invest is "special situations" from
time to time. A special situation arises when, in the opinion of the
portfolio manager, the securities of a particular issuer will be recognized
and appreciate in value due to a specific development with respect to that
issuer. Developments creating a special situation might include, among
others, a new product or process, a technical breakthrough, a management
change or other extraordinary corporate event, or differences in market
supply and demand for the security. 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
impact of this strategy on the Portfolio will depend on the Portfolio's size
and the extent of the holdings of the special situation issuer relative to
the Portfolio's total assets.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to investment restrictions, certain of which are
fundamental policies and as such may not be changed without approval of the
Portfolio's shareholders. Non-fundamental investment restrictions and
operating policies may be changed by the Board of Directors without
shareholder or Policyholder approval. The investment restrictions of the
Portfolio are described in the Statement of Additional Information.
The securities and financial instruments markets in the United States and
worldwide have been characterized in recent years by rapid change and
innovation in the creation of new instruments and securities. The Sub-Adviser
reserves the right to evaluate new financial instruments as they are
developed and become actively traded, and subject to any applicable
investment restriction of the Portfolio, the Portfolio may invest in any such
investment products that its portfolio manager believes will further the
Portfolio's investment objective.
PORTFOLIO TURNOVER
Although it is the policy of the Portfolio to purchase and hold securities
for its stated investment objective, changes in these holdings will generally
be made whenever the portfolio manager believes they are advisable. Portfolio
changes in the Portfolio may result from liquidity needs, securities having
reached a price or yield objective, anticipated changes in interest rates or
the credit standing of an issuer or by reason of developments not foreseen at
the time of the investment decision. To a limited extent, the Portfolio may
engage in short-term transactions if such transactions further its investment
objective. Because investment changes ordinarily will be made without
reference to the length of time a security has been held, a significant
number of short-term transactions may result, and the rate of portfolio
turnover will not be a limiting factor when changes are deemed to be
appropriate.
A portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. High turnover
5
<PAGE>
and short-term trading involve correspondingly greater commission expenses.
The Portfolio's annual turnover is anticipated to be up to 200%. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund within the meaning of that
term under the 1940 Act. The Board meets regularly four times each year and
at other times as necessary. By virtue of the functions performed by WRL as
Investment Adviser and Janus Capital Corporation as Sub-Adviser, the Fund
requires no employees other than its executive officers, none of whom devotes
full
5
<PAGE>
time to the affairs of the Fund. These officers are employees of WRL and
receive no compensation from the Fund. The Statement of Additional
Information contains the names of and general background information
regarding each Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Fund's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by
AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly traded international insurance
group. The Investment Adviser has served as the investment adviser to the
Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio. For the fiscal year ended December 31,
1995, the Fund did not pay WRL advisory fees on behalf of the Portfolio
because the Portfolio had not yet commenced operations.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and organization of the Portfolio, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments and any registration or
qualification under state securities laws required in connection with the
Portfolio's offering of shares. The Investment Adviser will also pay all
reasonable compensation and related expenses of the officers and Directors of
the Fund, except for such Directors who are not interested persons (as that
term is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets. No expenses were
paid by the Investment Adviser on behalf of the Portfolio for the fiscal year
ended December 31, 1995 as the Portfolio had not yet commenced operations.
THE SUB-ADVISER
Janus Capital Corporation, located at 100 Fillmore Street, Suite 300,
Denver, Colorado 80206, serves as the Sub-Adviser to the Portfolio. Thomas
H. Bailey is the President of Janus Capital Corporation. Kansas City Southern
Industries, Inc. ("KCSI") owns approximately 83% of the Sub-Adviser. The
Sub-Adviser provides investment management and related services to other
mutual funds, and individual, corporate, charitable and retirement accounts.
See "Management of the Fund - The Sub-Adviser" in the Statement of Additional
Information for a more detailed description of the previous experience of
Janus Capital Corporation as an investment adviser.
Blaine Rollins serves as portfolio manager for the Janus Balanced
Portfolio. Mr. Rollins joined Janus Capital in 1990 and has gained experience
as a trader and research analyst prior to assuming management responsibility
for the Janus Balanced Portfolio. He holds a Bachelor of Science in Finance
from the University of Colorado and is a Chartered Financial Analyst. He has
also managed the Janus Balanced Fund since January 1996.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
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<PAGE>
Investment Adviser at the annual rate of 0.40% of the average daily net
assets of the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc. In addition, the Sub-Adviser may occasionally place portfolio
6
<PAGE>
business with broker-dealers affiliated with the Investment Adviser or the
Sub-Adviser; in such event, the Sub-Adviser always will seek best execution.
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board of Directors, the Portfolio may
transfer uninvested cash balances on a daily basis into certain joint trading
accounts. Assets in the joint trading accounts are invested in money market
instruments. All other participants in the joint trading accounts will be
registered mutual funds or other clients of the Sub-Adviser or its
affiliates. The Portfolio will participate in the joint trading accounts only
to the extent that the investments of the joint trading accounts are
consistent with the Portfolio's investment policies and restrictions. The
Sub-Adviser anticipates that the investments made by the Portfolio through
the joint trading accounts will be at least as advantageous to the Portfolio
as if the Portfolio had made such investment directly. (See "The Sub-Adviser"
in the Statement of Additional Information.)
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy (the "Ethics Policy") that has
been adopted by the Board of Directors of the Fund. Access Persons are
required to follow the guidelines established by this Ethics Policy in
connection with all personal securities transactions and are subject to
certain prohibitions on personal trading. The Fund's Sub-Advisers, pursuant
to Rule 17j-1 and other applicable laws, and pursuant to the terms of the
Ethics Policy, must adopt and enforce their own Code of Ethics and Insider
Trading Policies appropriate to their operations. Each Sub-Adviser is
required to report to the Board of Directors on a quarterly basis with
respect to the administration and enforcement of such Ethics Policy,
including any violations thereof which may potentially affect the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends from investment income, if any, of the
Portfolio normally are declared and paid semi-annually in additional shares
of the Portfolio at net asset value. Distributions of net realized capital
gains from security transactions and net gains from foreign currency
transactions, if any, normally are declared and paid in additional shares of
the Portfolio at the end of the fiscal year.
TAXES
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
Shares of the Portfolio are offered only to the Separate Accounts (which
are insurance company separate accounts that fund the Policies and the
Annuity Contracts). Under the Code, no tax is imposed on an insurance company
with respect to income of a qualifying separate account properly allocable to
the value of eligible variable annuity or variable life insurance contracts.
For a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter or within 30 days
thereafter no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
7
<PAGE>
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
7
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of a Portfolio share is computed by dividing the value of
the net assets of the Portfolio by the total number of shares outstanding in
the Portfolio.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis. (See the Statement of Additional
Information for details.)
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985 and is registered with the SEC as a diversified, open-end,
management investment company.
The Fund offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
the variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts of the Life Companies to invest in the
Fund simultaneously. Neither the Life Companies nor the Fund currently
foresees any such disadvantages or conflicts, either to variable life
insurance policyowners or to variable annuity contractowners. After being
notified by one or more of the Life Companies of a potential or existing
conflict, the Fund's Board of Directors will determine if a material conflict
exists and what action, if any, should be taken in response thereto. Such
action could include the sale of Fund shares by one or more of the Separate
Accounts, which could have adverse consequences. Material conflicts could
result from, for example, (1) changes in state insurance laws, (2) changes in
Federal income tax laws, or (3) differences in voting instructions between
those given by variable life insurance policyowners and those given by
variable annuity contractowners. If the Board of Directors were to conclude
that separate funds should be established for variable life and variable
annuity Separate Accounts, the affected Life Companies will bear the
attendant expenses, but variable life insurance policyowners and variable
annuity contractowners would no longer have the economies of scale typically
resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio will be entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. To
the extent required by law, the Life Companies, will vote the Fund's shares
held in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from persons having voting interests in the
corresponding sub-accounts of the Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
8
<PAGE>
If the 1940 Act or any regulation thereunder should be amended, or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote the Fund's shares in their own
right, they may elect to do so. The rights of Policyholders are described in
more detail in the prospectuses or disclosure documents for the Policies and
the Annuity Contracts, respectively.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of the Portfolio's
total return or yield in connection with the total return for the appropriate
Separate Account in advertisements, sales literature or reports to
Policyholders or to prospective investors. Total return and yield quotations
for the Portfolio reflect only the performance of a hypothetical investment
in the Portfolio during the particular time period shown as calculated based
on the historical performance of the Portfolio during that period. Such
quotations do not in any way indicate or project future performance.
Quotations of total return and yield will not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant,
8
<PAGE>
the prospectuses for the Policies and the Annuity Contracts contain
additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations for the Portfolio are expressed as average annual compound rates
of return for each of the periods quoted, reflect the deduction of a
proportionate share of the Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
The Fund may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Fund may also, from time to time, compare performance information for
the Portfolio in advertisements, sales literature and reports to
Policyholders or to prospective investors to: (1) the Standard & Poor's Index
of 500 Common Stocks, the Dow Jones Industrial Average or other widely
recognized indices; (2) other mutual funds whose performance is reported by
Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity Research &
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar") or reported by
other services, companies, individuals or other industry or financial
publications of general interest, such as Forbes, Money, The Wall Street
Journal, Business Week, Barron's, Kiplinger's Personal Finance and Fortune,
which rank and/or rate mutual funds by overall performance or other criteria;
and (3) the Consumer Price Index. Lipper, VARDS and Morningstar are widely
quoted independent research firms which rank mutual funds according to
overall performance, investment objective, and assets. Unmanaged indices may
assume the reinvestment of dividends but usually do not reflect any
"deduction" for the expense of operating or managing a fund.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
9
<PAGE>
WRL SERIES FUND, INC.
JANUS BALANCED PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00076-05/96
10
<PAGE>
WRL SERIES FUND, INC.
JANUS BALANCED PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Janus Balanced Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of
the Prospectus may be obtained from the Fund by writing the Fund at 201
Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
JANUS CAPITAL CORPORATION
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL000077-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE TO
OF ADDITIONAL INFORMATION PAGE IN PROSPECTUS
------------------------------ -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 5
Lending of Portfolio Securities 3 3
Investments in Futures, Options and Other
Derivative Instruments 3 2
Zero Coupon, Pay-In-Kind and
Step Coupon Securities 15 3
Other Income-Producing Securities 15 1
Illiquid Securities 16 2
Repurchase and Reverse Repurchase Agreements 16 2
Pass-through Securities 17 3
High Yield/High Risk Bonds 18 3
Warrants and Rights 18 1
U.S. Government Securities 18 1
Management of the Fund 19 5
Directors and Officers 19 5
The Investment Adviser 21 6
The Sub-Adviser 22 6
Joint Trading Accounts 23 7
Portfolio Transactions and Brokerage 23 6
Portfolio Turnover 23 5
Placement of Portfolio Brokerage 23 6
Purchase and Redemption of Shares 25 8
Offering of the Shares and Determination of
Offering Price 25 8
Net Asset Valuation 25 8
Calculation of Performance Related Information 25 8
Total Return 26 9
Yield Quotations 26 9
Taxes 26 7
Capital Stock of the Fund 28 8
Registration Statement 28 N/A
Financial Statements 28 9
Appendix A - Description of Portfolio Securities A-1 1
</TABLE>
i
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Janus Balanced Portfolio (the "Portfolio")
of the Fund is described in the Portfolio's Prospectus. Shares of the
Portfolio are sold only to the separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from those which a Policyholder deemed appropriate at the
time of investment.
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
INVESTMENT RESTRICTIONS
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government
securities" as defined in the 1940 Act) if immediately after and as a result
of such purchase (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets, or (b) the Portfolio owns more than 10% of the outstanding voting
securities of any one class of securities of such issuer;
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than U.S. Government securities);
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this restriction
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other
instruments backed by physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio; and
6. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio may not: (i) enter into any futures contracts and
related options for purposes other than bona fide hedging transactions within
the meaning of Commodity Futures Trading Commission ("CFTC") regulations if
the aggregate initial margin deposits and premiums required to establish
positions in futures contracts and related options that do not fall within
the definition of bona
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fide hedging transactions will exceed 5% of the fair market value of the
Portfolio's net assets, after taking into account unrealized profits and
losses on such contracts it has entered into; and (ii) enter into any futures
contracts or options on futures contracts if the aggregate amount of the
Portfolio's commitments under outstanding futures contracts positions would
exceed the market value of its total assets;
(B) The Portfolio's investment in warrants, valued at the lower of cost or
market value may not exceed 5% of the value of its net assets. Included
within that amount, but not to exceed 2% of the value of its net assets, may
be warrants that are not listed on the New York or American Stock Exchange.
Warrants acquired by the Portfolio in units or attached to securities shall
be deemed to be without value for the purpose of monitoring this policy;
(C) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value provided that this limitation does not apply to
reverse repurchase agreements, deposits of assets to margin, or guarantee
positions in futures, options, swaps, or forward contracts or segregation of
assets in connection with such contracts;
(D) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short, without the payment of any additional consideration therefore,
and provided that transactions in options, futures contracts, swaps, and
forward contracts are not deemed to constitute selling securities short;
(E) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits made in connection with transactions in options, futures contracts,
swaps, and forward contracts shall not be deemed to constitute purchasing
securities on margin;
(F) The Portfolio may borrow money from banks for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). If borrowings exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets,
the Portfolio will reduce its borrowings within three business days to the
extent necessary to comply with the 25% limitation. This policy shall not
prohibit reverse repurchase agreements, or deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, and the
segregation of assets in connection with such contracts;
(G) The Portfolio may not purchase any security or enter into a repurchase
agreement, if as a result, more than 15% of its net assets would be invested
in repurchase agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by virtue of
legal or contractual restrictions on resale or the absence of a readily
available market. The Board of Directors, or the Portfolio's Investment
Adviser or Sub-Adviser acting pursuant to authority delegated by the Board of
Directors, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, or any successor to such rule, and municipal lease obligations.
Accordingly, such securities may not be subject to the foregoing limitation;
(H) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not apply to
money market funds or to securities received as dividends, through offers of
exchange, or as a result of reorganization, consolidation, or merger. If the
Portfolio invests in a money market fund, the Investment Adviser will reduce
its advisory fee by the amount of any investment advisory or administrative
service fees paid to the investment manager of the money market fund;
(I) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
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(J) The Portfolio may not invest in companies for the purpose of
exercising control or management;
(K) The Portfolio may not purchase securities, including securities of
issuers which are not readily marketable, of any issuer (other than U.S.
Government agencies and instrumentalities or instruments guaranteed by an
entity with a record of more than three years' continuous operation,
including that of predecessors) with a record of less than three years'
continuous operation (including that of predecessors) if such purchase would
cause the cost of the Portfolio's investments in all such issuers to exceed
5% of the Portfolio's total assets taken at market value at the time of such
purchase;
(L) The Portfolio will normally invest at least 25% of its assets in
fixed-income senior securities, which include corporate debt securities and
preferred stock; and
(M) The Portfolio may not purchase or retain the securities of any issuer
if any of the officers or directors of the Fund or Investment Adviser
individually owns more than 0.5% of the outstanding securities of the issuer
and together they own beneficially more than 0.5% of such securities.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value of the
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures and other derivative instruments. In
addition, such laws and regulations may require the Portfolio's investments
in foreign securities to meet additional diversification and other
requirements.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the
restrictions stated in this Statement of Additional Information. Under
applicable regulatory requirements (which are subject to change), the
following conditions apply to securities loans: (a) the loan must be
continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) the
Portfolio must receive any dividends or interest paid by the issuer on such
securities; (c) the Portfolio must have the right to call the loan and obtain
the securities loaned at any time upon notice of not more than five business
days, including the right to call the loan to permit voting of the
securities; and (d) the Portfolio must receive either interest from the
investment of collateral or a fixed fee from the borrower. Securities loaned
by the Portfolio remain subject to fluctuations in market value. The
Portfolio may pay reasonable finders, custodian and administrative fees in
connection with a loan. Securities lending, as with other extensions of
credit, involves the risk that the borrower may default. Although securities
loans will be fully collateralized at all times, the Portfolio may experience
delays in, or be prevented from, recovering the collateral. During the period
that the Portfolio seeks to enforce its rights against the borrower, the
collateral and the securities loaned remain subject to fluctuations in market
value. The Portfolio may also incur expenses in enforcing its rights. If the
Portfolio has sold a loaned security, it may not be able to settle the sale
of the security and may incur potential liability to the buyer of the
security on loan for its costs to cover the purchase. The Portfolio will not
lend securities to any adviser or sub-adviser to the Fund or their
affiliates. By lending its securities, the Portfolio can increase its income
by continuing to receive interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term securities or
by earning income in the form of interest paid by the borrower when U.S.
Government securities are used as collateral.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
A. Futures Contracts. The Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies or contracts based on financial indices including indices of U.S.
Government or foreign government securities or equity or fixed-income
securities ("futures contracts"). U.S. futures contracts are traded on
exchanges that have been designated "contract markets" by the CFTC and must
be executed through a futures commission merchant ("FCM"), or brokerage firm,
which is a member of the relevant contract market. Through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange.
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When the Portfolio buys or sells a futures contract, it incurs a
contractual obligation to receive or deliver the underlying instrument (or a
cash payment based on the difference between the underlying instrument's
closing price and the price at which the contract was entered into) at a
specified price on a specified date. Transactions in futures contracts will
not be made for speculation and may be made to attempt to hedge against
potential changes in interest or currency exchange rates or the price of a
security or a securities index which might correlate with or otherwise
adversely affect either the value of the Portfolio's securities or the prices
of securities which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the
delivery date. However, both the buyer and seller are required to deposit
"initial margin" for the benefit of a FCM when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be maintained in
cash or certain high-grade liquid assets by the Portfolio's custodian for the
benefit of a FCM. Initial margin payments are similar to good faith deposits
or performance bonds. Unlike margin extended by a securities broker, initial
margin payments do not constitute purchasing securities on margin for
purposes of the Portfolio's investment limitations. If the value of either
party's position declines, that party will be required to make additional
"variation margin" payments with a FCM to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. In the event of the bankruptcy of a FCM that holds
margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to the Portfolio only in proportion to the amount received by the
FCM's other customers. The Sub-Adviser will attempt to minimize the risk by
careful monitoring of the creditworthiness of the FCMs with which the
Portfolio does business and by segregating margin payments with the
custodian.
Although the Portfolio would segregate cash and liquid assets in an amount
sufficient to cover its open futures obligations, the segregated assets would
be available to the Portfolio immediately upon closing out the futures
position, while settlement of securities transactions could take several
days. However, because the Portfolio's cash that may otherwise be invested
would be held uninvested or invested in high-grade liquid assets so long as
the futures position remains open, the Portfolio's return could be diminished
due to the opportunity losses of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
the Portfolio holds or is considering purchasing equity securities and seeks
to protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. Similarly, if interest rates
were expected to rise, the Portfolio might sell bond index futures contracts,
thereby hoping to offset a potential decline in the value of debt securities
in the portfolio by a corresponding increase in the value of the futures
contract position held by the Portfolio. The Portfolio also could seek to
protect against potential price declines by selling portfolio securities and
investing in money market instruments. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase, or
interest rates are expected to fall, futures contracts may be bought to
attempt to hedge against the possibility of having to buy equity securities
at higher prices. This technique is sometimes known as an anticipatory hedge.
Because the fluctuations in the value of futures contracts should be similar
to those of equity securities, the Portfolio could take advantage of the
potential rise in the value of equity or debt securities without buying them
until the market has stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could buy equity or debt securities on the cash
market. To the extent the Portfolio enters into futures contracts for this
purpose, the segregated assets maintained to cover the Portfolio's
obligations with respect to futures contracts will consist of high-grade
liquid assets from its portfolio in
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an amount equal to the difference between the contract price and the
aggregate value of the initial and variation margin payments made by the
Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal price relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make or
take delivery, liquidity in the futures market could be reduced and prices in
the futures market distorted. Third, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of the foregoing distortions, a correct
forecast of general price trends by the Sub-Adviser still may not result in a
successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolio, if the Sub-Adviser's investment
judgment is incorrect, the Portfolio's overall performance could be worse
than if the Portfolio had not entered into futures contracts. For example, if
the Portfolio has hedged against the effects of a possible decrease in prices
of securities held in its portfolio and prices increase instead, the
Portfolio may lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Portfolio's futures positions.
In addition, if the Portfolio has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements.
Those sales may, but will not necessarily, be at increased prices which
reflect the rising market and may occur at a time when the sales are
disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to the Portfolio will not match exactly the Portfolio's current or
potential investments. The Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests -- for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities -- which involves a risk that the futures position will not
correlate precisely with the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with the
Portfolio's investments. Futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
the underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between the Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. The Portfolio may buy or sell
futures contracts with a greater or lesser value than the securities it
wishes to hedge or is considering purchasing in order to attempt to
compensate for differences in historical volatility between the futures
contract and the securities, although this may not be successful in all
cases. If price changes in the Portfolio's futures positions are poorly
correlated with its other investments, its futures positions may fail to
produce desired gains or result in losses that are not offset by the gains in
the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a
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contract's price moves upward or downward more than the limit in a given day.
On volatile trading days when the price fluctuation limit is reached, it may
be impossible for the Portfolio to enter into new positions or close out
existing positions. If the secondary market for a futures contract is not
liquid because of price fluctuation limits or otherwise, the Portfolio may
not be able to promptly liquidate unfavorable positions and potentially be
required to continue to hold a futures position until the delivery date,
regardless of changes in its value. As a result, the Portfolio's access to
other assets held to cover its futures positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
The Portfolio intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. The Portfolio will use futures contracts and related options
primarily for bona fide hedging purposes within the meaning of CFTC
regulations; except that, in addition, the Portfolio may hold positions in
futures contracts and related options that do not fall within the definition
of hedging transactions, provided that the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of the fair
market value of the Portfolio's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into.
B. Options on Futures Contracts. The Portfolio may buy put and call
options and write covered put and call options on futures contracts. An
option on a futures contract gives the Portfolio the right (but not the
obligation) to buy or sell a futures contract at a specified price on or
before a specified date. Transactions in options on futures contracts may be
made to attempt to hedge against potential changes in interest rates or
currency exchange rates or the price of a security or a securities index
which might correlate with or otherwise adversely affect either the value of
the Portfolio's securities or the prices of securities which the Portfolio is
considering buying at a later date. Transactions in options on futures
contracts will be made for hedging purposes only, and will not be made for
speculation.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than
ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, when the Portfolio is not fully invested it
may buy a call option on a futures contract to attempt to hedge against a
market advance.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option the Portfolio has written is exercised, the Portfolio will incur
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, the
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
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The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, the Portfolio may buy a put option on a futures contract to
hedge the Portfolio's securities against the risk of falling prices or rising
interest rates.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
C. Options on Securities. In an effort to increase current income and to
reduce fluctuations in net asset value, the Portfolio may write covered put
and call options and buy put and call options on securities that are traded
on United States and foreign securities exchanges and over-the-counter. The
Portfolio may write and buy options on the same types of securities that the
Portfolio may purchase directly. There are no specific limitations on the
Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by the Portfolio is "covered" if the Portfolio (i)
segregates cash not available for investment or high-grade liquid assets with
a value equal to the exercise price with its custodian or (ii) holds a put on
the same security and in the same principal amount as the put written and the
exercise price of the put held is equal to or greater than the exercise price
of the put written. The premium paid by the buyer of an option will reflect,
among other things, the relationship of the exercise price to the market
price and the volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates.
A call option written by the Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash with its custodian) upon conversion or exchange of
other securities held in its portfolio. A call option written by the
Portfolio is also deemed to be covered if the Portfolio holds a call on the
same security and in the same principal amount as the call written and the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the
call written if the difference is segregated with its custodian.
The Portfolio also may write call options that are not covered for
cross-hedging purposes. The Portfolio collateralizes its obligation under a
written call option for cross-hedging purposes by segregating cash or
high-grade liquid assets in an amount not less than the market value of the
underlying security, marked-to-market daily. The Portfolio would write a call
option for cross-hedging purposes, instead of writing a covered call option,
when the premium to be received from the cross-hedge transaction would
exceed that which would be received from writing a covered call option and
the portfolio manager believes that writing the option would achieve the
desired hedge.
If a put or call option written by the Portfolio were exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised and the
underlying security would then be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, because with regard to certain options, the writer
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may be assigned an exercise notice at any time prior to the termination of
the obligation. Whether or not an option expires unexercised, the writer
retains the amount of the premium. This amount, of course, may, in the case
of a covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer experiences a profit or loss from the sale of the underlying
security. If a put option is exercised, the writer must fulfill the
obligation to buy the underlying security at the exercise price, which will
usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
In the case of a written call option, effecting a closing transaction will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both. In the
case of a written put option, such a transaction will permit the Portfolio to
write another put option to the extent that the exercise price thereof is
secured by deposited high-grade liquid assets. Effecting a closing
transaction also will permit the cash or proceeds from the concurrent sale of
any securities subject to the option to be used for other Portfolio
investments. If the Portfolio desires to sell a particular security on which
the Portfolio has written a call option, the Portfolio will effect a closing
transaction prior to or concurrent with the sale of the security.
The Portfolio will realize a profit from a closing transaction if the
price of the purchase transaction is less than the premium received from
writing the option or the price received from a sale transaction is more than
the premium paid to buy the option. The Portfolio will realize a loss from a
closing transaction if the price of the purchase transaction is more than the
premium received from writing the option or the price received from a sale
transaction is less than the premium paid to buy the option. Because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where a secondary market for an
option of the same series exists. If a secondary market does not exist, the
Portfolio may not be able to effect closing transactions in particular
options and the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market may include
the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by a national securities exchange
on which the option is traded ("Exchange") on opening or closing transactions
or both, (iii) trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an Exchange, (v) the facilities of an Exchange or the Options
Clearing Corporation ("OCC") may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on that Exchange
that had been issued by the OCC as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions. In other words, the Portfolio may buy a security and then write
a call option against that security. The exercise price of such call will
depend upon the expected price movement of the underlying security. The
exercise price
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of a call option may be below ("in-the-money"), equal to ("at-the-money") or
above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when
it is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the
premiums received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone.
If the call options are exercised in such transactions, the Portfolio's
maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price. If the options are not
exercised and the price of the underlying security declines, the amount of
such decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put options minus
the amount by which the market price of the security is below the exercise
price.
The Portfolio may buy put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Portfolio will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Portfolio may buy call options to hedge against an increase in the
price of securities that it may buy in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit, if any,
realized by the Portfolio upon exercise of the option, and, unless the price
of the underlying security rises sufficiently, the option may expire
worthless to the Portfolio.
In purchasing an option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option purchased by the Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
In addition to options on securities, the Portfolio may also purchase and
sell call and put options on securities indexes. A stock index reflects in a
single number the market value of many different stocks. Relative values are
assigned to the stocks included in an index and the index fluctuates with
changes in the market values of the stocks. The options give the holder the
right to receive a cash settlement during the term of the option based on the
difference between the exercise price and the value of the index. By writing
a put or call option on a securities index, the Portfolio is obligated, in
return for the premium received, to make delivery of this amount. The
Portfolio may offset its position in stock index options prior to expiration
by entering into a closing transaction on an exchange or it may let the
option expire unexercised.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase these options unless
the Sub-Adviser is satisfied with the development, depth and liquidity of the
market and believes the options can be closed out.
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Price movements in the Portfolio's securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of its portfolio manager to predict correctly movements in the
direction of the stock market generally or of a particular industry. Because
options on securities indexes require settlement in cash, the portfolio
manager may be forced to liquidate portfolio securities to meet settlement
obligations.
D. Options on Foreign Currencies. The Portfolio may buy and write options
on foreign currencies in a manner similar to that in which futures or forward
contracts on foreign currencies will be utilized. For example, a decline in
the U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. 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 Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will offset, in whole or in part the adverse
effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may buy 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 the Portfolio from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent desired, the Portfolio could sustain losses on
transactions in foreign currency options which would require the Portfolio to
forego a portion or all of the benefits of advantageous changes in those
rates. In addition, in the case of other types of options, the benefits to
the Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs.
The Portfolio may also write options on foreign currencies. For example,
in attempting to hedge against a potential decline in the U.S. dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates, the Portfolio could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. dollar cost of securities to be acquired,
the Portfolio could write a covered put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised and
allow the Portfolio to hedge the increased cost up to the amount of premium.
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. If exchange rates do not move in the expected direction, the option
may be exercised and the Portfolio would be required to buy 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, the Portfolio
also may lose all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, and if the difference is
maintained by the Portfolio in cash or high-grade liquid assets in a
segregated account with the Fund's custodian.
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The Portfolio may write call options on foreign currencies for
cross-hedging purposes that would not be deemed to be covered. A call option
on a foreign currency is for cross-hedging purposes if it is not covered but
is designed to provide a hedge against a decline due to an adverse change in
the exchange rate in the U.S. dollar value of a security which the Portfolio
owns or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes
the option by segregating cash or high-grade liquid assets in an amount not
less than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
E. Forward Contracts. A forward contract is an agreement between two
parties in which one party is obligated to deliver a stated amount of a
stated asset at a specified time in the future and the other party is
obligated to pay a specified invoice amount for the assets at the time of
delivery. The Portfolio may enter into forward contracts to purchase and sell
government securities, foreign currencies or other financial instruments.
Forward contracts generally are traded in an interbank market conducted
directly between traders (usually large commercial banks) and their
customers. Unlike futures contracts, which are standardized contracts,
forward contracts can be specifically drawn to meet the needs of the parties
that enter into them. The parties to a forward contract may agree to offset
or terminate the contract before its maturity, or may hold the contract to
maturity and complete the contemplated exchange.
The following discussion summarizes the Portfolio's principal uses of
forward foreign currency exchange contracts ("forward currency contracts").
The Portfolio may enter into forward currency contracts with stated contract
values of up to the value of the Portfolio's assets. A forward currency
contract is an obligation to buy or sell an amount of a specified currency
for an agreed price (which may be in U.S. dollars or a foreign currency). The
Portfolio will exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell ("transaction hedge"). The Portfolio
also may hedge some or all of its investments denominated in foreign currency
against a decline in the value of that currency relative to the U.S. dollar
by entering into forward currency contracts to sell an amount of that
currency (or a proxy currency whose performance is expected to replicate or
exceed the performance of that currency relative to the U.S. dollar)
approximating the value of some or all of its portfolio securities
denominated in that currency ("position hedge") or by participating in
options or futures contracts with respect to the currency. The Portfolio also
may enter into a forward currency contract with respect to a currency where
the Portfolio is considering the purchase or sale of investments denominated
in that currency but has not yet selected the specific investments
("anticipatory hedge"). In any of these circumstances the Portfolio may,
alternatively, enter into a forward currency contract to purchase or sell one
foreign currency for a second currency that is expected to perform more
favorably relative to the U.S. dollar if the portfolio manager believes there
is a reasonable degree of correlation between movements in the two currencies
("cross-hedge").
These types of hedging minimize the effect of currency appreciation as
well as depreciation, but do not eliminate fluctuations in the underlying
U.S. dollar equivalent value of the proceeds of or rates of return on the
Portfolio's foreign currency denominated portfolio securities. The matching
of the increase in value of a forward contract and the decline in the U.S.
dollar equivalent value of the foreign currency denominated asset that is the
subject of the hedge generally will not be precise. Shifting the Portfolio's
currency exposure from one foreign 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 to the Portfolio if its
portfolio manager's position projection of future exchange rates is
inaccurate. Proxy hedges and cross-hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which
hedged securities are denominated. Unforeseen changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts.
The Portfolio will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency
underlying the forward contract or the currency being hedged. To the extent
that the Portfolio is not able to cover its forward currency positions with
underlying
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portfolio securities, its custodian will segregate cash or high-grade liquid
assets having a value equal to the aggregate amount of the Portfolio's
commitments under forward contracts entered into with respect to position
hedges, cross-hedges and anticipatory hedges. If the value of the securities
used to cover a position or the value of segregated assets declines, the
Portfolio will find alternative cover or segregate additional cash or
highgrade liquid assets on a daily basis so that the value of the covered and
segregated assets will be equal to the amount of the Portfolio's commitments
with respect to such contracts. As an alternative to segregating assets, the
Portfolio may buy call options permitting the Portfolio to buy the amount of
foreign currency being hedged by a forward sale contract or the Portfolio may
buy put options permitting it to sell the amount of foreign currency subject
to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event, the Portfolio's ability to utilize forward contracts may be
restricted. In addition, the Portfolio may not always be able to enter into
forward contracts at attractive prices and may be limited in its ability to
use these contracts to hedge its assets.
F. Swaps and Swap-Related Products. In order to attempt to protect the
value of its investments from interest rate or currency exchange rate
fluctuations, the Portfolio may enter into interest rate and currency
exchange rate swaps, and may buy or sell interest rate and currency exchange
rate caps and floors. The Sub-Adviser expects to enter into these
transactions primarily to attempt to preserve a return or spread on a
particular investment or portion of its portfolio. The Portfolio also may
enter into these transactions to attempt to protect against any increase in
the price of securities the Portfolio may consider buying at a later date.
The Portfolio does not intend to use these transactions as a speculative
investment. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. The
exchange commitments can involve payments to be made in the same currency or
in different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive
payments of interest on a contractually based principal amount from the party
selling the interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors either
on asset-based or liability-based basis, depending upon whether it is
hedging its assets or liabilities, and will usually enter into interest rate
swaps on a net basis (i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments). The net amount of the excess, if any, of the Portfolio's
obligations over its entitlement with respect to each interest rate swap will
be calculated on a daily basis and an amount of cash or high-grade liquid
assets having an aggregate net asset value at least equal to the accrued
excess will be segregated by the Fund's custodian. If the Portfolio enters
into an interest rate swap on other than a net basis, the Portfolio would
maintain a segregated account in the full amount accrued on a daily basis of
obligations with respect to the swap. The Portfolio will not enter into any
interest rate swap, cap or floor transaction unless the unsecured senior debt
or the claims-paying ability of the other party thereto is rated in one of
the three highest rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such
transaction. The Sub-Adviser will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party
to such a transaction, the Portfolio will have contractual remedies pursuant
to the agreements related to the transaction.
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. The Sub-Adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent the
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Portfolio sells (i.e., writes) caps and floors, it will segregate cash or
high-grade liquid assets having an aggregate net asset value at least equal
to the full amount, accrued on a daily basis, of its obligations with respect
to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio, although the Portfolio presently does
not intend to engage in such transactions in excess of 5% of its total
assets. These transactions may in some instances involve the delivery of
securities or other underlying assets by the Portfolio or its counterparty to
collateralize obligations under the swap. Under the documentation currently
used in those markets, the risk of loss with respect to interest rate swaps
is limited to the net amount of the interest payments that the Portfolio is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Portfolio would risk the loss of the
net amount of the payments that the Portfolio contractually is entitled to
receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregation requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques, that become
available as the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. The Sub-Adviser may use these
opportunities to the extent they are consistent with the Portfolio's
investment objective and are permitted by the Portfolio's investment
limitations and applicable regulatory requirements.
G. Eurodollar Instruments. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate (the "LIBOR"), although foreign currency-denominated instruments
are available from time to time. Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to
obtain a fixed rate for borrowings. The Portfolio might use Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many interest rate swaps and fixed income instruments are linked.
H. Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolio invests. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected
manner, the Portfolio may not achieve the desired benefits of the foregoing
instruments or may realize losses and thus be in a worse position than if
such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies, forward contracts
and other negotiated or over-the-counter instruments, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to the Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can
be given that the Portfolio will be able to use those instruments effectively
for their intended purposes.
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In connection with certain of its hedging transactions, the Portfolio must
segregate assets with the Fund's custodian bank to ensure that the Portfolio
will be able to meet its obligations under these instruments. Segregated
assets generally may not be disposed of for so long as the Portfolio
maintains the positions giving rise to the segregation requirement.
Segregation of a large percentage of the Portfolio's assets could impede
implementation of the Portfolio's investment policies or the Portfolio's
ability to meet redemption requests or other current obligations.
I. Additional Risks of Options on Foreign Currencies, Forward Contracts
and Foreign Instruments. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to Securities and Exchange
Commission ("SEC") regulation. Options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received
or initial margin or collateral posted due to the potential additional margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result,
the OCC may, if it determines that foreign government restrictions or taxes
would prevent the orderly settlement of foreign currency option exercises, or
would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in
the mechanics of delivery of currency, the fixing of dollar settlement prices
or prohibition on exercise.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter markets
in foreign countries. Such transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected
by (i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) low
trading volume.
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ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES
The Portfolio may invest in zero coupon, pay-in-kind and step coupon
securities. Zero coupon bonds are issued and traded at a discount from their
face value. They do not entitle the holder to any periodic payment of
interest prior to maturity. Step coupon bonds trade at a discount from their
face value and pay coupon interest. The coupon rate is low for an initial
period and then increases to a higher coupon rate thereafter. The discount
from the face amount or par value depends on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Pay-in-kind securities may pay all or
a portion of their interest or dividends in the form of additional
securities. Because they do not pay current income, the price of pay-in-kind
securities can be very volatile when interest rates change. The Portfolio may
also invest in strips, which are debt securities that are stripped of their
interest after the securities are issued, but otherwise are comparable to
zero coupon bonds.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue
discount on such securities that accrues that year as interest income, even
though the holders receive no cash payments of interest during the year. In
order to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986 (the "Code"), the Portfolio must distribute its
investment company taxable income, including the original issue discount
accrued on zero coupon or step coupon bonds. Because the Portfolio will not
receive cash payments on a current basis in respect of accrued original-issue
discount on zero coupon bonds or step coupon bonds during the period before
interest payments begin, in some years the Portfolio may have to distribute
cash obtained from other sources in order to satisfy the distribution
requirements under the Code. The Portfolio might obtain such cash from
selling other portfolio holdings. These actions are likely to reduce the
assets to which the Portfolio's expenses could be allocated and to reduce the
rate of return for the Portfolio. In some circumstances, such sales might be
necessary in order to satisfy cash distribution requirements even though
investment considerations might otherwise make it undesirable for the
Portfolio to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and pay-in-kind
securities are more volatile than the prices of securities that pay interest
periodically and in cash and are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having similar
maturities and credit quality.
OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Portfolio may purchase
include, but are not limited to, the following types of securities:
Variable and floating rate obligations. These types of securities are
relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at
specified intervals prior to maturity.
Standby commitments. These instruments, which are similar to a put,
give the Portfolio the option to obligate a broker, dealer or bank to
repurchase a security held by the Portfolio at a specified price.
Tender option bonds. Tender option bonds are relatively long-term
bonds that are coupled with the agreement of a third party (such as a
broker, dealer or bank) to grant the holders of such securities the
option to tender the securities to the institution at periodic
intervals.
Inverse floaters. Inverse floaters are instruments whose interest
bears an inverse relationship to the interest rate on another
security. The Portfolio will not invest more than 5% of its assets in
inverse floaters.
The Portfolio will purchase instruments with demand features, standby
commitments and tender option bonds primarily for the purpose of increasing
the liquidity of its portfolio. See the Appendix to the Statement of
Additional Information regarding income producing securities in which the
Portfolio may invest.
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ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in illiquid
securities (i.e., securities that are not readily marketable). The Fund's
Board of Directors has authorized the Sub-Adviser to make liquidity
determinations with respect to Rule 144A securities in accordance with the
guidelines established by the Board of Directors. Under the guidelines, the
Sub-Adviser will consider the following factors in determining whether a Rule
144A security is liquid: 1) the frequency of trades and quoted prices for the
security; 2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; 3) the willingness of dealers
to undertake to make a market in the security; and 4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. The sale of
illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. The Portfolio may be restricted in its ability to
sell such securities at a time when the Sub-Adviser deems it advisable to do
so. In addition, in order to meet redemption requests, the Portfolio may have
to sell other assets, rather than such illiquid securities, at a time which
is not advantageous.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Although the Portfolio may enter into repurchase and reverse repurchase
agreements, it does not intend to invest more than 15% of its assets in
either repurchase or reverse repurchase agreements. In a repurchase
agreement, the Portfolio purchases a security and simultaneously commits to
resell that security to the seller at an agreed upon price on an agreed upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount that is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security or "collateral." The
Portfolio may engage in a repurchase agreement with respect to any security
in which it is authorized to invest. At the time the Portfolio enters into a
repurchase agreement, the value of the underlying security including accrued
interest will be equal to or exceed the value of the repurchase agreement
and, for repurchase agreements that mature in more than one day, the seller
will agree that the value of the underling security including accrued
interest will continue to be at least equal to the value of the repurchase
agreement. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the
market value of the underlying securities, as well as delays and costs to the
Portfolio in connection with bankruptcy proceedings against a counterparty),
it is the policy of the Portfolio to limit repurchase agreements to those
parties whose creditworthiness has been reviewed and found satisfactory by
the Sub-Adviser and approved by the Board of Directors of the Fund. In
addition, the Portfolio currently intends to invest primarily in repurchase
agreements collateralized by U.S. Government securities whose value equals at
least 100% of the repurchase price, marked-to-market daily.
Although repurchase agreements carry certain risks not associated with
direct investment in securities, the Portfolio intends to enter into
repurchase agreements only with banks and dealers in transactions which the
Sub-Adviser believes present minimal credit risks in accordance with
guidelines adopted by the Board of Directors. To the extent that proceeds
from any sales of collateral upon a default in the counterparty's obligation
to repurchase were less than the repurchase price, the Portfolio would suffer
a loss. If the counterparty's petition for bankruptcy or otherwise becomes
subject to bankruptcy or liquidation proceedings, there might be restrictions
on the Portfolio's ability to sell the collateral and the Portfolio could
suffer a loss.
In a reverse repurchase agreement, the Portfolio sells a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Portfolio will
segregate cash and appropriate liquid assets with the Fund's custodian to
cover its obligation under the agreement.
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<PAGE>
The Portfolio will enter into reverse repurchase agreements only with parties
that the Sub-Adviser deems creditworthy, and that are approved by the Board
of Directors of the Fund.
PASS-THROUGH SECURITIES
The Portfolio may invest up to 25% of its net assets in various types of
pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share
or certificate of interest in a pool of debt obligations that have been
repackaged by an intermediary, such as a bank or broker-dealer. The purchaser
receives an undivided interest in the underlying pool of securities. The
issuers of the underlying securities make interest and principal payments to
the intermediary which are passed through to purchasers, such as the
Portfolio. The most common type of pass-through securities are mortgagebacked
securities. Government National Mortgage Association ("GNMA") Certificates
are mortgage-backed securities that evidence an undivided interest in a pool
of mortgage loans. GNMA Certificates differ from traditional bonds in that
principal is paid back monthly by the borrowers over the term of the loan
rather than returned in a lump sum at maturity. The Portfolio will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder
to receive a share of all interest and principal payments paid and owned on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment. GNMA Certificates
are backed as to the timely payment of principal and interest by the full
faith and credit of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates
("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA
Certificates in that each PC represents a pro rata share of all interest and
principal payments made and owned on the underlying pool. FHLMC guarantees
timely payments of interest on PCs and the full return of principal. GMCs
also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as
to timely payment of principal and interest, but is not backed by the full
faith and credit of the U.S. Government.
The Federal National Mortgage Association ("FNMA") issues guaranteed
mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro
rata share of all interest and principal payments made and owned on the
underlying pool. This type of security is guaranteed by FNMA as to timely
payment of principal and interest, but it is not backed by the full faith and
credit of the U.S. Government.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Portfolio), like the payments on the underlying
loans, represent both principal and interest. Although the underlying
mortgage loans are for specified periods of time, such as 20 or 30 years, the
borrowers can, and typically do, pay them off sooner. Thus, the security
holders frequently receive prepayments of principal in addition to the
principal that is part of the regular monthly payments. A borrower is more
likely to prepay a mortgage that bears a relatively high rate of interest.
This means that in times of declining interest rates, some of the Portfolio's
higher yielding mortgage-backed securities might be converted to cash and the
Portfolio will be forced to accept lower interest rates when that cash is
used to purchase additional securities in the mortgage-backed securities
sector or in other investment sectors. Mortgage -and asset-backed securities
may have periodic income payments or may pay interest at maturity (as is the
case with Treasury bills or zero coupon bonds).
Asset-backed securities represent interests in pools of consumer loans and
are backed by paper or accounts receivables originated by banks, credit card
companies or other providers of credit. Generally, the originating bank or
credit provider is neither the obliger or guarantor of the security and
interest and principal payments ultimately depend upon payment of the
underlying loans by individuals.
17
<PAGE>
HIGH-YIELD/HIGH-RISK BONDS
High-yield/high-risk, below investment grade securities (commonly known as
"junk bonds") involve significant credit and liquidity concerns and
fluctuating yields and are not suitable for short-term investing. Higher
yields are ordinarily available on fixed-income securities which are unrated
or are rated in the lower rating categories of recognized rating services
such as Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("Standard & Poor's"). The Portfolio may not invest more than 5%
of its net assets in junk bonds. Lower rated bonds also involve the risk that
the issuer will not make interest or principal payments when due. In the
event of an unanticipated default, the Portfolio owning such bonds would
experience a reduction in its income, and could expect a decline in the
market value of the securities so affected. More careful analysis of the
financial condition of each issuer of lower rated securities is therefore
necessary. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payments obligations, to meet projected business goals and to obtain
additional financing.
The market prices of lower grade securities are generally less sensitive
to interest rate changes than higher rated investments, but more sensitive to
adverse economic or political changes or individual developments specific to
the issuer. Periods of economic or political uncertainty and change can be
expected to result in volatility of prices of these securities. Since the
last major economic recession, there has been a substantial increase in the
use of high-yield debt securities to fund highly leveraged corporate
acquisitions and restructurings, so past experience with high-yield
securities in a prolonged economic downturn may not provide an accurate
indication of future performance during such periods. Lower rated securities
also may have less liquid markets than higher rated securities, and their
liquidity as well as their value may be more severely affected by adverse
economic conditions. Adverse publicity and investor perceptions as well as
new or proposed laws may also have a greater negative impact on the market
for lower rated bonds.
Unrated securities are not necessarily of lower quality than rated
securities, but the markets for lower rated and nonrated securities are more
limited than those in which higher rated securities are traded. In addition,
an economic downturn or increase in interest rates is likely to have a
greater negative effect on the market for lower rated and nonrated
securities, the value of high yield debt securities held by the Portfolio,
the net asset value of the Portfolio and the ability of the bonds' issuers to
repay principal and interest, meet projected business goals and obtain
additional financing than on higher rated securities.
WARRANTS AND RIGHTS
The Portfolio may invest in warrants and rights. A warrant is a type of
security that entitles the holder to buy a proportionate amount of common
stock at a specified price, usually higher than the market price at the time
of issuance, for a period of years or to perpetuity. In contrast, rights,
which also represent the right to buy common shares, normally have a
subscription price lower than the current market value of the common stock
and a life of two to four weeks. The Portfolio's investment in warrants,
valued at the lower of cost of market value may not exceed 5% of the value of
the net assets. Included within that amount, but not to exceed 2% of the
value of its net assets, may be warrants that are not listed on the New York
or American Stock Exchange. The Portfolio intends to invest in warrants that
are freely transferrable and are traded on the major securities exchanges.
U.S. GOVERNMENT SECURITIES
Examples of the types of U.S. Government securities that the Portfolio may
hold include, in addition to those described in the Prospectus and direct
obligations of the U.S. Treasury, the obligations of the Federal Housing
Administration, Farmers Home Administration, Small Business Administration,
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Banks,
Federal Land Banks and Maritime Administration. U.S. Government securities
may be supported by the full faith and credit of the U.S. Government (such as
securities of the Small Business Administration); by the right of the
18
<PAGE>
issuer to borrow from the Treasury (such as securities of the Federal Home
Loan Bank); by the discretionary authority of the U.S. Government to purchase
the agency's obligations (such as securities of the Federal National Mortgage
Association); or only by the credit of the issuing agency. There can be no
assurance that the U.S. Government itself will pay interest and principal on
securities as to which it is not legally obligated to do so.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (BD 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (BD 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer, (1968-1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 to December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (BD 8/17/44),1160 Gulf Boulevard,
Clearwater Beach, Florida 34630. General Manager, Sheraton Sand Key Resort
(resort hotel), Clearwater, Florida (1975 - present).
JOHN R. KENNEY (2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (BD
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present) President, (1978 - 1987 and December,
1992 -present), Director (1978 - present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 -February, 1991), President (1988 - 1989), Director (1976 - February,
1991), Executive Vice President (1972 - 1988), Pioneer Western Corporation
(financial services), Largo, Florida, President and Director (1985 -
September, 1990) and Director (December, 1990 - present), IDEX Management,
Inc. (investment adviser), Largo, Florida; Trustee (1987 - present) Chairman
(December, 1989 -September, 1990 and November, 1990 - present) and President
and Chief Executive Officer (November, 1986 - September, 1990), IDEX Fund,
IDEX II Series Fund and IDEX Fund 3 (investment companies), all of Largo,
Florida.
G. JOHN HURLEY (2), DIRECTOR AND EXECUTIVE VICE PRESIDENT (BD 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 -present) and Executive Vice President (June, 1988 - September,
1990) of
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
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<PAGE>
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief Executive
Officer and Director of InterSecurities, Inc. (May, 1988 - present);
Assistant Vice President of AEGON USA Managed Portfolios, Inc. (September,
1991 -August, 1992); Vice President of Pioneer Western Corporation (May,
1988 - February, 1991).
RICHARD B. FRANZ, II (2), TREASURER (BD 7/12/50). Senior Vice President (1987
- present), Chief Financial Officer (1987 - December, 1995) and Treasurer
(1988 - present), Western Reserve Life Assurance Co. of Ohio; Senior Vice
President and Treasurer (1988 -February, 1991), Pioneer Western Corporation
(financial services), Largo, Florida; Treasurer (1988 - September, 1990 and
November, 1990 -present), IDEX Fund, IDEX II Series Fund and IDEX Fund 3
(investment companies), all of Largo, Florida.
REBECCA A. FERRELL (2), SECRETARY, VICE PRESIDENT AND COUNSEL (BD 12/10/60).
Assistant Vice President and Counsel (June, 1995 -present), Attorney
(August, 1993 - June, 1995),Western Reserve Life Assurance Co. of Ohio;
Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 -present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor (August, 1991 - June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1989 - July, 1990), University of
South Florida (August, 1990 - July, 1991).
ALAN M. YAEGER (2), EXECUTIVE VICE PRESIDENT (BD 10/21/46), Executive Vice
President (June, 1993 - present), Senior Vice President (1981 - June, 1993)
and Actuary (1972 - present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. Because the Portfolio
had not commenced operations as of December 31, 1995, the Portfolio did not
pay any Directors fees for the fiscal year ended December 31, 1995. The
following table provides compensation amounts paid to disinterested Directors
of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
AGGREGATE COMPENSATION DIRECTORS FROM WRL SERIES
FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ---------------------------------- ----------------------- -------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,500 $32,500
Charles C. Harris, Director $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
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<PAGE>
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio ("WRL" or the "Investment
Adviser") serves as the investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement dated March 15, 1995 with the Fund on behalf of
the Janus Balanced Portfolio. The Investment Adviser is a wholly-owned
subsidiary of First AUSA Life Insurance Company ("First AUSA"), a stock life
insurance company which is wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON
is a financial services holding company whose primary emphasis is on life and
health insurance and annuity and investment products. AEGON is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a
publicly traded international insurance group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act), on March 6, 1995. The
Investment Advisory Agreement provides that subsequent to its initial
approval by the Portfolio's initial shareholder, it will continue in effect
for an initial term ending April 22, 1997, and from year to year thereafter,
if approved annually (a) by the Board of Directors of the Fund or by a
majority of the outstanding shares of the Portfolio, and (b) by a majority of
the Directors who are not parties to such contract or "interested persons" of
any such party. The Investment Advisory Agreement may be terminated without
penalty on 60 days written notice at the option of either party or by the
vote of the shareholders of the Portfolio and terminate automatically in the
event of assignment (within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Portfolio and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Investment Advisory Agreement. For further information about the
management of the Portfolio, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolio for the year ended December 31, 1995 because the Portfolio
had not commenced operations as of that date.
Payment of Expenses. Under the terms of the Investment Advisory
Agreement, the Investment Adviser is responsible for providing investment
advisory services and pays all compensation of and furnishes office space for
officers and employees of the Investment Adviser connected with investment
management of the Portfolio, as well as the fees of all directors of the Fund
who are affiliated persons of the Investment Adviser or any of its
subsidiaries. Accounting services are provided for the Portfolio by the
Investment Adviser. The Investment Adviser also pays all expenses incurred in
connection with the formation and organization of the Portfolio, including
all costs and expenses of preparing and filing the post-effective amendment
to the Fund's registration statement effecting the registration of the
Portfolio and its shares under the 1940 Act and the Securities Act of 1933.
The Portfolio pays all other expenses incurred in its operation and all of
the Portfolio's general administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses in connection with
ongoing registration or qualification requirements under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the custodian, fees and expenses
of Fund directors who are not "interested persons" of the Fund, legal
expenses, state franchise taxes, cost of auditing services,
21
<PAGE>
costs of printing proxies, SEC fees, advisory fees, certain insurance
premiums, costs of corporate meetings, costs of maintenance of corporate
existence, investor services (including allocable telephone and personnel
expenses), extraordinary expenses, and other expenses properly payable by the
Portfolio. Depending upon the nature of the lawsuit, litigation costs may be
borne by the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
Portfolio in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
There were no expenses paid by the Investment Adviser on behalf of the
Portfolio for the year ended December 31, 1995 as the Portfolio had not yet
commenced operations.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
Janus Capital Corporation (the "Sub-Adviser") serves as the Sub-Adviser
for the Portfolio pursuant to a Sub-Advisory Agreement dated March 15, 1995
on behalf of the Portfolio. The Sub-Advisory Agreement was approved by the
Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act), on
March 6, 1995. The Sub-Advisory Agreement provides that it will continue in
effect for an initial term ending April 22, 1997, and from year to year
thereafter, if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreement may be terminated without penalty on 60 days written
notice at the option of either party or by the vote of the shareholders of
the Portfolio and terminate automatically in the event of assignment (within
the meaning of the 1940 Act) or termination of the Investment Advisory
Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. Such managers consider
analyses from various sources, make the necessary decisions and effect
transactions accordingly. The Sub-Adviser bears all of its expenses in
connection with the performance of its services under the Sub-Advisory
Agreement, such as compensating and furnishing office space for its officers
and employees connected with investment and economic research, trading and
investment management of the Portfolio. The method of computing the
Sub-Adviser's fee is set forth in the Prospectus. Because the Portfolio had
not commenced operations as of December 31, 1995, there were no sub-advisory
fees paid for the fiscal year ended December 31, 1995.
The Sub-Adviser, located at 100 Fillmore Street, Denver, Colorado 80206,
has been engaged in the management of the Janus funds since 1969. Janus
Capital Corporation also serves as investment adviser or sub-adviser to other
mutual funds, and for individual, corporate, charitable and retirement
accounts. The aggregate market value of the assets managed by the Sub-Adviser
was approximately $34 billion as of March 1, 1996. Kansas City Southern
Industries, Inc. ("KCSI") owns approximately 83% of the Sub-Adviser. KCSI,
whose address is 114 West 11th Street, Kansas City, Missouri 64105-1804, is
a publicly-traded holding company whose largest subsidiary, the Kansas City
Southern Railway Company, is primarily engaged in the transportation
industry. Other KCSI subsidiaries are engaged in financial services and real
estate.
22
<PAGE>
JOINT TRADING ACCOUNTS
As described in the Prospectus, the Portfolio and other clients of the
Sub-Adviser and its affiliates may place assets in joint trading accounts for
the purpose of making short-term investments in money market instruments. The
Board of Directors of the Fund must approve the participation of the
Portfolio in these joint trading accounts, and procedures pursuant to which
the joint accounts will operate. The joint trading accounts are to be
operated pursuant to an exemptive order issued to the Sub-Adviser and certain
of its affiliates by the Securities and Exchange Commission. All joint
account participants, including the Portfolio, will bear the expenses of the
joint trading accounts in proportion to their investments. Financial
difficulties of other participants in the joint accounts could cause delays
or other difficulties for the Portfolio in withdrawing its assets from joint
trading accounts.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Janus Balanced Portfolio and the
Fund - Portfolio Turnover" in the Prospectus. The estimated annual turnover
rate for the Portfolio is anticipated to be up to 200%. This percentage is
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities during the fiscal year by (b) the monthly average of the value of
such securities (excluding from the computation all securities, including
options, with maturities at the time of acquisition of one year or less). For
example, a portfolio turnover rate of 100% would mean that all of the
Portfolio's securities (except those excluded from the calculation) were
replaced once in a period of one year. A high rate of portfolio turnover
generally involves correspondingly greater brokerage commission expenses.
Turnover rates may vary greatly from year to year as well as within a
particular year and may also be affected by cash requirements for redemptions
of the Portfolio's shares and by requirements, the satisfaction of which
enable the Portfolio to receive favorable tax treatment. Because the rate of
portfolio turnover is not a limiting factor, however, particular holdings may
be sold at any time, if investment judgment or portfolio operations make a
sale advisable. As a result, the annual portfolio turnover rate in future
years may exceed the percentage shown above.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and dealers and in negotiating commissions, the
Sub-Adviser considers such factors as: the Sub-Adviser's knowledge of
currently available negotiated commission rates or prices of securities
currently available and other current transaction costs; the nature of the
security being traded; the size and type of the transaction; the nature and
character of the markets for the security to be purchased or sold; the
desired timing of the trade; the activity existing and expected in the market
for the particular security; confidentiality; the quality of execution,
clearance and settlement services; financial stability; the existence of
actual or apparent operational problems of any broker or dealer; and
23
<PAGE>
research products or services to be provided. In recognition of the value of
the foregoing factors, the Sub-Adviser may place portfolio transactions with
a broker with whom it has negotiated a commission that is in excess of the
commission another broker would have charged for effecting that transaction
if the Sub-Adviser determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research
provided by such broker viewed in terms of either that particular transaction
or of the overall responsibilities of the Sub-Adviser. These products and
services may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities
or purchasers or sellers of securities; furnishing seminars, information,
analyses and reports concerning issuers, industries, securities, trading
markets and methods, legislative developments, changes in accounting
practices, economic factors and trends and portfolio strategy; access to
research analysts, corporate management personnel, industry experts,
economists and government officials; and comparative performance evaluation
and technical measurement services and quotation services, and products and
other services (such as third party publications, reports and analyses, and
computer and electronic access, equipment, software, information and
accessories that deliver, process or otherwise utilize information, including
the research described above) that assist the Sub-Adviser in carrying out its
responsibilities. Most brokers and dealers used by the Sub-Adviser provides
research and other services described above.
Supplemental research obtained through brokers or dealers will be in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser. The expenses of the Sub-Adviser will not necessarily be reduced
as a result of the receipt of such supplemental information. The Sub-Adviser
may use such research products and services in servicing other accounts in
addition to the Portfolio. If the Sub-Adviser determines that any research
product or service has a mixed use, such that it also serves functions that
do not assist in the investment decision-making process, the Sub-Adviser will
allocate the costs of such service or product accordingly. The portion of the
product or service that a Sub-Adviser determines will assist it in the
investment decision-making process may be paid for in brokerage commission
dollars. Such allocation may create a conflict of interest for the
Sub-Adviser. Conversely, such supplemental information obtained by the
placement of business for the Sub-Adviser will be considered by and may be
useful to the Sub-Adviser in carrying out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
On occasion, securities may be purchased directly from the issuer. Bonds
and money market securities are generally traded on a net basis and do not
normally involve either brokerage commissions or transfer taxes. The cost of
portfolio securities transactions of the Portfolio that are transactions with
principals will consist primarily of brokerage commissions or dealer or
underwriter spreads between the bid and asked price, although purchases from
underwriters of portfolio securities include a commission or concession paid
by the issuer. No stated commission is generally applicable to securities
traded in the U. S. over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser
24
<PAGE>
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse effect on
price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the individual and group life insurance policies and
variable annuity contracts issued by a broker-dealer as a factor in the
selection of broker-dealers to execute Portfolio transactions. In addition,
the Sub-Adviser may occasionally place portfolio business with affiliated
brokers of the Investment Adviser or the Sub-Adviser, including: DST
Securities, Inc., 301 West 11th Street, Kansas City, Missouri 64105; and
InterSecurities, Inc., P.O. Box 5068, Clearwater, Florida 33518. As stated
above, any such placement of portfolio business will be subject to the
ability of the broker-dealer to provide best execution and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at its
net asset value as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus the net asset value of the Portfolio's share
is determined, once daily, as of the close of the regular session of business
on the New York Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern
time), on each day the Exchange is open. (Currently the Exchange is closed on
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.) The per share net asset value
of the Portfolio is determined by dividing the total value of the securities
and other assets, less liabilities, by the total number of shares
outstanding. In determining asset value, securities listed on the national
securities exchanges and the NASDAQ National Market are valued at the closing
prices on such markets, or if such a price is lacking for the trading period
immediately preceding the time of determination, such securities are valued
at their current bid price. Foreign securities and currencies are converted
to U.S. dollars using the exchange rate in effect at the close of the
Exchange. Other securities which are traded on the over-the-counter market
are valued at bid price. Other securities for which quotations are not
readily available are valued at fair value as determined in good faith by the
Sub-Adviser under the supervision of the Fund's Board of Directors. Money
market instruments maturing in 60 days or less are valued on the amortized
cost basis discussed above.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief discussion of how performance is
calculated.
25
<PAGE>
TOTAL RETURN
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period)
The total return quotation calculations reflect the deduction of a
proportional share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account, or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the Portfolio
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Because the Portfolio did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or
26
<PAGE>
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months-options, futures or forward contracts (other than
those on foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the Portfolio's
principal business of investing in securities (or options and futures with
respect thereto) ("Short-Short Limitation"); (3) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs, and other securities that, with respect
to any one issuer, do not exceed 5% of the value of the Portfolio's total
assets and that do not represent more than 10% of the outstanding voting
securities of the issuer; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of 817(h), all securities of the same issuer, all interests in the
same real property project, and all interests in the same commodity are
treated as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while a particular foreign
government and its agencies, instrumentalities and political subdivisions all
are considered the same issuer. For information concerning the consequences
of failure to meet the requirements of section 817(h), see the respective
prospectuses for the Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolios will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
27
<PAGE>
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that limitation. The Portfolio intends that, when it engages in
hedging transactions, they will qualify for this treatment, but at the
present time it is not clear whether this treatment will be available for all
of the Portfolio's hedging transactions. To the extent this treatment is not
available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
Policyholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio, Bond Portfolio, Growth Portfolio, Global
Portfolio, Short-to-Intermediate Government Portfolio, Emerging Growth
Portfolio, Equity-Income Portfolio, Aggressive Growth Portfolio, Balanced
Portfolio, Utility Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E.
Quality Growth Portfolio, C.A.S.E. Growth & Income Portfolio, C.A.S.E. Growth
Portfolio, International Equity Portfolio, Leisure Portfolio, Janus Balanced
Portfolio, Value Equity Portfolio, Meridian/INVESCO Global Sector Portfolio,
Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
No financial statements for the Portfolio are available for the period
ended December 31, 1995, because the Portfolio had not commenced operations
as of that date.
28
<PAGE>
APPENDIX A
DESCRIPTION OF ADDITIONAL PORTFOLIO SECURITIES -
INCOME PRODUCING SECURITIES IN WHICH THE PORTFOLIO MAY INVEST
A. Certificates of Deposit
A time deposit is a non-negotiable interest-bearing deposit with a bank
which generally cannot be withdrawn prior to a specified maturity date
without substantial interest penalties. A certificate of deposit ("CD") is a
negotiable instrument issued by a bank against a time deposit. CDs normally
can be traded in the secondary market prior to maturity, and are thus more
liquid than other forms of time deposits. The Portfolio will only invest in
U.S. dollar denominated time deposits and CDs representing deposits in U.S.
Banks with assets of $1 billion or more, whose deposits are insured by the
Federal Deposit Insurance Corporation.
B. Commercial Paper
Commercial paper refers to short-term unsecured promissory notes issued by
commercial and industrial corporations to finance their current operations.
Commercial paper may be issued at a discount and redeemed at par, or issued
at par with interest added at maturity. The interest or discount rate depends
on general interest rates, the credit standing of the issuer, and the
maturity of the note, and generally moves in tandem with rates on large CDs
and Treasury bills. An established secondary market exists for commercial
paper, particularly that of stronger issuers which are rated by Moody's
Investors Service, Inc. and Standard and Poor's Corporation. Investments in
commercial paper are subject to the risks that general interest rates will
rise, that the credit standing and outside rating of the issuer will fall, or
that the secondary market in the issuer's notes will become too limited to
permit their liquidation at a reasonable price.
C. Bankers' Acceptance
A bankers' acceptance is a negotiable short-term draft, generally arising
from a bank customer's commercial transaction with another party, with
payment due for the transaction on the maturity date of the customer's draft.
The draft becomes a bankers' acceptance when the bank, upon fulfillment of
the obligations of the third party, accepts for the later payment at
maturity, thus adding the bank's guarantee of payment to its customer's own
obligation. In effect, a bankers' acceptance is a post-dated certified check
payable to its bearer at maturity. The Portfolio may invest in U.S. dollar
denominated bankers' acceptances issued by U.S. banks, their foreign
branches, and by U.S. branches of foreign banks.
D. Corporate Debt Securities
The Portfolio may invest in corporate bonds, notes and debentures of long
and short maturities and of various grades, including unrated securities.
Corporate debt securities exist in great variety, differing from one another
in quality, maturity, and call or other provisions. Lower grade bonds,
whether rated or unrated, usually offer higher interest income, but also
carry increased risk of default. Corporate bonds may be secured or unsecured,
senior to or subordinated to other debt of the issuer, and, occasionally, may
be guaranteed by another entity. In addition, they may carry other features,
such as those described under "Convertible Securities" and "Variable or
Floating Rate Securities", or have special features such as the right of the
holder to shorten or lengthen the maturity of a given debt instrument, rights
to purchase additional securities, rights to elect from among two or more
currencies in which to receive interest or principal payments, or provisions
permitting the holder to participate in the value of some specified
commodity, financial index, or other measure of value.
E. International Agency Obligations
The Portfolio may invest in bonds, notes or Eurobonds of international
agencies. Examples are securities issued by the Asian Development Bank, the
European Economic Community, and the
A-1
<PAGE>
European Investment Bank. The Portfolio may also purchase obligations of the
International Bank for Reconstruction and Development which, while
technically not a U.S. Government agency or instrumentality, has the right to
borrow from the participating countries, including the United States.
F. Bank Obligations or Savings and Loan Obligations
The Portfolio may purchase certificates of deposit, bankers' acceptances
of other debt obligations of commercial banks and certificates of deposit and
other debt obligations of savings and loan associations ("S&L's").
Certificates of deposit are receipts from a bank or an S&L for funds
deposited for a specified period of time at a specified rate of return.
Bankers' acceptance are time drafts drawn on commercial banks by borrowers,
usually in connection with international commercial transactions. These
instruments may be issued by institutions of any size, may be of any
maturity, and may be insured or uninsured. The quality of bank or savings and
loan obligations may be affected by such factors as (a) location - the
strength of the local economy will often affect financial institutions in the
region, (b) asset mix - institutions with substantial loans in a troubled
industry may be weakened by those loans, and (c) amount of equity capital --
under-capitalized financial institutions are more vulnerable when loan losses
are suffered. The Portfolio Manager will evaluate these and other factors
affecting the quality of bank and savings and loan obligations purchased by
the Portfolio, but the Portfolio is not restricted to obligations or
institutions which satisfy specified quality criteria.
G. Variable or Floating Rate Securities
The Portfolio may purchase variable rate securities that provide for
automatic establishment of a new interest rate at fixed intervals (e.g.
daily, monthly, semi-annually, etc.). Floating rate securities provide for
automatic adjustment of the interest rate whenever some specified interest
rate index changes. The interest rate on variable and floating rate
securities is ordinarily determined by reference to, or is a percentage of, a
bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure.
H. Preferred Stocks
Preferred stocks are securities which represent an ownership interest in a
corporation and which give the owner a prior claim over common stock on the
corporation's earnings and assets. Preferred stock generally pays quarterly
dividends. Preferred stocks may differ in many of their provisions. Among the
features that differentiate preferred stock from one another are the dividend
rights, which may be cumulative or non-cumulative and participating or
non-participating, redemption provisions, and voting rights. Such features
will establish the income return and may affect the prospects for capital
appreciation or risks of capital loss.
I. Convertible Securities
The Portfolio may invest in debt securities convertible into or
exchangeable for equity securities, or debt securities that carry with them
the right to acquire equity securities, as evidenced by warrants attached to
such securities or acquired as part of units of the securities. Such
securities normally pay less current income than securities into which they
are convertible, and the concomitant risk of loss from declines in those
values.
A-2
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
LEISURE PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [INVESCO LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the Leisure Portfolio of the Fund.
The investment objective of the Leisure Portfolio is to seek capital
appreciation. The Leisure Portfolio seeks to achieve its objective by
investing primarily in equity securities of companies principally engaged in
the design, production or distribution of products or services related to the
leisure-time activities of individuals. These companies may be either
established, well-capitalized companies or small newly formed companies with
lower capitalization (including "small-cap companies"). There can be, of
course, no assurance that the Leisure Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and INVESCO Trust Company serve as the investment adviser (the
"Investment Adviser") and the sub-adviser (the "Sub-Adviser"), respectively,
to the Leisure Portfolio. See "The Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the Leisure
Portfolio that prospective investors ought to know before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund, the Leisure Portfolio and the other
portfolios of the Fund has been filed with the Securities and Exchange
Commission and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information pertaining to the Leisure
Portfolio bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
1 Registered service mark of INVESCO PLC.
<PAGE>
WRL SERIES FUND, INC.
LEISURE PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Leisure Portfolio and the Fund .... 1
Management of the Fund ................. 5
Dividends and Other Distributions ..... 6
Taxes .................................. 6
Purchase and Redemption of Shares ..... 7
Valuation of Shares .................... 7
The Fund and Its Shares ................ 7
Performance Information ................ 7
General Information .................... 8
</TABLE>
i
<PAGE>
THE LEISURE PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Leisure Portfolio is a series of the Fund. The Fund consists of
several series, or separate investment portfolios, which offer shares for
investment by the Separate Accounts. This Prospectus describes only the
Leisure Portfolio.
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Leisure Portfolio (the "Portfolio") is to
seek capital appreciation. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of companies principally engaged in
the design, production, or distribution of products or services related to
the leisure-time activities of individuals. These companies may be either
established well-capitalized companies or small newly formed companies with
lower capitalization (including "small-cap companies").
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
The assets of the Portfolio are invested primarily in the equity
securities of companies in the leisure field. Companies in leisure industries
include those engaged in the design, production, or distribution of sporting
goods, recreational equipment, toys, games (including video and other
electronic games), photographic equipment and supplies, musical instruments,
and recordings; motion picture and broadcasting companies (including cable
television companies); companies engaged in furnishing domestic and foreign
transportation by air; and companies engaged in operating hotels or motels,
sports arenas, gambling casinos, amusement or theme parks, or restaurants.
Since these companies may derive a significant portion of their revenues from
the discretionary spending of individuals, they may be adversely affected by
economic downturns which reduce the amount of personal income available for
leisure activities and non-essential items. Securities of companies engaged
in operating gambling casinos may be subject to above-average price
volatility and may be considered speculative. In addition, many of the
products offered by companies engaged in the design, production, or
distribution of video and electronic games are subject to risks of rapid
obsolescence. Therefore, the market prices of securities of such companies
may be subject to significant fluctuations in value.
Under normal conditions, the Portfolio will invest at least 80% of its
total assets in the equity securities (common stocks and securities
convertible into common stocks, including convertible debt obligations and
convertible preferred stock) of leisure-industry companies traded on regional
or national stock exchanges or on the over-the-counter market. A particular
company will be deemed to be principally engaged in the leisure field if, in
the determination of the Sub-Adviser to the Portfolio, more than 50% of its
gross income or net sales is derived from activities in such field or more
than 50% of its assets are dedicated to the production of revenues from such
field. In circumstances where, based on available financial information, a
question exists whether a company meets one of these standards, the Portfolio
may invest in equity securities of such a company only if the Sub-Adviser
determines, after review of information describing the company and its
business activities, that the company's primary business is within the
leisure field, as such field is described above.
TYPES OF SECURITIES
The Portfolio will concentrate its investments in the group of industries
constituting the leisure field, as described above. Such equity securities
may be issued by either established, well-capitalized companies (companies
with a market capitalization of at least $1 billion) or newly-formed, small-
cap companies (companies with a market capitalization of up to $1 billion),
and may be traded on national or regional stock exchanges or in the
over-the-counter market.
The balance of the Portfolio's total assets may be invested in any
securities or other instruments deemed appropriate by the Sub-Adviser,
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consistent with the Portfolio's investment policies and restrictions. These
securities include debt securities issued by companies principally engaged in
the leisure field, debt or equity securities issued by companies outside the
leisure field, short-term high grade debt obligations maturing no later than
one year from the date of purchase (including U.S. government and agency
securities, domestic bank certificates of deposit, commercial paper rated at
least A-2 by Standard & Poor's or P-2 by Moody's Investors Service, Inc., and
repurchase agreements).
In addition, the Portfolio may invest temporarily in cash, cash items, and
in the short-term securities described above as a temporary defensive measure
(up to 100% of its assets) if the Sub-Adviser determines it to be appropriate
for purposes of enhancing liquidity or preserving capital in light of
prevailing market or economic conditions. While the Portfolio is in a
defensive position, the opportunity to achieve capital appreciation will be
limited or eliminated and, to the extent that the Sub-Adviser's assessment of
market conditions is incorrect,
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the Portfolio will be foregoing the opportunity to benefit from capital
appreciation resulting from increases in the value of equity investments.
FOREIGN SECURITIES. The Portfolio may invest up to 25% of its total
assets, measured at the time of purchase, directly in foreign securities.
Securities of Canadian issuers and American Depositary Receipts ("ADRs") are
not subject to the 25% limitation. ADRs are dollar-denominated receipts
issued generally by domestic banks and represent the deposit with the bank of
a security of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investments in foreign securities
involve certain risks that are not associated with investment in domestic
issuers. These risks are discussed below under "Risk Factors."
REPURCHASE AGREEMENTS. Investments in short-term securities may include
repurchase agreements. The Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio.
These agreements are entered into with member banks of the Federal Reserve
System, registered broker-dealers, and registered government securities
dealers, which are deemed creditworthy. A repurchase agreement is a means of
investing monies for a short period. In a repurchase agreement, which may be
considered a loan under the 1940 Act, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. government or an agency
thereof, bankers' acceptance, or a certificate of deposit) subject to resale
to the seller at an agreed upon price and date (normally, the next business
day). In the event that the original seller defaults on its obligation to
repurchase the security, the Portfolio could incur costs or delays in seeking
to sell such a security. To minimize risk, the securities that are the
subject of the repurchase agreement will be maintained with the Portfolio's
custodian in an amount at least equal to the repurchase price under the
agreement (including accrued interest), and such agreements will be effected
only with parties that meet certain creditworthiness standards established by
the Fund's Board of Directors. The Portfolio will not enter into a repurchase
agreement maturing in more than seven days if as a result more than 15% of
its net assets would be invested in such repurchase agreements and other
illiquid securities. The Portfolio has not adopted any limit on the amount of
its net assets that may be invested in repurchase agreements maturing in
seven days or less.
ILLIQUID AND RULE 144A SECURITIES. The Portfolio is authorized to invest
in securities that are illiquid because such securities are subject to
restrictions on their resale ("restricted securities") or because, based upon
their nature or the market for such securities, they are not readily
marketable. However, the Portfolio will not purchase any such security if the
purchase would cause the Portfolio to invest more than 15% of its net assets,
measured at the time of purchase, in illiquid securities. Repurchase
agreements maturing in more than seven days will be considered as illiquid
for purposes of this restriction. Investments in illiquid securities involve
certain risks to the extent that the Portfolio may be unable to dispose of
such securities at the time desired or at a reasonable price. In addition, in
order to resell a restricted security, the Portfolio might have to bear the
expense and incur the delays associated with effecting a registration
required in order to qualify for resale.
The securities that may be purchased subject to the foregoing limitation
include restricted securities that are not registered for sale to the general
public, but that can be resold to dealers or institutional investors ("Rule
144A Securities"). The liquidity of the Portfolio's investments in Rule 144A
Securities could be impaired if dealers or institutional investors become
uninterested in purchasing these securities. The Fund's Board of Directors
has delegated to the Sub-Adviser the authority to determine the liquidity of
Rule 144A Securities pursuant to guidelines approved by the Board. For more
information concerning Rule 144A Securities, see the Statement of Additional
Information.
LENDING AND BORROWING
The Portfolio is authorized to lend its securities to qualified brokers,
dealers, banks, or other financial institutions. Loans of securities will be
collateralized by cash, letters of credit, or securities issued or guaranteed
by the U.S. government or its agencies equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. The Portfolio
monitors the creditworthiness of borrowers in order to minimize such risks.
The Portfolio will not lend any security if, as a result of such loan, the
aggregate value of securities then on loan would exceed 33 1/3 % of the
Portfolio's total assets (taken at market value). The Portfolio does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if it were considered important with respect to the
investment.
The Portfolio may only borrow money for temporary or emergency purposes
(not for leverage or investment) in an amount not exceeding 33 1/3 % of the
value of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Reverse repurchase agreements are deemed
to be borrowings for purposes of this limitation. In accordance with the
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requirements of current California insurance regulations, the Portfolio will
restrict borrowings to no more than 10% of total assets, except that the
Portfolio may temporarily borrow amounts equal to as much as 25% of total
assets if such borrowing is necessary to meet redemptions. If California's
insurance regulations are changed at some future time to permit borrowings in
excess of 10% but less than 33 1/3 % of total assets, the Portfolio may
conduct borrowings in accordance with such revised limits.
The Portfolio limits its borrowing so that the Portfolio is not deemed to
be issuing senior securities in contravention of the 1940 Act, and the
Portfolio will not otherwise issue senior securities, except as permitted by
the 1940 Act.
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RISK FACTORS
There are special factors associated with the policies discussed below in
determining the appropriateness of an investment in the Portfolio.
FOREIGN SECURITIES. For U.S. investors, the returns on foreign securities
are influenced not only by the returns on the foreign investments themselves,
but also by currency fluctuations (i.e., changes in the value of the
currencies in which the securities are denominated relative to the U.S.
dollar). In a period when the U.S. dollar generally rises against foreign
currencies, the returns on foreign securities for a U.S. investor are
diminished. By contrast, in a period when the U.S. dollar generally declines,
the returns on foreign securities generally are enhanced.
Other risks and considerations of international investing include the
following: differences in accounting, auditing and financial reporting
standards which may result in less publicly available information than is
generally available with respect to U.S. issuers; generally higher commission
rates on foreign portfolio transactions and in some cases, longer settlement
periods; the smaller trading volumes and generally lower liquidity of foreign
stock markets, which may result in greater price volatility; foreign
withholding taxes payable on the Portfolio's foreign securities, which may
reduce dividend income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in investment or
exchange control regulations; political instability which could affect U.S.
investment in foreign countries; potential restrictions on the flow of
international capital; and the possibility of the Portfolio experiencing
difficulties in pursuing legal remedies and collecting judgments. Certain of
these risks, as well as currency risks, also apply to Canadian securities,
which are not subject to the Portfolio's 25% of total assets limitation on
investing directly in foreign equity securities. The Portfolio's investments
in foreign securities may include investments in developing countries. Many
of these securities are speculative and their prices may be more volatile
than those of securities issued by companies located in more developed
countries.
Securities purchased by means of ADRs also are not subject to the 25%
limitation. ADRs are receipts, typically issued by a U.S. bank or trust
company, evidencing ownership of the underlying foreign securities. ADRs are
denominated in U.S. dollars and trade in the U.S. securities markets. ADRs
may be issued in sponsored or unsponsored programs. In sponsored programs,
the issuer makes arrangements to have its securities traded in the form of
ADRs; in unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although the regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, the issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, such information may not be reflected in the
market value of the ADRs. ADRs are subject to certain of the same risks as
direct investments in foreign securities, including the risk that changes in
the value of the currency in which the security underlying an ADR is
denominated relative to the U.S. dollar may adversely affect the value of the
ADR.
FORWARD FOREIGN CURRENCY CONTRACTS. The Portfolio may enter into contracts
to purchase or sell foreign currencies at a future date ("forward contracts")
as a hedge against fluctuations in foreign exchange rates pending the
settlement of transactions in foreign securities or during the time the
Portfolio holds foreign securities. A forward contract, which is included in
the types of instruments commonly known as "derivatives," is an agreement
between contracting parties to exchange an amount of currency at some future
time at an agreed upon rate. Although the Portfolio has not adopted any
limitations on its ability to use forward contracts as a hedge against
fluctuation in foreign exchange rates, it does not attempt to hedge all of
its foreign investment positions, and will enter into forward contracts only
to the extent, if any, deemed appropriate by the Sub-Adviser. The Portfolio
will not enter into a forward contract for a term of more than one year or
for purposes of speculation. Investors should be aware that hedging against a
decline in the value of a currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
preclude the opportunity for gain if the value of the hedged currency should
rise. No predictions can be made with respect to whether the total of such
transactions will result in a better or a worse position than had the
Portfolio not entered into any forward contracts. Forward contracts may, from
time to time, be considered illiquid, in which case they would be subject to
the Portfolio's limitation on investing in illiquid securities, discussed
above. For additional information regarding forward contracts, see the
Portfolio's Statement of Additional Information.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may enter into futures
contracts for hedging or other non-speculative purposes within the meaning
and intent of applicable rules of the Commodity Futures Trading Commission
("CFTC"). Futures contracts are purchased or sold to attempt to hedge against
the effects of interest or exchange rate changes on the Portfolio's current
or intended investments. If an anticipated decrease in the value of portfolio
securities occurs as a result of a general increase in interest rates or a
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change in exchange rates, the adverse effects of such changes may be offset,
in whole or part, by gains on the sale of futures contracts. Conversely, an
increase in the cost of portfolio securities to be acquired caused by a
general decline in interest rates or a change in exchange rates may be
offset, in whole or part, by gains on futures contracts purchased by the
Portfolio. The Portfolio will incur brokerage fees when it purchases and
sells futures contracts, and it will be required to maintain margin deposits.
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The Portfolio also may use options to buy or sell futures contracts or
securities. Such investment strategies will be used as a hedge and not for
speculation.
Put and call options on futures contracts may be traded by the Portfolio
in order to protect against declines in the values of Portfolio securities or
against increases in the cost of securities to be acquired. Purchases of
options on futures contracts may present less dollar risk in hedging the
Portfolio than the purchase and sale of the underlying futures contracts,
since the potential loss is limited to the amount of the premium plus related
transaction costs. The premium paid for such a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Portfolio
upon exercise or liquidation of the option, and, unless the price of the
underlying futures contract changes sufficiently, the option may expire
without value to the Portfolio. The writing of covered options, however, does
not present less risk than the trading of futures contracts, and will
constitute only a partial hedge, up to the amount of the premium received,
and, if an option is exercised, the Portfolio may suffer a loss on the
transaction.
The Portfolio may purchase put or call options in anticipation of changes
in interest rates or other factors which may adversely affect the value of
its portfolio or the prices of securities which the Portfolio anticipates
purchasing at a later date. The Portfolio may be able to offset such adverse
effects, in whole or in part, through the options purchased. The premium paid
for a put or call option plus any transaction costs will reduce the benefit,
if any, realized by the Portfolio upon exercise or liquidation of the option,
and, unless the price of the underlying security changes sufficiently, the
option may expire without value to the Portfolio.
The Portfolio may, from time to time, also sell ("write") covered call
options or cash secured puts in order to attempt to increase the yield on its
portfolio or to protect against declines in the value of its portfolio
securities. By writing a covered call option, the Portfolio, in return for
the premium income realized from the sale of the option, gives up the
opportunity to profit from a price increase in the underlying security above
the option exercise price, where the price increase occurs while the option
is in effect. In addition, the Portfolio's ability to sell the underlying
security will be limited while the option is in effect. By writing a cash
secured put, the Portfolio, which receives the premium, has the obligation
during the option period, upon assignment of an exercise notice, to buy the
underlying security at a specified price. A put is secured by cash if the
Portfolio maintains at all times cash, Treasury bills or other high grade
short-term obligations with a value equal to the option exercise price in a
segregated account with its custodian.
Although the Portfolio will enter into options and futures contracts
solely for hedging or other non-speculative purposes, within the meaning and
intent of applicable rules of the CFTC, their use does involve certain risks.
For example, a lack of correlation between the value of an instrument
underlying an option or futures contract and the assets being hedged, or
unexpected adverse price movements, could render the Portfolio's hedging
strategy unsuccessful and could result in losses. In addition, there can be
no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Portfolio may be required to maintain a position
until exercised or expiration, which could result in losses. Transactions in
futures contracts and options are subject to other risks as well.
The risks related to transactions in options and futures to be entered
into by the Portfolio are set forth in greater detail in the Statement of
Additional Information, which should be reviewed in conjunction with the
foregoing discussion.
INDUSTRY CONCENTRATION. The Portfolio's policy of concentrating
investments in securities of leisure-industry companies is deemed to be a
fundamental policy and thus may not be changed without prior approval by
shareholders and Policyholders. While the Portfolio diversifies its
investments by investing not more than 5% of its total assets in the
securities of any one issuer, the Sub-Adviser for the Portfolio will normally
invest at least 80% of the Portfolio's assets in companies principally
engaged in the leisure field. As a result of this investment policy, an
investment in the Portfolio may be subject to greater fluctuations in value
than would generally be the case if an investment were made in an investment
company which did not concentrate its investments in a similar manner. For
example, certain economic factors or specific events (such as government
regulations related to cable television, gambling casinos, or air
transportation) may exert a disproportionate impact upon the prices of equity
securities of companies in the leisure field relative to their impact on the
prices of securities of companies engaged in other industries. Additionally,
changes in the market price of the equity securities of a particular company
which occupies a dominant position in a leisure industry may tend to
influence the market prices of other companies within that industry. As a
result of the foregoing factors, the net asset value of the Portfolio may be
more susceptible to change than those of investment companies which spread
their investments over many different industries. Accordingly, an investment
in the Portfolio may not constitute a complete, balanced investment program.
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OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover. Although the
Portfolio does not trade for short-term profits, securities may be sold
without regard to the time they have been held in the Portfolio when, in the
opinion of the Sub-Adviser, investment considerations warrant such action. In
addition, portfolio turnover rates may increase as a result of large amounts
of purchases or redemptions of Portfolio
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shares due to economic, market or other factors that are not within the
control of the Sub-Adviser. As a result, under certain market conditions, the
portfolio turnover rate for the Portfolio may exceed 100%, and may be higher
than that of other investment companies seeking capital appreciation.
Increased portfolio turnover would cause the Portfolio to incur greater
brokerage costs than would otherwise be the case.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and INVESCO Trust Company as Sub-Adviser, the Fund requires no
employees other than its executive officers, none of whom devotes full time
to the affairs of the Fund. These officers are employees of WRL and receive
no compensation from the Fund. The Statement of Additional Information
contains the names of and general background information regarding each
Director and executive officer of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and organization of the Portfolio, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments, and any registration or
qualification under state securities laws required in connection with the
Portfolio's offering of shares. The Investment Adviser will also pay all
reasonable compensation and related expenses of the officers and Directors of
the Fund, except for such Directors who are not interested persons (as that
term is defined in the 1940 Act) of the Investment Adviser, and the rental of
offices. The Portfolio pays all other expenses incurred in its operations,
including general administrative expenses. Accounting services are provided
for the Portfolio by the Investment Adviser. Pursuant to an expense
limitation voluntarily adopted by WRL, WRL has undertaken, until at least
April 30, 1997, to pay expenses on behalf of the Portfolio to the extent
normal operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed 1.00% of the Portfolio's average daily net assets.
THE SUB-ADVISER
INVESCO Trust Company, located at 7800 E. Union Avenue, Denver, Colorado
80237, serves as the Sub-Adviser to the Portfolio. The Sub-Adviser, a trust
company founded in 1969, is a wholly-owned subsidiary of INVESCO Funds Group,
Inc. ("INVESCO"). INVESCO is an indirect wholly-owned subsidiary of INVESCO
PLC. INVESCO PLC is a publicly held holding company that trades on the London
Stock Exchange. The Sub-Adviser served as adviser or sub-adviser to 41
investment portfolios as of December 31, 1995, including 27 open-end mutual
fund portfolios in the INVESCO group. These 41 portfolios had aggregate
assets of approximately $11 billion as of December 31, 1995. In addition, the
Sub-Adviser provides investment management services to private clients,
including employee benefit plans that may be invested in a collective trust
sponsored by the Sub-Adviser.
Mark Greenberg serves as portfolio manager of the Portfolio. Mr. Greenberg
also serves as portfolio manager of the Leisure Portfolio of INVESCO
Strategic Portfolios, Inc. He has been a portfolio manager with INVESCO Trust
Company since 1996. Previously, Mr. Greenberg was vice president and global
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media and entertainment analyst for Scudder, Stevens & Clark (1990 to 1996);
media, technology and telecommunications analyst for Campbell Advisors (1988
to 1989); media and technology analyst for Irving Trust Company (1983 to
1988); and analyst for Argus Research and Bernstein Macauley (1980 to 1983).
Mr. Greenberg earned a B.S.B.A. from Marquette University and is a Chartered
Financial Analyst.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears
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all of its expenses in connection with the performance of its services, such
as compensating and furnishing office space for its officers and employees
connected with investment and economic research, trading and investment
management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment advisory fees
received by the Investment Adviser with respect to the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy (the "Ethics Policy") that has
been adopted by the Board of Directors of the Fund. Access Persons are
required to follow the guidelines established by this Ethics Policy in
connection with all personal securities transactions and are subject to
certain prohibitions on personal trading. The Fund's Sub-Advisers, pursuant
to Rule 17j-1 and other applicable laws, and pursuant to the terms of the
Ethics Policy, must adopt and enforce their own Code of Ethics and Insider
Trading Policies appropriate to their operations. Each Sub-Adviser is
required to report to the Board of Directors on a quarterly basis with
respect to the administration and enforcement of such Ethics Policy,
including any violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be invested in securities of a single issuer. Specifically,
the regulations provide that, except as permitted by the "safe harbor"
described below, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of the Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
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treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional
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<PAGE>
Information for a more detailed discussion. Prospective investors are urged
to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so
and, in such event, holders of the remaining shares would not be able to
elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, the Life Companies will vote the Fund's
shares in the Separate Accounts, including Fund shares which are not
attributable to Policyholders, at meetings of the Fund in accordance with
instructions received from Policyholders having voting interests in the
7
<PAGE>
corresponding sub-accounts of the Separate Accounts. Except as required by
the 1940 Act, the Fund does not hold regular or special shareholder meetings.
If the 1940 Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield regarding the Portfolio do not reflect charges and deductions
against the Separate Accounts or charges and deductions against the Policies
or
7
<PAGE>
the Annuity Contracts. Where relevant, the prospectuses for the Policies and
the Annuity Contracts contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance, and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, a
Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
LEISURE PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
INVESCO Trust Company
7800 E. Union Avenue
Denver, CO 80237
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00080-05/96
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<PAGE>
WRL SERIES FUND, INC.
LEISURE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
Leisure Portfolio of the WRL Series Fund, Inc. (the "Fund"). A copy of the
Prospectus may be obtained from the Fund by writing the Fund at 201 Highland
Avenue, Largo, Florida 34640 or by calling the Fund at (800) 851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
INVESCO TRUST COMPANY
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00081-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 4
Lending of Portfolio Securities 3 2
Foreign Securities 3 2
Restricted/144A Securities 4 2
Futures, Options on Futures and Options
on Securities 4 3
Forward Foreign Currency Contracts 8 3
Repurchase Agreements 9 2
Management of the Fund 9 5
Directors and Officers 9 5
The Investment Adviser 11 5
The Sub-Adviser 12 5
Portfolio Transactions and Brokerage 13 5
Portfolio Turnover 13 4
Placement of Portfolio Brokerage 13 5
Purchase and Redemption of Shares 14 7
Determination of Offering Price 14 7
Net Asset Valuation 14 7
Calculation of Performance Related Information 15 7
Total Return 15 8
Yield Quotations 15 8
Taxes 16 6
Capital Stock of the Fund 17 7
Registration Statement 18 N/A
Financial Statements 18 8
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Leisure Portfolio (the "Portfolio") of the
Fund is described in the Portfolio's Prospectus. Shares of the Portfolio are
sold only to the separate accounts of Western Reserve Life Assurance Co. of
Ohio ("WRL") and to separate accounts of certain of its affiliated life
insurance companies (collectively, the "Separate Accounts") to fund the
benefits under certain variable life insurance policies (the "Policies") and
variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act"), means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to seventy-five percent (75%) of its total assets,
purchase the securities of any one issuer except cash items and "government
securities" as defined under the 1940 Act, if the purchase would cause the
Portfolio to have more than 5% of the value of its total assets invested in
the securities of such issuer or to own more than 10% of the outstanding
voting securities of such issuer.
2. Borrow money, except that the Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) and may enter into
reverse repurchase agreements in an aggregate amount not exceeding 33 1/3 %
of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed 33
1/3 % of the value of the Portfolio's total assets by reason of a decline in
net assets will be reduced within three business days to the extent necessary
to comply with the 33 1/3 % limitation. In accordance with the requirements
of current California insurance regulations, the Portfolio will restrict
borrowings to no more than 10% of total assets, except that the Portfolio may
temporarily borrow amounts equal to as much as 25% of total assets if such
borrowing is necessary to meet redemptions. If California's insurance
regulations are changed at some future time to permit borrowings in excess of
10% but less than 33 1/3 % of total assets, the Portfolio may conduct
borrowings in accordance with such revised limits. This restriction shall not
prohibit deposits of assets to margin or guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.
3. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses.
4. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities).
5. Lend any security or make any other loan if, as a result, more than 33
1/3 % of its total assets would be lent to other parties (but this limitation
does not apply to purchases of commercial paper, debt securities or to
repurchase agreements).
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of Portfolio securities.
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<PAGE>
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
(A) The Portfolio's investments in warrants, valued at the lower of cost
or market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchanges. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value.
(B) The Portfolio will not (i) enter into any futures contracts or
options on futures contracts if immediately thereafter the aggregate margin
deposits on all outstanding futures contracts positions held by the Portfolio
and premiums paid on outstanding options on futures contracts, after taking
into account unrealized profits and losses, would exceed 5% of the market
value of the total assets of the Portfolio, or (ii) enter into any futures
contracts if the aggregate net amount of the Portfolio's commitments under
outstanding futures contracts positions of the Portfolio would exceed the
market value of the total assets of the Portfolio.
(C) The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in options, swaps and
forward futures contracts are not deemed to constitute selling securities
short.
(D) The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments and other deposits in connection with transactions in options,
futures, swaps and forward contracts shall not be deemed to constitute
purchasing securities on margin.
(E) The Portfolio does not currently intend to (i) purchase securities of
closed-end investment companies, except in the open market where no
commission except the ordinary broker's commission is paid, or (ii) purchase
or retain securities issued by other open-end investment companies.
Limitations (i) and (ii) do not apply to money market funds or to securities
received as dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger.
(F) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed
in a segregated account in connection with such contracts.
(G) The Portfolio does not currently intend to purchase securities of any
issuer (other than U.S. government agencies and instrumentalities or
instruments guaranteed by an entity with a record of more than three years'
continuous operation, including that of predecessors) with a record of less
than three years' continuous operation (including that of predecessors) if
such purchase would cause the Portfolio's investments in all such issuers to
exceed 5% of the Portfolio's total assets taken at market value at the time
of such purchase.
(H) The Portfolio does not currently intend to invest directly in oil,
gas, or other mineral development or exploration programs or leases; however,
the Portfolio may own debt or equity securities of companies engaged in those
businesses.
(I) The Portfolio does not currently intend to purchase any security or
enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that
are illiquid by virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Board of Directors, or the
Portfolio's Sub-Adviser acting pursuant to authority delegated by the Board
of Directors, may determine that a readily available market exists for
securities eligible for
2
<PAGE>
resale pursuant to Rule 144A under the Securities Act of 1933, or any
successor to such rule, and therefore that such securities are not subject to
the foregoing limitation.
(J) The Portfolio may not invest in companies for the purpose of
exercising control or management, except to the extent that exercise by the
Fund of its rights under agreements related to Portfolio securities would be
deemed to constitute such control.
(K) The Portfolio may not invest more than 25% of the value of its total
assets directly in foreign securities. Securities of Canadian issuers and
securities purchased by means of American Depository Receipts are not subject
to this 25% limitation.
With respect to investment restriction (I) above, the Fund's Board of
Directors has delegated to the Sub-Adviser the authority to determine that a
liquid market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "1933 Act"), or any
successor to such rule and that such securities are not subject to
restriction (I) above. Under guidelines established by the Board of
Directors, the Sub-Adviser will consider the following factors, among others,
in making this determination: (1) the frequency of trades and quotes for the
security; (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (3) the willingness of dealers
to undertake to make a market in the security; and (4) the nature of the
security and the nature of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer).
Except with respect to borrowing money, if a percentage limitation is
complied with at the time of the investment, a subsequent change in the
percentage resulting from any change in value or of the Portfolio's net
assets will not result in a violation of such restriction. State laws and
regulations may impose additional limitations on borrowing, lending, and the
use of options, futures, and other derivative instruments. In addition, such
laws and regulations may require the Portfolio's investments in foreign
securities to meet additional diversification and other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5 above, the Portfolio, from time to
time, may lend its securities to qualified brokers, dealers, banks, or other
financial institutions. This practice permits the Portfolio to earn income,
which, in turn, can be invested in additional securities of the type
described below in pursuit of the Portfolio's investment objective. Loans of
securities by the Portfolio will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S. government or its
agencies equal to at least 100% of the current market value of the loaned
securities, determined on a daily basis. Lending securities involves certain
risks, the most significant of which is the risk that a borrower may fail to
return a portfolio security. The Portfolio monitors the creditworthiness of
borrowers in order to minimize such risks. The Portfolio will not lend any
security if, as a result of such loan, the aggregate value of securities then
on loan would exceed 33 1/2 % of the Portfolio's total assets (taken at
market value). While voting rights may pass with the loaned securities, if a
material event (e.g., proposed merger, sale of assets, or liquidation) is to
occur affecting an investment on loan, the loan must be called and the
securities voted. Loans of securities made by the Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange and the requirements of the 1940 Act and the rules of the
Securities and Exchange Commission ("SEC") thereunder.
FOREIGN SECURITIES
The Portfolio may invest up to 25% of its total assets, measured at the
time of purchase, directly in foreign securities. Securities of Canadian
issuers and securities purchased by means of American Depositary Receipts
("ADRs") are not subject to this 25% limitation. As described in the section
of the Portfolio's Prospectus entitled "Risk Factors," foreign securities
involve certain risks not associated with investment in domestic companies.
Foreign companies generally are not subject to uniform accounting, auditing,
and financial reporting standards comparable to those applicable to domestic
companies. Securities of many foreign companies may be less liquid and more
volatile than securities of comparable domestic companies. With respect to
certain foreign countries, there may be a
3
<PAGE>
possibility of political developments which could affect investments in those
countries. Finally, it may be more difficult for the Portfolio to obtain or
to enforce a judgment against a foreign issuer than against a domestic
issuer. In determining individual portfolio investments, however, INVESCO
Trust Company, the Portfolio's sub-adviser (the "Sub-Adviser") will carefully
consider all of the above.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle the
transaction. Although the counterparty in such transactions is often a bank
or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
Securities denominated in foreign currency, whether issued by a foreign or
a domestic issuer, may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and costs will be
incurred in connection with conversions between various currencies.
RESTRICTED/144A SECURITIES
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act. Institutional
investors generally will not seek to sell these instruments to the general
public, but instead will often depend on an efficient institutional market in
which such unregistered securities can readily be resold or on an issuer's
ability to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities that might develop as a result of Rule 144A could provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment in order to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A-eligible security held by the Portfolio, however,
could adversely affect the marketability of such portfolio security and the
Portfolio might be unable to dispose of such security promptly or at
reasonable prices.
FUTURES, OPTIONS ON FUTURES AND OPTIONS ON SECURITIES
As discussed in the section entitled "The Leisure Portfolio and the Fund"
in the Prospectus, the Portfolio may enter into futures contracts for hedging
or other non-speculative purposes, and purchase and sell ("write") options to
buy or sell futures contracts and other securities. These instruments are
sometimes referred to as "derivatives." The Portfolio will comply with and
adhere to all limitations in the manner and extent to which it effects
transactions in futures and options on such futures currently imposed by the
rules and policy guidelines of the Commodity Futures Trading Commission (the
"CFTC") as conditions for exemption of a mutual fund, or investment advisers
thereto, from registration as a commodity pool operator. Under those
restrictions, the Portfolio will not, as to any positions, whether long,
short or a combination thereof, enter into futures and options thereon for
which the aggregate initial margins and premiums exceed 5% of the fair market
value of the Portfolio's total assets after taking into account unrealized
profits and losses on options it has entered into.
In the case of an option that is "in-the-money" (as defined in the
Commodity Exchange Act), the in-the-money amount may be excluded in computing
the 5% limitation described above. (In general a call option on a future is
"in-the-money" if the value of the future exceeds the exercise ("strike")
price of the call; a put option on a future is "in-the-money" if the value of
the future that is the subject of the put is exceeded by the strike price of
the put.) As to long positions which are used as part of the
4
<PAGE>
Portfolio's strategies and are incidental to their activities in the
underlying cash market, the "underlying commodity value" of the Portfolio's
futures and options thereon must not exceed the sum of (i) cash set aside in
an identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside,
plus sums deposited on margin; (ii) cash proceeds from existing investments
due in 30 days; and (iii) accrued profits held at the futures commission
merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the
future. For an option on a future, that value is the underlying commodity
value of the future underlying the option.
A futures contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a futures contract
provides for a specified settlement date on which, in the case of the
majority of interest rate and foreign currency futures contracts, the fixed
income securities or currency underlying the contract are delivered by the
seller and paid for by the purchaser, or on which, in the case of stock index
futures contracts and certain interest rate and foreign currency futures
contracts, the difference between the price at which the contract was entered
into and the contract's closing value is settled between the purchaser and
seller in cash. Futures contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. In addition, futures contracts call
for settlement only on the expiration date, and cannot be "exercised" at any
other time during their term.
The purchase or sale of a futures contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price
is paid or received. Instead, an amount of cash or cash equivalent, which
varies but may be as low as 5% or less of the value of the contract, must be
deposited with the broker as "initial margin." Subsequent payments to and
from the broker, referred to as "variation margin," are made on a daily basis
as the value of the index or instrument underlying the futures contract
fluctuates, making positions in the futures contract more or less valuable, a
process known as "marking-to-market."
Initial margin is in the nature of a performance bond or good faith
deposit on the contract. However, since losses on open contracts are required
to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of the
contracts to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the
Portfolio, there was a general increase in interest rates, thereby making the
Portfolio's portfolio securities less valuable. In all instances involving
the purchase of financial futures contracts by the Portfolio, an amount of
cash together with such other securities as permitted by applicable
regulatory authorities to be utilized for such purpose, at least equal to the
market value of the futures contracts, will be deposited in a segregated
account with the Portfolio's custodian to collateralize the position. At any
time prior to the expiration of a futures contract, the Portfolio may elect
to close its position by taking an opposite position that will operate to
terminate the Portfolio's position in the futures contract.
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the CFTC for the trading of such contract,
and only through a registered futures commission merchant which is a member
of such contract market. A commission must be paid on each completed purchase
and sale transaction. The contract market clearing house guarantees the
performance of each party to a futures contract, by in effect taking the
opposite side of such contract. At any time prior to the expiration of a
futures contract, a trader may elect to close out its position by taking an
opposite position on the contract market on which the position was entered
into, subject to the availability of a secondary market, which will operate
to terminate the initial position. At that time, a final determination of
variation margin is made and any loss experienced by the trader is required
to be paid to the contract market clearing house while any profit due to the
trader must be delivered to it.
Where futures are purchased to hedge against a possible increase in the
price of a security before the Portfolio is able in an orderly fashion to
invest in the security, it is possible that the market may
5
<PAGE>
decline instead. If the Portfolio, as a result, concluded not to make the
planned investment at that time because of concern as to possible further
market decline or for other reasons, the Portfolio would realize a loss on
the futures contract that is not offset by a reduction in the price of
securities purchased.
In addition to the possibility that there may be an imperfect correlation
or no correlation at all between movements in the futures and the portion of
the Portfolio being hedged, the prices of futures may not correlate perfectly
with movements in interest rates or exchange rates due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship between
interest rates or exchange rates and the value of a future. Moreover, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market and may therefore cause increased
participation by speculators in the futures market. Such increased
participation also may cause temporary price distortions. Due to the
possibility of price distortion in the futures market and because of the
imperfect correlation between movements in interest rates or exchange rates
and movements in the prices of futures contacts, the value of futures
contracts as a hedging device may be reduced.
In addition, if the Portfolio has insufficient available cash, it may at
times have to sell securities to meet variation margin requirements. Such
sales may have to be effected at a time when it may be disadvantageous to do
so.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. In addition, interest rate futures contracts include
contracts on indices of municipal securities. Foreign currency futures
contracts currently are traded on the British pound, Canadian dollar,
Japanese yen, Swiss franc, West German mark and on Eurodollar deposits.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts solely for bona fide hedging purposes or for other
non-speculative purposes within the meaning and intent of the applicable
provisions of the CEA. The purchase of a call option on a futures contact is
similar in some respects to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than
ownership of the futures contact or the underlying instrument. As with the
purchase of futures contracts, when the Portfolio is not fully invested it
may buy a call option on a futures contract to hedge against a market
advance.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price to a stated expiration
date. Upon exercise of the option by the holder, the contract market clearing
house establishes a corresponding short position for the writer of the
option, in the case of a call option, or a corresponding long position, in
the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
futures contracts, such as payment of variation margin deposits. In addition,
the writer of an option on a futures contract, unlike the holder, is subject
to initial and variation margin requirements on the option position.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium, which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the security or
foreign currency which
6
<PAGE>
is deliverable under, or of the index comprising, the futures contract. If
the futures price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities
which the Portfolio is considering buying. If a call or put option the
Portfolio has written is exercised, the Portfolio will incur a loss which
will be reduced by the amount of the premium it received. Depending on the
degree of correlation between change in the value of its securities and
changes in the value of the futures positions, the Portfolio's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of its securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, the Portfolio may buy a put option on a futures contract to
hedge against the risk of falling prices.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series. (i.e., the
same exercise price and expiration date) as the option previously purchased
or sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of
an option, the exchange or contract market clearing house assigns exercise
notices on a random basis to those of its members which have written options
of the same series and with the same expiration date. A brokerage firm
receiving such notices then assigns them on a random basis to those of its
customers which have written options of the same series and expiration date.
A writer therefore has no control over whether an option will be exercised
against it, nor over the time of such exercise.
Options on Securities. An option on a security provides the purchaser, or
"holder," with the right, but not the obligation, to purchase, in the case of
a "call" option, or sell, in the case of a "put" option, the security or
securities underlying the option, for a fixed exercise price up to a stated
expiration date. The holder pays a non-refundable purchase price for the
option, known as the "premium." The maximum amount of risk the purchaser of
the option assumes is equal to the premium plus related transaction costs,
although the entire amount may be lost. The risk of the seller, or "writer,"
however, is potentially unlimited, unless the option is "covered," which is
generally accomplished through the writer's ownership of the underlying
security, in the case of a call option, or the writer's segregation of an
amount of cash or securities equal to the exercise price, in the case of a
put option. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option.
Options on securities which have been purchased or written may be closed out
prior to exercise or expiration by entering into an offsetting transaction on
the exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which
are regulated by the SEC. The Options Clearing Corporation ("OCC") guarantees
the performance of each party to an exchange-traded option, by in effect
taking the opposite side of each such option. A holder or writer may engage
in transactions in exchange-traded options on securities and options on
indices of securities only through a registered broker/dealer which is a
member of the exchange on which the option is traded.
7
<PAGE>
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same
series. Although the Portfolio generally will purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option at any particular time. In such event it might not be
possible to effect closing transactions in a particular option with the
result that the Portfolio would have to exercise the option in order to
realize any profit. This would result in the Portfolio incurring brokerage
commissions upon the disposition of underlying securities acquired through
the exercise of a call option or upon the purchase of underlying securities
upon the exercise of a put option. If the Portfolio, as a covered call option
writer, is unable to effect a closing purchase transaction in a secondary
market, unless the Portfolio is required to deliver the securities pursuant
to the assignment of an exercise notice, it will not be able to sell the
underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or particular class or series of
options) in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on that exchange which had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at a
particular time, render certain of the facilities of any of the clearing
corporations inadequate and thereby result in the institution by an exchange
of special procedures which may interfere with the timely execution of
customers' orders. However, the OCC, based on forecasts provided by the U.S.
exchanges, believes that its facilities are adequate to handle the volume of
reasonably anticipated options transactions, and such exchanges have advised
such clearing corporation that they believe their facilities will also be
adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter ("OTC")
through financial institutions dealing in such options as well as the
underlying instruments. OTC options are purchased from or sold (written) to
dealers or financial institutions which have entered into direct agreements
with the Fund on behalf of the Portfolio. With OTC options, such variables as
expiration date, exercise price and premium will be agreed upon between the
Portfolio and the transacting dealer, without the intermediation of a third
party such as the OCC. If the transacting dealer fails to make or take
delivery of the securities underlying an option it has written, in accordance
with the terms of that option as written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolio will engage in OTC option transactions only with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York.
FORWARD FOREIGN CURRENCY CONTRACTS
As discussed in the section of the Portfolio's Prospectus entitled "The
Leisure Portfolio and the Fund," the Portfolio may enter into forward
contracts, which are included among the types of instruments sometimes known
as derivatives, to purchase or sell foreign currencies as a hedge against
possible variations in foreign exchange rates. A forward foreign currency
contract is an agreement between the contracting parties to exchange an
amount of currency at some future time at an agreed upon rate. The rate can
be higher or lower than the spot rate between the currencies that are the
subject of the contract. A forward contract generally has no deposit
requirement, and such transactions do not involve commissions. By entering
into a forward contract for the purchase or sale of the amount of foreign
currency invested in a foreign security transaction, the Portfolio can hedge
against possible
8
<PAGE>
variations in the value of the dollar versus the subject currency either
between the date the foreign security is purchased or sold and the date on
which payment is made or received or during the time the Portfolio holds the
foreign security. The Portfolio will not speculate in forward currency
contracts. Although the Portfolio has not adopted any limitations on its
ability to use forward contracts as a hedge against fluctuations in foreign
exchange rates, the Portfolio will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent,
if any, deemed appropriate by the Sub-Adviser. The Portfolio will not enter
into a forward contract for a term of more than one year. Forward contracts
may, from time to time, be considered illiquid, in which case they would be
subject to the Portfolio's limitation on investing in illiquid securities,
discussed above.
REPURCHASE AGREEMENTS
As discussed in the Portfolio's Prospectus, the Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for
investment by the Portfolio with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers. A
repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the
period the instrument is held by the Portfolio and is unrelated to the
interest rate on the underlying instrument. In these transactions, the
collateral securities acquired by the Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the
repurchase agreement, and are held as collateral by the Portfolio's custodian
bank until the repurchase agreement is completed.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 -1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President (1978 - 1987 and December,
1992 - present) Director (1978 - present), Western Reserve Life Assurance
Co. of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 to February, 1991), President (1988 - 1989), Director (1976 -
February, 1991), Executive Vice President
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of the
Investment Adviser.
9
<PAGE>
(1972 - 1988), Pioneer Western Corporation (financial services), Largo,
Florida; President and Director (1985 - September, 1990) and Director
(December, 1990 - present); Idex Management, Inc. (investment adviser),
Largo, Florida; Trustee (1987 - present), Chairman (December, 1989 -
September, 1990 and November, 1990 - present) and President and Chief
Executive Officer (November, 1986 - September, 1990), IDEX Fund, IDEX II
Series Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 to February, 1991), Pioneer
Western Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 -present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney, (September, 1992
-August, 1993), Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing
Instructor, (August, 1991 -June, 1992), Florida State University College of
Law; Teaching Assistant, English (August, 1990 - July, 1991), University of
South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), (Chief Financial Officer (December,
1995 - present) Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular and special Board meeting attended. Because the
Portfolio had not commenced operations as of December 31, 1995 the Portfolio
did not pay any Directors' fees for the fiscal year ended December 31, 1995.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS FROM
WRL SERIES FUND, INC.,
IDEX FUND, IDEX II
AGGREGATE COMPENSATION SERIES FUND AND
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. IDEX FUND 3
- ----------------------------------- --------------------------- -----------------------
<S> <C> <C>
Peter R. Brown, Director .......... $9,500 $32,500
Charles C. Harris, Director ...... $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A
10
<PAGE>
shares of a portfolio of IDEX II Series Fund (without imposition of sales
charge), as elected by the directors. It is not anticipated that the Plan
will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - The
Investment Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated June 19, 1995 with the Fund. The Investment Adviser
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), a stock life insurance company which is wholly-owned by AEGON USA,
Inc. ("AEGON"). AEGON is a financial services holding company whose primary
emphasis is on life and health insurance and annuity and investment products.
AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on June 19, 1995. The
Investment Advisory Agreement provides that subsequent to its initial
approval by the Portfolio's initial shareholders, it will continue in effect
for an initial term ending April 22, 1997, and from year to year thereafter,
if approved annually (a) by the Board of Directors of the Fund or by a
majority of the outstanding shares of the Portfolio, and (b) by a majority of
the Directors who are not parties to such contract or "interested persons" of
any such party. The Investment Advisory Agreement may be terminated without
penalty on 60 days' written notice at the option of either party or by the
vote of the shareholders of the Portfolio and terminates automatically in the
event of its assignment (within the meaning of the 1940 Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Investment Advisory Agreement. For further information about the
management of the Portfolio, see "The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolio for the year ended December 31, 1995 because the Portfolio
had not commenced operations as of that date.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of the Investment Adviser or any of its subsidiaries.
Accounting services are provided for the Portfolio by the Investment Adviser.
The Investment Adviser also pays all expenses incurred in connection with the
formation and organization of the Portfolio, including all costs and expenses
of preparing and filing the post-effective amendment to the Fund's
registration statement effecting the registration of the Portfolio and its
shares under the 1940 Act and the Securities Act of 1933. The Portfolio pays
all other expenses incurred in its operation and all of the Portfolio's
general administrative expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses in connection with
ongoing registration or qualification requirements under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
11
<PAGE>
value), interest, certain taxes, charges of the custodian, fees and expenses
of Fund directors who are not "interested persons" of the Fund, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, SEC fees, advisory fees, certain insurance premiums, costs of
corporate meetings, costs of maintenance of corporate existence, investor
services (including allocable telephone and personnel expenses),
extraordinary expenses, and other expenses properly payable by the Portfolio.
Depending upon the nature of the lawsuit, litigation costs may be borne by
the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
INVESCO Trust Company (the "Sub-Adviser") serves as the Sub-Adviser for
the Portfolio pursuant to a Sub-Advisory Agreement dated June 19, 1995, on
behalf of the Portfolio. The Sub-Advisory Agreement was approved by the
Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
June 19, 1995. The Sub-Advisory Agreement provides that it will continue in
effect for an initial term ending April 22, 1997, and from year to year
thereafter, if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreement may be terminated without penalty on 60 days written
notice at the option of either party or by the vote of the shareholders of
the Portfolio and terminates automatically in the event of its assignment
(within the meaning of the 1940 Act) or termination of the Investment
Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub-Adviser bears all
of its expenses in connection with the performance of its services under the
Sub-Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. Because the Portfolio
had not commenced operations as of December 31, 1995, there were no
sub-advisory fees paid for the fiscal year ended December 31, 1995.
The Sub-Adviser is located at 7800 E. Union Avenue, Denver, Colorado
80237. The Sub-Adviser is a wholly-owned subsidiary of INVESCO Funds Group,
Inc. ("INVESCO"). INVESCO is an indirect wholly-owned subsidiary of INVESCO
PLC. INVESCO PLC is the holding company for a group of companies engaged in
financial services. INVESCO PLC was organized in 1935 and its ordinary shares
and American Depositary Shares are traded on the London Stock Exchange and
the New York Stock Exchange, respectively. The corporate headquarters of
INVESCO PLC is located at 11 Devonshire Square, London, EC2M 4YR, England.
The Sub-Adviser served as adviser or sub-adviser to 41 investment portfolios
as of December 31, 1995 with aggregate assets of approximately $11 billion.
In addition, the Sub-Adviser provides investment management services to
private clients including employee benefit plans that may be invested in a
collective trust sponsor by the Sub-Adviser.
12
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Leisure Portfolio and the Fund -
Portfolio Turnover" in the Prospectus. In computing the portfolio turnover
rate for the Portfolio, securities whose maturities or expiration dates at
the time of acquisition are one year or less are excluded. Subject to this
exclusion, the turnover rate for the Portfolio is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of portfolio securities owned by the Portfolio
during the fiscal year.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolio. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolio.
13
<PAGE>
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of Portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses or disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
As stated in the Prospectus, the net asset value of Portfolio shares is
ordinarily determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m.,
Eastern time) on each day the Exchange is open. (Currently the Exchange is
closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total
number of shares outstanding. In determining asset value, securities listed
on the national securities exchanges and
14
<PAGE>
traded on the NASDAQ National Market are valued at the closing prices on such
markets, or if such a price is lacking for the trading period immediately
preceding the time of determination, such securities are valued at their
current bid price. Foreign securities and currencies are converted to U.S.
dollars using the exchange rate in effect at the close of the Exchange. Other
securities which are traded on the over-the-counter market are valued at bid
price. Other securities for which quotations are not readily available are
valued at fair values as determined in good faith by the Investment Adviser
and the Sub-Adviser under the supervision of the Fund's Board of Directors.
Money market instruments maturing in 60 days or less are valued on the
amortized cost basis.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ending redeemable value (at the end of the applicable period of a
hypothetical $1,000 payment made at the beginning of the applicable
ERV = period).
</TABLE>
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional Information regarding the investment performance of the
Portfolio appears in the Prospectus.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C><C>
YIELD = 2 [ ( a-b cd + 1)(6 )- 1]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned during the period by the Portfolio.
b = expenses accrued for the period (net of reimbursement).
the average daily number of shares outstanding during the period that were
c = entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Because the Portfolio has not commenced operations as of the date of this
Prospectus, no quotations of standardized or non-standardized performance
information are available.
15
<PAGE>
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a discussion of the special taxation
of insurance companies with respect to the Separate Accounts and of the
Policies, the Annuity Contracts and the holders thereof.
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months - options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of
16
<PAGE>
foreign currencies, and options, futures, and forward contracts on foreign
currencies, that are not directly related to the Portfolio's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are
held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC Income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Equity-Income Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; International Equity Portfolio; Leisure
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/ INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
17
<PAGE>
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
No financial statements for the Portfolio are available for the year ended
December 31, 1995, because the Portfolio had not commenced operations as of
that date.
18
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
[WRL LOGO] [SCOTTISH EQUITABLE LOGO]
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios.
This Prospectus pertains only to the International Equity Portfolio of the
Fund.
The investment objective of the International Equity Portfolio is to
provide long-term growth of capital. The International Equity Portfolio seeks
to achieve its objective by investing primarily in the common stock of
foreign issuers traded on overseas exchanges and in foreign over-the-counter
("OTC") markets. There can be, of course, no assurance that the International
Equity Portfolio will achieve its objective.
Shares of the Fund are sold only to the separate accounts (the "Separate
Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL Life
Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits
under certain individual variable life insurance policies (the "Policies")
and individual and group variable annuity contracts (the "Annuity
Contracts"). The Life Companies are affiliates. The Separate Accounts, which
may or may not be registered with the Securities and Exchange Commission,
invest in shares of one or more of the portfolios in accordance with the
allocation instructions received from holders of the Policies and the Annuity
Contracts (collectively, the "Policyholders"). Such allocation rights are
further described in the prospectuses or disclosure documents for the
Policies and the Annuity Contracts.
WRL and Scottish Equitable Investment Management Limited serve as the
investment adviser (the "Investment Adviser") and the sub-adviser (the
"Sub-Adviser"), respectively, to the International Equity Portfolio. See "The
Investment Adviser" and "The Sub-Adviser."
This Prospectus sets forth concisely the information about the
International Equity Portfolio that prospective investors ought to know
before investing. Investors should read this Prospectus and retain it for
future reference.
Additional information about the Fund, the International Equity Portfolio
and the other portfolios of the Fund has been filed with the Securities and
Exchange Commission and is available upon request without charge by calling
or writing the Fund. The Statement of Additional Information pertaining to
the International Equity Portfolio bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety.
- -----------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
Prospectus Dated May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
201 Highland Avenue
Largo, FL 34640
Telephone (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The International Equity Portfolio and the Fund .... 1
Management of the Fund .............................. 5
Dividends and Other Distributions ................... 6
Taxes ............................................... 6
Purchase and Redemption of Shares ................... 7
Valuation of Shares ................................. 7
The Fund and Its Shares ............................. 7
Performance Information ............................. 8
General Information ................................. 8
</TABLE>
i
<PAGE>
THE INTERNATIONAL EQUITY PORTFOLIO
AND THE FUND
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The International Equity Portfolio is a series of the Fund. The Fund
consists of several series, or separate investment portfolios, which offer
shares for investment by the Separate Accounts. This Prospectus describes
only the International Equity Portfolio (the "Portfolio").
A particular portfolio of the Fund may not be available under the Policy
or Annuity Contract you have chosen or may not be available in your state due
to certain state insurance law considerations. The prospectus or disclosure
document for the particular Policy or Annuity Contract you have chosen will
indicate the portfolios which are generally available under the applicable
Policy or Annuity Contract and should be read in conjunction with this
Prospectus.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The investment objective of the Portfolio is to provide long-term growth
of capital. The Portfolio seeks to achieve its objective by investing
primarily in the common stock of foreign issuers traded on overseas exchanges
and in foreign OTC markets. While the Portfolio will primarily invest in
common stock, from time to time, the Portfolio may invest in convertible
securities, warrants, or fixed-income instruments when the Sub-Adviser may
deem appropriate.
There can be, of course, no assurance that the Portfolio will achieve its
investment objective. The Portfolio's investment objective and, unless
otherwise noted, its investment policies and techniques, may be changed by
the Board of Directors of the Fund without shareholder or Policyholder
approval. A change in the investment objective or policies of the Portfolio
may result in the Portfolio having an investment objective or policies
different from that which a Policyholder deemed appropriate at the time of
investment.
PORTFOLIO POLICIES AND TECHNIQUES
The Portfolio will seek to be invested in a minimum of 50 stocks of
issuers from approximately 15-25 countries, based on (i) the country in which
an issuer is organized; (ii) the country from which an issuer derives at
least 50% of its revenues or profits; or (iii) the principal trading market
for the issuer's securities. The Portfolio will not be invested in issuers of
fewer than twelve countries other than the United States at any time. (For
this purpose, American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs"), and Global Depositary Receipts ("GDRs") will be considered
to be issued by the issuer of the securities underlying the receipt.) See
"Foreign Investments, Related Derivative Instruments, and Special Risks,"
below.
At any time, overseas economies may not be moving in the same direction
and will be subject to substantially different fiscal and monetary policies.
These provide situations the Portfolio will aim to exploit. The Portfolio
will aim to add value primarily through active asset allocation among
international equity markets. Typically, the Portfolio will be invested
broadly, not only in the larger stock markets of the United Kingdom,
Continental Europe, Japan and the Far East, but also, to a lesser extent, in
the smaller stock markets of Asia, Europe and Latin America. In accordance
with the requirements of current California insurance regulations, the
Portfolio will have no more than 20% of its net assets invested in securities
of issuers located in any one foreign country, but may have an additional 15%
of its net assets invested in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
West Germany. If California's insurance regulations are changed at some
future time to permit a larger percentage of the Portfolio's net assets to be
invested in a single foreign country, the Portfolio may invest more of its
net assets in a single foreign country, in accordance with the Portfolio's
investment objective and investment restrictions.
The Portfolio will seek to enhance investment returns and preserve
capital, when appropriate, primarily through shifts of Portfolio investments
between the international equity markets and cash. The Portfolio may invest
up to 20% of its total assets in cash, as a temporary defense measure, during
periods of perceived extreme market risk. In determining when an increase in
the Portfolio's cash position will be implemented, the portfolio manager will
make use of the asset allocation research and analysis undertaken by the Sub-
Adviser. When the Portfolio increases its cash or debt investment position,
its income may increase while its ability decreases to participate in stock
market declines or advances.
TYPES OF SECURITIES AND RISK FACTORS
The Portfolio seeks to invest its assets primarily in the common stock of
foreign issuers traded on overseas exchanges and in foreign OTC markets. The
Portfolio will seek to invest at least 80% of its net assets in equity
1
<PAGE>
securities at all times. For temporary defensive purposes, the Portfolio may
invest in cash and cash equivalents, commercial paper, certificates of
deposit, bank time deposits in the currency of any nation and bankers'
acceptances with respect to these securities.
Investments in warrants, when advisable by the Sub-Adviser, may not
exceed 5% of the value of the Portfolio's net assets. The Portfolio may
purchase warrants listed on both the New York Stock Exchange and on Foreign
Exchanges. The risks involved in investments in such securities are described
under "Foreign Investments, Related Derivative Instruments, and Special
Risks," below and "Investment Objective and Policies - Warrants" in the
Statement of Additional Information.
The Portfolio may purchase and sell financial futures contracts, stock
index futures contracts, and foreign currency futures contracts and related
options, forward currency contracts, and interest rate swaps, caps and floors
for hedging purposes only and not for speculation. It may engage in such
transactions only if the total contract value of the futures contracts does
not exceed 20% of the Portfolio's total assets. See
1
<PAGE>
"Financial Futures Contracts", below and "Foreign Investments, Related
Derivative Instruments, and Special Risks," p. 2. Further information on
these instruments, hedging strategies and the considerations relating to them
is set forth below and in the Statement of Additional Information.
CONVERTIBLE SECURITIES
The 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 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. In evaluating a convertible security, the Sub-Adviser
will give primary emphasis to the attractiveness of the underlying common
stock. Convertible securities in which the Portfolio invests will be rated
AA+ or higher by Standard & Poor's Corporation or Aa1 or higher by Moody's
Investors Service, Inc. The Portfolio will not invest in unrated convertible
securities.
FINANCIAL FUTURES CONTRACTS
The Portfolio may enter into stock index futures contracts, including
indexes on specific securities, as a hedge against changes in the market
values of common stocks. The Portfolio may enter into interest rate futures
contracts as a hedge against changes in prevailing levels of interest rates.
In both cases, the purpose is to establish more definitely the effective
return on securities held or intended to be acquired by the Portfolio. The
Portfolio's hedging may include sales of futures as an offset against the
effect of expected decreases in stock values or increases in interest rates,
and purchases of futures as an offset against the effect of expected
increases in stock values or decreases in interest rates.
The Portfolio will not enter into a futures contract if, as a result
thereof, (i) the aggregate market value of all open futures positions would
exceed one-third of the Portfolio's total assets or (ii) the sum of the
initial margin deposits of all open futures positions (other than an
offsetting transaction) would be more than 5% of the Portfolio's total
assets. More than 5% of the Portfolio's total assets may be committed to the
aggregate of initial and variation margin payments however. Furthermore, in
order to be certain that the Portfolio has sufficient assets to satisfy its
obligations under a futures contract, the Portfolio deposits with the Fund's
custodian cash or cash equivalents equal in value to the market value of the
futures contract in a segregated account.
Financial futures prices are volatile and difficult to forecast and the
correlation between changes in prices of futures contracts and the securities
being hedged can be only approximate. A decision of whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected stock market or interest rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. A relatively small price movement in a
futures contract may result in immediate and substantial loss, as well as
gain, to the investor. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
A description of financial futures contracts is included in the Statement
of Additional Information.
ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when sale would
otherwise be desirable. The Portfolio will limit investments in illiquid
securities, including restricted securities, not determined by the Board of
Directors to be liquid, non-negotiable time deposits, to 15% of its net
assets.
FOREIGN INVESTMENTS, RELATED DERIVATIVE INSTRUMENTS, AND SPECIAL RISKS
The Portfolio has an unlimited right to purchase securities in any foreign
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country, developed or developing. In selecting investments in foreign
securities for the Portfolio, the Sub-Adviser will consider a variety of
factors which may include the political and economic conditions in a country,
the prospect for changes in the value of its currency and the liquidity of
the investment in that country's securities markets. If appropriate and
available, the Sub-Adviser may purchase foreign securities through
dollar-denominated ADRs, EDRs, GDRs and other types of receipts or shares
evidencing ownership of the underlying foreign securities. While ADRs are
dollar-denominated receipts that are issued by domestic banks and traded in
the United States, EDRs are typically issued by European banks, and GDRs may
be issued by either domestic or foreign banks. In addition, the Portfolio may
invest indirectly in foreign securities through foreign investment funds or
trusts (including passive foreign investment companies).
Investing in foreign securities involves opportunities and risks that
differ from those involved with investing solely in U.S. markets. The
Sub-Adviser believes that there is substantial opportunity from a
professionally managed portfolio of
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securities selected from foreign markets. This investment framework seeks to
take advantage of the investment opportunities created by the global economy.
Accordingly, an investor may benefit from worldwide access to investment
opportunities, without being constrained by the location of a company's
headquarters or the trading market for its shares.
At the same time, these opportunities involve considerations and risks
that may not be encountered in U.S. investments. For example, changes in
currency exchange rates and exchange rate controls may affect the value of
foreign securities and the value of their dividend or interest payments, and
therefore the Portfolio's share prices and returns. Foreign companies
generally are subject to tax laws and accounting, auditing, and financial
reporting standards, practices and requirements that differ from those
applicable to U.S. companies. There is generally less publicly available
information about foreign companies and less securities and other
governmental regulation and supervision of foreign companies, stock exchanges
and securities brokers and dealers. The Portfolio may encounter difficulties
in enforcing obligations in foreign countries and negotiating favorable
brokerage commission rates. Securities of some foreign companies are less
liquid, and their prices more volatile, than securities of comparable U.S.
companies. Security trading practices abroad may offer less protection to
investors such as the Portfolio than the practices of domestic securities
trading. Custody charges are generally higher for foreign securities than for
domestic securities.
The considerations noted above may be intensified in the case of
investments in developing countries or countries with limited or developing
capital markets. In particular, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers
located in developing countries may have limited marketability and may be
subject to more abrupt or erratic price fluctuations. Special custody or
other arrangements may need to be made before the Portfolio can make certain
investments in developing countries. It may be more difficult to assess the
value or prospects of an investment in an issuer from a developing country,
and the laws of some foreign countries may limit the ability of the Portfolio
to invest in securities of certain issuers in such countries.
In addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation; limitations on the
removal of securities, property or other assets of the Portfolio; political
or social instability or war; or diplomatic developments which could affect
U.S. investments in those countries. These latter considerations generally
are more of a concern in developing countries. Developing countries may also
have economies that are based on only a few industries. Although investments
in companies domiciled in developing countries may be subject to potentially
greater risk than investments in developed countries, the Portfolio will not
invest in any securities of issuers located in developing countries if the
Sub-Adviser determines these securities to be speculative.
At times, securities held by the Portfolio may be listed on foreign
exchanges or traded in foreign markets which are open on days (such as
Saturday) when the Portfolio does not compute its price or accept orders for
the purchase, redemption or exchange of its shares. As a result, the net
asset value of the Portfolio may be significantly affected by trading on days
when shareholders cannot make transactions.
To the extent the Portfolio invests in international foreign securities
markets, changes in the Portfolio's share price may have a reduced
correlation with movements in the U.S. markets. The Portfolio's share price
reflects the movements of both the prices of securities in which the
Portfolio is invested and the currencies in which the investments are
denominated. Because the foreign securities in which the Portfolio may invest
include those that are denominated in foreign currencies, or that otherwise
have values that depend on the performance of foreign currencies relative to
the U.S. dollar, the relative strength of the U.S. dollar may be, to that
extent, an important factor in the performance of the Portfolio. In an effort
to manage exchange rate risks, the Portfolio may enter into foreign currency
exchange contracts (agreements to exchange one currency for another at a
future date). The Portfolio may exchange foreign currencies for U.S. dollars
and for other foreign currencies in the normal course of business, and may
purchase and sell currencies through currency exchange contracts in order to
fix a price for securities they have agreed to buy or sell. The Sub-Adviser
may also seek to hedge some or all of the Portfolio's investments denominated
in foreign currency against a decline in the value of that currency relative
to U.S. dollars, by entering into contracts to exchange that currency for
U.S. dollars (not exceeding the value of the Portfolio's assets denominated
in that currency), or by participating in options or futures contracts with
respect to such currency. This type of hedge may minimize the effect of
currency appreciation as well as depreciation, but does not protect against a
decline in the security's value relative to other securities denominated in
that currency.
The Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the Sub-
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Adviser believed that a particular currency may decline relative to the U.S.
dollar, the Portfolio could enter into a contract to sell that currency (up
to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable
or to appreciate relative to the U.S. dollar. As a non-fundamental operating
policy, the Portfolio will not enter into currency exchange contracts if, as
a result, more than 10% of its assets would be committed to the consummation
of cross-hedge contracts, and will instruct its custodian bank to set
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aside high-grade, liquid assets to cover the Portfolio's purchase obligations
under this type of contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which the Portfolio would not be subject absent the use
of these strategies. If the Sub-Adviser engages in a hedging transaction
intended to protect the Portfolio against potential adverse movements in the
securities, foreign currency or interest rate markets using these hedging
instruments, and such markets do not move in a direction adverse to the
Portfolio, the Portfolio could be left in a less favorable position than if
such hedging strategy had not been used. The use of hedging strategies
involves special risks, which include: 1) the risk that interest rates,
securities prices and currency markets will not move in the directions
anticipated; 2) imperfect correlation between the price of the hedging
instruments and movements in the prices of the securities or currencies
underlying the hedging transaction; 3) the fact that the skills needed to use
these strategies are different from those needed to select portfolio
securities; 4) the possible absence of a liquid secondary market for any
particular instrument at any time; and 5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. See the
Statement of Additional Information for further information concerning these
risks.
INVESTMENT FUNDS AND OTHER INVESTMENT COMPANIES
The Portfolio may invest in investment funds which have been authorized by
the governments of certain countries specifically to permit foreign
investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Portfolio invests in such
investment funds, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the investment adviser), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their
net asset value.
The Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in securities issued by investment companies, including
such investment funds. The Portfolio may not invest (i) more than 5% of its
total assets in the securities of any one investment company or (ii) in more
than 3% of the voting securities of any other investment company.
BORROWING
The Portfolio may borrow only for temporary or emergency purposes (not for
leveraging or investments) in an amount not to exceed 25% of its total
assets, including the amount borrowed. To secure borrowings, the Portfolio
may not mortgage or pledge its securities in amounts that exceed 15% of its
net assets, at the time the loan or borrowing is made. In addition, the
Portfolio may borrow money from or lend money to other funds that permit such
transactions which are also advised by the Sub-Adviser, provided the
Portfolio seeks and obtains permission to do so from the Securities and
Exchange Commission. There is no assurance that such permission would be
granted. In accordance with the requirements of current California insurance
regulations, the Portfolio will restrict borrowings to no more than 10% of
total assets, except that the Portfolio may temporarily borrow amounts equal
to as much as 25% of total assets if such borrowing is necessary to meet
redemptions. If California's insurance regulations are changed at some future
time to permit borrowings in excess of 10% but less than 25% of total assets,
the Portfolio may conduct borrowings in accordance with such revised limits.
LENDING OF PORTFOLIO SECURITIES
In order to generate income and to offset expenses, the Portfolio may lend
securities to brokers, dealers, banks or other financial institutions or make
any other loan up to 25% of its total assets, although this limitation does
not apply to purchases of commercial paper or debt securities. Securities
lending may involve some credit risk to the Portfolio if the borrower
defaults and the Portfolio is delayed or prevented from recovering the
collateral for the loan or is otherwise required to cover a transaction in
the security loaned. Loans of securities will be collateralized by cash,
letters of credit or U.S. Government securities that are maintained at all
times in an amount equal to at least 10% of the current market value of the
loaned securities. If a material event is to be voted upon affecting the
Portfolio's investment in securities which are on loan, the Portfolio will
take such action as may be appropriate in order to vote its shares. The
Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. (See the Statement of Additional
Information for further information on securities loans.)
FIXED-INCOME INVESTING
The performance of the debt component of the Portfolio (if any) depends
primarily on interest rate changes, the average weighted maturity of the
Portfolio and the quality of securities held. The debt component of the
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Portfolio will tend to decrease in value when interest rates rise and
increase when interest rates fall. The Portfolio may vary the average
maturities of its portfolio of debt securities based on the portfolio
manager's analysis of interest rate trends and other factors. Generally,
shorter term securities are less sensitive to interest rate changes, but
longer term securities offer higher yields. The Portfolio's share price and
yield will also depend, in part, on the quality of its investments in debt
securities. For example, while U.S. Government securities generally are of
high quality, government securities that are not backed by the full faith and
credit of the United States and other debt securities, including those of
foreign governments, may be affected by changes in the creditworthiness of
the issuer of the security. The extent that such changes are reflected in the
Portfolio's share price will depend upon the extent of the Portfolio's
investment in such securities.
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BANK OBLIGATIONS
Because the Portfolio may invest (up to 100%) of its assets in bank
obligations, an investment in the Portfolio should be made with an
understanding of the characteristics of the banking industry and the risks
which such an investment may entail. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which may be made and interest rates and fees
which may be charged. The profitability of this industry is largely dependent
upon the availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also, general
economic conditions play an important part in the operations of this
industry, and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its
obligations.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not
be changed without the approval of a majority of the Portfolio's shareholders
and the Policyholders.
PORTFOLIO TURNOVER
The Portfolio's turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain short-term securities) for a year and dividing it by the monthly
average of the market value of such securities during the year. The
Portfolio's annual portfolio turnover rate is expected to exceed 100% but is
not expected to exceed 200%; the rate of portfolio turnover is not expected
to be a limiting factor when changes are deemed appropriate. High turnover
and short-term trading involve correspondingly higher transaction costs for
the Portfolio which are ultimately borne by the shareholders and
Policyholders. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. There are currently five Directors, three
of whom are not "interested persons" of the Fund as that term is defined in
the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by the Investment
Adviser and Sub-Advisers, the Fund requires no employees other than its
executive officers, none of whom devotes full time to the affairs of the
Fund. These officers are employees of WRL and receive no compensation from
the Fund. The Statement of Additional Information contains the names and
general background information regarding each Director and executive officer
of the Fund.
THE INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo,
Florida 34640, serves as the Portfolio's Investment Adviser. The Investment
Adviser is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), a stock life insurance company which is wholly-owned by AEGON
USA, Inc. ("AEGON"). AEGON is a financial services holding company whose
primary emphasis is on life and health insurance and annuity and investment
products. AEGON is an indirect wholly-owned subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly-traded international insurance
group.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in
accordance with the Portfolio's stated investment objective and policies. As
compensation for its services to the Portfolio, the Investment Adviser
receives monthly compensation at the annual rate of 0.80% of the average
daily net assets of the Portfolio.
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment
Adviser also assists the Portfolio in maintaining communications and
relations with the shareholders of the Portfolio, including assisting in the
preparation of reports to shareholders. The Investment Adviser may incur and
will pay certain additional expenses, including legal and accounting fees, in
connection with the formation and organization of the Portfolio, including
the preparation and filing, when appropriate, of all documents, including
registration statements, post-effective amendments, and any registration or
qualification under state securities laws required in connection with the
Portfolio's offering of shares. The Investment Adviser will also pay all
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reasonable compensation, fees, and related expenses of the officers and
Directors of the Fund, except for such Directors who are not interested
persons (as that term is defined in the 1940 Act) of the Investment Adviser,
and the rental of offices. The Portfolio pays all other expenses incurred in
its operations, including general administrative expenses. Accounting
services are provided for the Portfolio by the Investment Adviser. Pursuant
to an expense limitation voluntarily adopted by WRL, WRL has undertaken,
until at least April 30, 1997, to pay expenses on behalf of the Portfolio to
the extent normal operating expenses (including investment advisory fees but
excluding interest, taxes, brokerage fees, commissions and extraordinary
charges) exceed 1.00% of the Portfolio's average daily net assets.
THE SUB-ADVISER
Scottish Equitable Investment Management Limited, located at Edinburgh
Park, Edinburgh EH12 9SE, Scotland, serves as the Sub-Adviser to the
Portfolio. The Sub-Adviser is a wholly-owned subsidiary of Scottish Equitable
plc. Scottish Equitable plc, formerly Scottish Equitable Life Assurance
Society, was founded in Edinburgh in 1831. As of December 31, 1995, the
Sub-Adviser had approximately $15.9 billion in assets under management. The
Sub-Adviser is also an
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indirect wholly-owned subsidiary of AEGON nv. The Sub-Adviser has not
previously managed a U.S.-registered mutual fund. The Sub-Adviser currently
provides investment management services to certain of its affiliates,
including Scottish Equitable plc. and to external organizations.
James Aird will serve as the head portfolio manager of the Portfolio. Mr.
Aird joined Scottish Equitable in 1981 and has served both as a Portfolio
Manager and Investment Analyst. Mr. Aird has the responsibility for the
Sub-Adviser's investment services in the U.S. and Europe. Mr. Aird joined the
Sub-Adviser directly from the University of Edinburgh where he earned a BSc
in Economics and he is an associate of Institute of Investment Management and
Research.
The Committee of Global Portfolio Managers of the Sub-Adviser (including
Mr. Aird) meet on a daily basis to establish consensus views on markets and
portfolio strategy. Each of the team members has primary responsibility for a
group of client funds and acts as the manager for those funds.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. Subject to
review and supervision by the Investment Adviser and the Board of Directors
of the Fund, the Sub-Adviser is responsible for the actual management of the
Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser in the amount of 50% of the investment management fees
received by the Investment Adviser with respect to the Portfolio less 50% of
the amount of any excess expenses paid by the Investment Adviser on behalf of
the Portfolio pursuant to the expense limitation described above. (See "The
Investment Adviser", p.5.)
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described
in the accompanying prospectus by a broker-dealer as a factor in the
selection of broker-dealers to execute portfolio transactions. In placing
portfolio business with all dealers, the Sub-Adviser seeks best execution of
each transaction and all brokerage placement must be consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
PERSONAL SECURITIES TRANSACTIONS
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of
the Code of Ethics and Insider Trading Policy (the "Ethics Policy") that has
been adopted by the Board of Directors of the Fund. Access Persons are
required to follow the guidelines established by this Ethics Policy in
connection with all personal securities transactions and are subject to
certain prohibitions on personal trading. The Fund's Sub-Advisers, pursuant
to Rule 17j-1 and other applicable laws, and pursuant to the terms of the
Ethics Policy, must adopt and enforce their own Code of Ethics and Insider
Trading Policies appropriate to their operations. Each Sub-Adviser is
required to report to the Board of Directors on a quarterly basis with
respect to the administration and enforcement of such Ethics Policy,
including any violations thereof which may potentially affect the Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio intends to distribute substantially all of its net
investment income, if any. Dividends, if any, from investment income normally
are declared and paid semi-annually in additional shares of the Portfolio at
net asset value. Distributions of net realized capital gains from security
transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the
end of the fiscal year.
TAXES
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended ("Code"). As such, the Portfolio is not subject to
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net gains from certain
foreign currency transactions, and net short-term capital gain, if any) and
any net capital gain (the excess of net long-term capital gain over net
short-term capital loss) that it distributes to its shareholders. It is the
Portfolio's intention to distribute all such income and gains.
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Portfolio shares are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Policies and the Annuity
Contracts). Under the Code, no tax is imposed on an insurance company with
respect to income of a qualifying separate account properly allocable to the
value of eligible variable annuity or variable life insurance contracts. For
a discussion of the taxation of life insurance companies and the Separate
Accounts, as well as the tax treatment of the Policies and Annuity Contracts
and the holders thereof, see "Federal Tax Matters" included in the respective
prospectuses for the Policies and the Annuity Contracts.
The Portfolio intends to comply with the diversification requirements
imposed by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on
the Portfolio by Subchapter M and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because section 817(h) and
the regulations thereunder treat the Portfolio's assets as assets of the
related separate account, these limitations also apply to the Portfolio's
assets that may be
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invested in securities of a single issuer. Specifically, the regulations
provide that, except as permitted by the "safe harbor" described below, as of
the end of each calendar quarter, or within 30 days thereafter, no more than
55% of the Portfolio's total assets may be represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities, and
political subdivisions all will be considered securities issued by the same
issuer. Failure of the Portfolio to satisfy the section 817(h) requirements
would result in taxation of the Separate Accounts, the insurance companies,
the Policies, and the Annuity Contracts, and tax consequences to the holders
thereof, other than as described in the respective prospectuses for the
Policies and the Annuity Contracts.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Portfolio and its shareholders;
see the Statement of Additional Information for a more detailed discussion.
Prospective investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value
next determined after receipt of a purchase order or notice of redemption in
proper form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain sales and other charges may
apply to the Policies and the Annuity Contracts. Such charges are described
in the respective prospectuses for the Policies and the Annuity Contracts.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day
the Exchange is open.
The value of a foreign security held by the Portfolio is determined in its
national currency as of the close of trading on the foreign exchange on which
it is traded, or as of 4:00 p.m., New York time, if that is earlier, and that
value is then converted into its U.S. dollar equivalent at foreign exchange
rates in effect at noon, New York time, on the day the value of the foreign
security is determined.
Net asset value of the Portfolio's shares is computed by dividing the
value of the net assets of the Portfolio by the total number of Portfolio
shares outstanding.
Except for money market instruments maturing in 60 days or less,
securities held by the Portfolio are valued at market value. Securities for
which market values are not readily available are valued at fair value as
determined in good faith by the Advisers under the supervision of the Fund's
Board of Directors. Money market instruments maturing in 60 days or less are
valued on the amortized cost basis.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on
August 21, 1985, and is registered with the Securities and Exchange
Commission as a diversified, open-end, management investment company.
The Fund offers its shares for purchase by the Separate Accounts of the
Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because Fund shares are sold
to Separate Accounts established to receive and invest premiums received
under variable life insurance policies and purchase payments received under
variable annuity contracts, it is conceivable that, in the future, it may
become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Fund simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyholders
or to variable annuity contractowners. After being notified by one or more of
the Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if
any, should be taken in response thereto. Such action could include the sale
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of Fund shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyholders and those given by variable annuity contractowners.
If the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity Separate Accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyholders and variable annuity contractowners would no longer
have the economies of scale typically resulting from a larger combined fund.
The Fund offers a separate class of Common Stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios have equal voting
rights, except that only shares of a particular portfolio are entitled to
vote on matters concerning only that portfolio. Each issued and outstanding
share of the Portfolio is entitled to one vote and to participate equally in
dividends and distributions declared by the Portfolio and, upon liquidation
or dissolution, to participate equally in the net assets of the Portfolio
remaining after satisfaction of outstanding liabilities. The shares of the
Portfolio, when
7
<PAGE>
issued, will be fully paid and nonassessable, have no preference, preemptive,
conversion, exchange or similar rights, and will be freely transferable.
Shares do not have cumulative voting rights and the holders of more than 50%
of the shares of the Fund voting for the election of directors can elect all
of the directors of the Fund if they choose to do so and, in such event,
holders of the remaining shares would not be able to elect any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Fund and are entitled to exercise the rights directly as described above. If
and to the extent required by law, Life Companies will vote the Fund's shares
in the Separate Accounts, including Fund shares which are not attributable to
Policyholders, at meetings of the Fund in accordance with instructions
received from Policyholders having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act,
the Fund does not hold regular or special shareholder meetings. If the 1940
Act or any regulation thereunder should be amended or if present
interpretation thereof should change, and as a result it is determined that
the Life Companies are permitted to vote Fund shares in their own right, they
may elect to do so. The rights of Policyholders are described in more detail
in the prospectuses or disclosure documents for the Policies and the Annuity
Contracts, respectively.
PERFORMANCE INFORMATION
The Portfolio may, from time to time, include quotations of its total
return or yield in connection with the total return for any Separate Account
in advertisements, sales literature or reports to Policyholders or to
prospective investors. Total return and yield quotations reflect only the
performance of a hypothetical investment in the Portfolio during the
particular time period shown as calculated based on the historical
performance of the Portfolio during that period. Such quotations do not in
any way indicate or project future performance. Quotations of total return
and yield regarding the Portfolio do not reflect charges or deductions
against the Separate Accounts or charges and deductions against the Policies
or the Annuity Contracts. Where relevant, the prospectuses for the Policies
and the Annuity Contracts contain additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years, ten years and
since the Portfolio began operations, as of a stated ending date. When the
Portfolio has been in operation for these periods, the total return for such
periods will be provided if performance information is quoted. Total return
quotations are expressed as average annual compound rates of return for each
of the periods quoted, reflect the deduction of a proportionate share of the
Portfolio's investment advisory fees and Portfolio expenses and assume that
all dividends and capital gains distributions during the period are
reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Policyholders or to prospective investors, total
return for the Portfolio for periods in addition to those required to be
presented, or disclose other nonstandardized data such as cumulative total
returns, actual year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare the performance of the
Portfolio in advertisements, sales literature and reports to Policyholders or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service
("VARDS") and Morningstar, Inc. ("Morningstar") or reported by other
services, companies, individuals or other industry or financial publications
of general interest, such as Forbes, Money, The Wall Street Journal, Business
Week, Barron's, Kiplinger's Personal Finance, and Fortune, which rank and/or
rate mutual funds by overall performance or other criteria; and (3) the
Consumer Price Index. Lipper, VARDS and Morningstar are widely quoted
independent research firms which rank mutual funds by overall performance,
investment objectives, and assets. Unmanaged indices may assume the
reinvestment of dividends but usually do not reflect any "deduction" for the
expense of operating or managing a fund. In connection with a ranking, a
Portfolio will also provide additional information with respect to the
ranking, including the particular category to which it relates, the number of
funds in the category, the period and criteria on which the ranking is based,
and the effect of fee waivers and/or expense reimbursements.
The Portfolio yield quotation refers to the income generated by a
hypothetical investment in the Portfolio over a specified thirty-day period
expressed as a percentage rate of return for that period. The yield is
calculated by dividing the net investment income per share for the period by
the price per share on the last day of that period.
(See the Statement of Additional Information for more information about
the Portfolio's performance.)
8
<PAGE>
GENERAL INFORMATION
REPORTS TO POLICYHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The
Fund will send to the Portfolio's Policyholders, at least semi-annually,
reports showing the Portfolio's composition and other information. An annual
report, containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, acts as Custodian and Dividend Disbursing Agent of the Portfolio's
assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first
page of this Prospectus should be used for requests for additional
information.
8
<PAGE>
WRL SERIES FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 34640
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Scottish Equitable Investment Management Limited
Edinburgh Park
Edinburgh EH12 9SE, Scotland
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN ANY STATE OR JURISDICTION OF THE UNITED STATES
OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
WRL00086-05/96
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<PAGE>
WRL SERIES FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for the
International Equity Portfolio of the WRL Series Fund, Inc. (the "Fund"). A
copy of the Prospectus may be obtained from the Fund by writing the Fund at
201 Highland Avenue, Largo, Florida 34640 or by calling the Fund at (800)
851-9777.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
Sub-Adviser
The date of the Prospectus to which this Statement of Additional
Information relates and the date of this Statement of Additional Information
is May 1, 1996.
WRL00087-05/96
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Investment Objective and Policies 1 1
Investment Restrictions 1 5
Lending of Portfolio Securities 3 4
Borrowing 3 4
Foreign Securities 3 2
Foreign Currency Futures 3 3
Investment Funds 4 4
Warrants 4 1
Investments in Futures, Options and
Other Derivative Instruments 4 1
Management of the Fund 16 5
Directors and Officers 16 5
The Investment Adviser 17 5
The Sub-Adviser 18 5
Portfolio Transactions and Brokerage 19 6
Portfolio Turnover 19 5
Placement of Portfolio Brokerage 19 6
Purchase and Redemption of Shares 21 7
Determination of Offering Price 21 7
Net Asset Valuation 21 7
Calculation of Performance Related Information 22 8
Total Return 22 8
Yield Quotations 22 8
Taxes 22 6
Capital Stock of the Fund 25 7
Registration Statement 25 N/A
Financial Statements 24 8
</TABLE>
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the International Equity Portfolio (the
"Portfolio") of the Fund is described in the Portfolio's Prospectus. Shares
of the Portfolio are sold only to the separate accounts of Western Reserve
Life Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts")
to fund the benefits under certain variable life insurance policies (the
"Policies") and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Policies or of the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio having an investment objective or
policies different from that which a Policyholder deemed appropriate at the
time of investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act
of 1940, as amended (the "1940 Act") means the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares of the Portfolio are represented or (ii) more than 50% of the
outstanding shares of the Portfolio. A complete statement of all such
fundamental policies is set forth below.
The Portfolio may not, as a matter of fundamental policy:
1. (a) With respect to 75% of the Portfolio's assets, invest in the
securities (other than Government securities as defined in the 1940 Act) of
any one issuer if immediately thereafter, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; or (b) with
respect to 100% of the Portfolio's assets, own more than either (i) 10% in
principal amount of the outstanding debt securities of an issuer, or (ii) 10%
of the outstanding voting securities of an issuer, except that such
restrictions shall not apply to U.S. Government securities, bank money market
instruments or bank repurchase agreements;
2. Invest more than 25% of the Portfolio's assets in the securities of
issuers primarily engaged in the same industry. Utilities will be divided
according to their services, for example, gas, gas transmission, electric and
telephone each will be considered a separate industry for purposes of this
restriction, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or of certificates of deposit and bankers' acceptances;
3. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts or from investing in securities or other instruments backed
by physical commodities);
4. Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged
in those businesses;
5. Lend any security or make any other loan if, as a result, more than 25%
of its total assets would be lent to other parties (but this limitation does
not apply to purchases of commercial paper, debt securities or to repurchase
agreements); and
6. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of its portfolio securities.
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Policyholder approval:
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<PAGE>
(A) The Portfolio's investment in warrants valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net assets,
may be warrants that are not listed on the New York or American Stock
Exchange. Warrants acquired by the Portfolio in units or attached to
securities shall be deemed to be without value;
(B) The Portfolio may not (i) enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions
within the meaning of Commodity Futures Trading Commission regulations if the
aggregate initial margin deposits and premiums required to establish
positions in futures contracts and related options that do not fall within
the definition of bona fide hedging transactions would exceed 5% of the fair
market value of the Portfolio's net assets, after taking into account
unrealized profits and losses on such contracts it has entered into and (ii)
enter into any futures contracts or options on futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions and options on futures contracts would exceed the market
value of its total assets;
(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities
sold short and provided that transactions in options, swaps and forward
futures contracts are not deemed to constitute selling securities short;
(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the
clearance of transactions, provided that margin payments and other deposits
in connection with transactions in options, futures, swaps and forward
contracts shall not be deemed to constitute purchasing securities on margin;
(E) The Portfolio may not own any security issued by any other investment
company if immediately after such purchase or acquisition it owns in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
other investment company; (ii) securities issued by the other investment
company having an aggregate value in excess of 5% of the value of the total
assets of the Portfolio; or (iii) securities issued by the other investment
company and all other investment companies (other than treasury stock of the
Portfolio) having an aggregate value of 10% of the total assets of the
Portfolio;
(F) The Portfolio may not mortgage or pledge any securities owned or held
by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net assets, provided that this limitation does not apply to
reverse purchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or the
segregation of assets in connection with such contracts;
(G) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(H) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging or investment) in an amount not exceeding 25% of
the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings). Any borrowings that exceed 25% of
the value of the Portfolio's total assets by reason of a decline in net
assets will be reduced within three business days to the extent necessary to
comply with the 25% limitation. This policy shall not prohibit reverse
repurchase agreements or deposits of assets to margin or guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets
in connection with such contracts;
(i) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. This does not include securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 or any other
securities as to which the Board of Directors has made a determination as to
liquidity, as permitted under the 1940 Act;
(J) The Portfolio may not invest in companies for the purpose of
exercising control or management; and
2
<PAGE>
(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
Except with respect to borrowing money, if a percentage limitation set
forth above is complied with at the time of the investment, a subsequent
change in the percentage resulting from any change in value or of a
Portfolio's net assets will not result in a violation of such restriction.
State laws and regulations may impose additional limitations on borrowing,
lending, and the use of options, futures, and other derivative instruments.
In addition, such laws and regulations may require the Portfolio's
investments in foreign securities to meet additional diversification and
other requirements.
LENDING OF PORTFOLIO SECURITIES
Subject to Investment Restriction 5, above, the Portfolio from time to
time may lend securities from its portfolio to brokers, dealers and financial
institutions and receive as collateral cash or U.S. Treasury securities which
at all times while the loan is outstanding will be maintained in amounts
equal to at least 100% of the current market value of the loaned securities.
Any cash collateral will be invested in short-term securities, which will
likely increase the current income of the Portfolio. Such loans, which may
not have terms longer than 30 days, will be terminable at any time. The
Portfolio may also pay reasonable fees to persons unaffiliated with the
Portfolio for services in arranging such loans.
BORROWING
The Portfolio may borrow money from or lend money to other funds that
permit such transactions and are also advised by the Adviser or Sub-Adviser
if the Portfolio seeks and obtains permission to do so from the Securities
and Exchange Commission ("SEC"). There is no assurance that such permission
would be granted. The Portfolio may also borrow money only for temporary or
emergency purposes (not for leveraging or investment). Any such loans or
borrowings are expected to be short- term in nature and used for temporary or
emergency purposes, such as to provide cash for redemptions, and will not
exceed 25% of the Portfolio's net assets, including the amount borrowed, at
the time the loan or borrowing is made.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio has the right to
purchase securities in any foreign country, developed or underdeveloped.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in domestic issuers. These considerations include changes in
currency rates, currency exchange control regulations, the possibility of
expropriation, the unavailability of financial information or the difficulty
of interpreting financial information prepared under foreign accounting
standards, less liquidity and more volatility in foreign securities markets,
the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available.
In such event, these securities shall be valued at fair market value as
determined in good faith by the Sub-Adviser under the supervision of the
Fund's Board of Directors. If it should become necessary, the Portfolio could
encounter greater difficulties in invoking legal processes abroad than would
be the case in the United States. Transaction costs with respect to foreign
securities may be higher. The Investment Adviser and the Sub-Adviser will
consider these and other factors before investing in foreign securities. The
Portfolio will not concentrate its investments in any particular foreign
country. For a more detailed explanation regarding the special risks of
investing in foreign securities, see "Foreign Investments, Related Derivative
Instruments, and Special Risks" in the Prospectus.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the
Portfolio may be required to complete a currency exchange transaction at a
time outside of normal business hours in the counterparty's location, making
prompt settlement of such transaction impossible. This exposes the Portfolio
to an increased risk that the counterparty will be unable to settle
3
<PAGE>
the transaction. Although the counterparty in such transactions is often a
bank or other financial institution, currency transactions are generally not
covered by insurance otherwise applicable to such institutions.
FOREIGN CURRENCY FUTURES
The Portfolio has the authority to deal in forward foreign exchange
between currencies of the different countries in which the Portfolio will
invest as a hedge against possible variations in the foreign exchange rate
between these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date and price
set at the time of the contract. The Portfolio's dealings in forward foreign
exchange will be limited to hedging involving either specific transactions or
portfolio positions or anticipated transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Portfolio arising from the
purchase and sale of portfolio securities, the sale and redemption of shares
of the Portfolio, or the payment of dividends and distributions by the
Portfolio. Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated or quoted in such foreign
currency. The Portfolio will not speculate in forward foreign exchange. For a
more detailed explanation regarding futures, see "Investments in Futures,
Options and Other Derivative Instruments" below.
INVESTMENT FUNDS
The Portfolio may invest in investment funds which have been authorized by
the governments of certain countries specifically to permit foreign
investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Portfolio invests in such
investment funds, the Portfolio's shareholders will bear not only their
proportionate share of the expenses of the Portfolio (including operating
expenses and the fees of the investment adviser), but also will bear
indirectly similar expenses of the underlying investment funds. In addition,
the securities of these investment funds may trade at a premium over their
net asset value.
WARRANTS
Warrants are, in effect, longer-term call options. They give the holder
the right to purchase a given number of shares of a particular company at
specified prices within certain periods of time. The purchaser of a warrant
expects that the market price of the security will exceed the purchase price
of the warrant plus the exercise price of the warrant, thus giving him a
profit. Of course, because the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than exercised.
Warrants are sometimes sold in unit form with other securities of an issuer.
Units of warrants and common stock may be employed in financing young
unseasoned companies. The purchase price of a warrant varies with the
exercise price of the warrant, the current market value of the underlying
security, the life of the warrant and various other investment factors. No
more than 5% of the total assets of the Portfolio at the time of purchase
will be invested in warrants.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. As discussed in the section of the Portfolio's
Prospectus entitled "Financial Futures Contracts," the Portfolio may enter
into futures contracts, which are contracts for the purchase or sale for
future delivery of fixed-income securities, foreign currencies or contracts
based on financial indices of U.S. Government or foreign government
securities or equity or fixed-income securities. U.S. futures contracts are
traded on exchanges that have been designated "contract markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant ("FCM"), or brokerage firm, which is a member of
the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing
members of the exchange. Because all transactions in the futures market are
4
<PAGE>
made through a member of, and are offset or fulfilled through a clearinghouse
associated with, the exchange on which the contracts are traded, the
Portfolio will incur brokerage fees when it buys or sells futures contract.
When the Portfolio buys or sells a futures contract, it incurs a
contractual obligation to receive or deliver the underlying instrument (or a
cash payment based on the difference between the underlying instrument's
closing price and the price at which the contract was entered into) at a
specified price on a specified date. Transactions in futures contracts will
not be made for speculation and will not be made other than to seek to hedge
against potential changes in interest or currency exchange rates or the price
of a security or a securities index which might correlate with or otherwise
adversely affect either the value of the Portfolio's securities or the prices
of securities which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or
pay for the underlying instrument unless the contract is held until the
delivery date. However, both the buyer and seller are required to deposit
"initial margin" for the benefit of a FCM when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value, as
set by the exchange on which the contract is traded, and may be maintained in
cash or certain high-grade liquid assets. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments with a FCM to settle the change in value on a daily basis.
The party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments are similar to good faith
deposits or performance bonds, unlike margin extended by a securities broker,
and initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Portfolio's investment limitations.
In the event of the bankruptcy of a FCM that holds margin on behalf of the
Portfolio, the Portfolio may be entitled to return of margin owed to the
Portfolio only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser will attempt to minimize the risk by careful
monitoring of the creditworthiness of the FCM's with which the Portfolio does
business and by depositing margin payments in a segregated account with the
custodian when practical or otherwise required by law.
Although the Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost
of foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
the Portfolio holds or is considering purchasing equity securities and seeks
to protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
might sell equity index futures contracts, thereby hoping to offset a
potential decline in the value of equity securities in the Portfolio by a
corresponding increase in the value of the futures contract position held by
the Portfolio and thereby preventing the Portfolio's net asset value from
declining as much as it otherwise would have. The Portfolio also could seek
to protect against potential price declines by selling portfolio securities
and investing in money market instruments. However, since the futures market
is more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility
of having to buy equity securities at higher prices. This technique is
sometimes known as an anticipatory hedge. Because the fluctuations in the
value of futures contracts should be similar to those of equity securities,
the Portfolio could take advantage of the potential rise in the value of
equity securities without buying them until the market has stabilized. At
that time, the futures contracts could be liquidated and the Portfolio could
buy equity securities on the cash market. To the extent the Portfolio enters
into futures contracts for this purpose, the assets in the
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<PAGE>
segregated asset account maintained to cover the Portfolio's obligations with
respect to futures contracts will consist of high-grade liquid assets from
its portfolio in an amount equal to the difference between the contract price
and the aggregate value of the initial and variation margin payments made by
the Portfolio with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial margin
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close out futures contracts through
offsetting transactions which could distort the normal price relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make or
take delivery, liquidity in the futures market could be reduced and prices in
the futures market distorted. Third, from the point of view of speculators,
the margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of the foregoing distortions, a correct
forecast of general price trends by the Sub-Adviser still may not result in a
successful use of futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use
of such contracts can benefit the Portfolio, if the Sub-Adviser's investment
judgment is incorrect, the Portfolio's overall performance could be worse
than if the Portfolio had not entered into futures contracts. For example, if
the Portfolio has attempted to hedge against the effects of a possible
decrease in prices of securities held by the Portfolio and prices increase
instead, the Portfolio may lose part or all of the benefit of the increased
value of these securities because of offsetting losses in the Portfolio's
futures positions. In addition, if the Portfolio has insufficient cash, it
may have to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may, but will not necessarily, be at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to the Portfolio will not match exactly the Portfolio's current or
potential investments. The Portfolio may buy and sell futures contracts based
on underlying instruments with different characteristics from the securities
in which it typically invests -- for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities -- which involves a risk that the futures position will not
correlate precisely with the performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with the
Portfolio's investments. Futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of
the underlying instruments, and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from futures
prices. Imperfect correlations between the Portfolio's investments and its
futures positions may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in
how futures and securities are traded, and from imposition of daily price
fluctuation limits for futures contracts. The Portfolio may buy or sell
futures contracts with a greater or lesser value than the securities it
wishes to hedge or is considering purchasing in order to attempt to
compensate for differences in historical volatility between the futures
contract and the securities, although this may not be successful in all
cases. If price changes in the Portfolio's futures positions are poorly
correlated with its other investments, its futures positions may fail to
produce desired gains or result in losses that are not offset by the gains in
the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of three days for some
types of securities, the futures markets can
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provide superior liquidity to the securities markets. Nevertheless, there is
no assurance a liquid secondary market will exist for any particular futures
contract at any particular time. In addition, futures exchanges may establish
daily price fluctuation limits for futures contracts and may halt trading if
a contract's price moves upward or downward more than the limit in a given
day. On volatile trading days when the price fluctuation limit is reached, it
may be impossible for the Portfolio to enter into new positions or close out
existing positions. If the secondary market for a futures contract is not
liquid because of price fluctuation limits or otherwise, the Portfolio may
not be able to promptly liquidate unfavorable positions and potentially be
required to continue to hold a futures position until the delivery date,
regardless of changes in its value. As a result, the Portfolio's access to
other assets held to cover its futures positions also could be impaired.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the
value of the underlying commodities, in most cases the contractual obligation
is offset before the delivery date of the contract by buying, in the case of
a contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
The Portfolio intends to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
CFTC and the National Futures Association, which regulate trading in the
futures markets. Such guidelines presently require that to the extent that
the Portfolio enters into futures contracts or options on a futures position
that are not for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums on these positions (excluding the
amount by which options are "in-the-money") may not exceed 5% of the
Portfolio's net assets.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a
futures contract at specified price on or before a specified date. The
purchase and writing of options on futures contracts is similar in some
respects to the purchase and writing of options on individual securities. See
"Options on Securities", p. 10. Transactions in options on futures contracts
will not be made for speculation and will not be made other than to attempt
to hedge against potential changes in interest rates, or currency exchange
rates, or the price of a security or a securities index which might correlate
with, or otherwise adversely affect, either the value of the Portfolio's
securities or the prices of securities which the Portfolio is considering
buying at a later date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is
not fully invested it may buy a call option on a futures contract to attempt
to hedge against a market advance.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at the expiration of the option is below the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings. The writing of a put option on a futures contract may
constitute a partial hedge against increasing prices of the security or
foreign currency which is deliverable under, or of the index comprising, the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio is considering buying. If a call or
put option a Portfolio has written is exercised, the Portfolio will incur
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between change in the value of its
portfolio securities and changes in the value of the futures positions, the
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
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The purchase of a put option on a futures contract is similar in some
respect to the purchase of protective put options on portfolio securities.
For example, the Portfolio may buy a put option on a futures contract to
attempt to hedge the Portfolio's securities against the risk of falling
prices.
The amount of risk the Portfolio assumes when it buys an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the options
bought.
Forward Contracts. The Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the
U.S. dollar and other currencies. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed
price (which may be in U.S. dollars or a foreign currency) at a future date
which is individually negotiated between currency traders and their
customers. The Portfolio may invest in forward currency contracts with stated
contract values of up to the value of the Portfolio's assets.
The Portfolio may exchange foreign currencies for U.S. dollars and for
other foreign currencies in the normal course of business and may buy and
sell currencies through forward currency contracts in order to fix a price
for securities it has agreed to buy or sell. The Portfolio may enter into a
forward currency contract, for example, when it enters into a contract to buy
or sell a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in
which portfolio securities are denominated may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward currency
contract to sell an amount of that foreign currency (or a proxy currency
whose performance is expected to replicate the performance of that currency)
for U.S. dollars approximating the value of some or all of the portfolio
securities denominated in that currency (not exceeding the value of the
Portfolio's assets denominated in that currency) or by participating in
options or futures contracts with respect to the currency. When the
Sub-Adviser believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, the Portfolio may enter into a forward currency
contract to buy that foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge seeks to minimize the effect of
currency appreciation as well as depreciation, but does not protect against a
decline in the security's value relative to other securities denominated in
the foreign currency.
The Portfolio also may enter into a forward currency contract with respect
to a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge")
in an effort to hedge currency-related risk or against market movements.
In any of the above circumstances the Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, the
Portfolio could enter into a contract to sell that currency or a proxy
currency (up to the value of the Portfolio's assets denominated in that
currency) in exchange for another currency that the Sub-Adviser expects to
remain stable or to appreciate relative to the U.S. dollar. Shifting the
Portfolio's currency exposure from one foreign 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 to the Portfolio if
the Sub-Adviser's projection of future exchange rates is inaccurate.
The Portfolio also may enter into forward contracts to buy or sell at a
later date instruments in which a Portfolio may invest directly or on
financial indices based on those instruments. The market for those types of
forward contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
Forward contracts are currently considered illiquid. Accordingly, the
Fund's custodian will place cash or high-grade liquid assets in a segregated
account of the Portfolio having a value equal to the
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aggregate amount of the Portfolio's commitments under forward contracts
entered into with respect to position hedges and cross-hedges. If the value
of the securities placed in the segregated account declines, additional cash
or high-grade liquid assets will be placed in the account on a daily basis so
that the value of the account will be equal to the amount of the Portfolio's
commitments with respect to such contracts. As an alternative to maintaining
all or part of the segregated account, the Portfolio may buy call options
permitting the Portfolio to buy the amount of foreign currency subject to the
hedging transaction by a forward sale contract or the Portfolio may buy put
options permitting the Portfolio to sell the amount of foreign currency
subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event the Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unforeseen changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts
will not eliminate fluctuations in the underlying U.S. dollar equivalent
value of the proceeds or rates of return on the Portfolio's foreign currency
denominated portfolio securities.
The matching of the increase in value of a forward contract with the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedging transaction generally
will not be precise. In addition, the Portfolio may not always be able to
enter into forward contracts at attractive prices and accordingly may be
limited in its ability to use these contracts in seeking to hedge the
Portfolio's assets.
Also, with regard to the Portfolio's use of cross-hedging transactions,
there can be no assurance that historical correlations between the movement
of certain foreign currencies relative to the U.S. dollar will continue.
Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Portfolio's
cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are subject of the cross-
hedging transaction are denominated.
Options on Foreign Currencies. The Portfolio may buy put and call options
and may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in
the U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. 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 Portfolio
may buy put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount in U.S. dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to the
Portfolio's option position, the Portfolio could sustain losses on
transactions in foreign currency options which would require that the
Portfolio lose a portion or all of the benefits of advantageous changes in
those rates. In addition, in the case of other types of options, the benefit
to the Portfolio from purchases of foreign currency options will be reduced
by the amount of the premium and related transaction costs.
The Portfolio may write options on foreign currencies for the same types
of hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities
due to adverse fluctuations in exchange rates, the Portfolio could, instead
of purchasing a put option, write a call option on the relevant currency. If
the expected decline occurs, the
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option will most likely not be exercised and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to attempt to hedge against
a potential increase in the U.S. dollar cost of securities to be acquired,
the Portfolio could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow the
Portfolio to hedge the increased cost up to the amount of premium. 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
received, and only if exchange rates move in the expected direction. If that
does not occur, the option may be exercised and the Portfolio would be
required to buy 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, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is
equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written, and if the difference is
maintained by the Portfolio in cash or high-grade liquid assets in a
segregated account with the Fund's custodian.
The Portfolio may also write call options on foreign currencies for
cross-hedging purposes that may not be deemed to be covered. A call option on
a foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes
the option by maintaining, in a segregated account with the Fund's custodian,
cash or high-grade liquid assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The
Portfolio will effect such transactions only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
institutions) deemed creditworthy, and only pursuant to procedures adopted by
the Sub-Adviser for monitoring the creditworthiness of those entities. To the
extent that an option bought or written by the Portfolio in a negotiated
transaction is illiquid, the value of an option bought or the amount of the
Portfolio's obligations under an option written by the Portfolio, as the case
may be, will be subject to the Portfolio's limitation on illiquid
investments. In the case of illiquid options, it may not be possible for the
Portfolio to effect an offsetting transaction at the time when the
Sub-Adviser believes it would be advantageous for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, the Portfolio may write covered put and call options and may buy put
and call options and warrants on securities that are traded on United States
and foreign securities exchanges and over-the-counter. The Portfolio also may
write call options that are not covered for cross-hedging purposes. The
Portfolio may write and buy options on the same types of securities that the
Portfolio could buy directly and may buy options on financial indices as
described above with respect to futures contracts. There are no specific
limitations on the Portfolio's writing and buying options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option
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gives the holder the right, upon payment of a premium, to call upon the
writer to deliver a specified amount of a security on or before a fixed date
at a predetermined price.
A put option written by the Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with
a value equal to the exercise price in a segregated account with its
custodian, or (ii) holds a put on the same security and in the same principal
amount as the put written and the exercise price of the put held is equal to
or greater than the exercise price of the put written. The premium paid by
the buyer of an option will reflect, among other things, the relationship of
the exercise price to the market price and the volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates.
A call option written by the Portfolio is "covered" if the Portfolio owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and
in the same principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written, or (ii) is greater than the exercise price of the call written if
the difference is maintained by the Portfolio in cash and high-grade liquid
assets in a segregated account with its custodian.
The Portfolio collateralizes its obligation under a written call option
for cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. The
Portfolio would write a call option for cross-hedging purposes, instead of
writing a covered call option, when the premium to be received from the
cross-hedge transaction would exceed that which would be received from
writing a covered call option and the Sub-Adviser believes that writing the
option would achieve the desired hedge.
If a put or call option written by the Portfolio was exercised, the
Portfolio would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a decrease in the
market value of the underlying security, in which case the option could be
exercised and the underlying security would then be sold by the option holder
to the Portfolio at a higher price than its current market value. Writing a
call option involves the risk of an increase in the market value of the
underlying security; in which case the option could be exercised and the
underlying security would than be sold by the Portfolio to the option holder
at a lower price than its current market value. Those risks could be reduced
by entering into an offsetting transaction. The Portfolio retains the premium
received from writing a put or call option whether or not the option is
exercised.
The writer of an option may have no control when the underlying security
must be sold, in the case of a call option, or bought, in the case of a put
option, because with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount, of course, may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security.
The writer of an option who wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or
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both or, in the case of a written put option, will permit the Portfolio to
write another put option to the extent that the exercise price thereof is
secured by deposited high-grade liquid assets. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other portfolio investments.
If the Portfolio desires to sell a particular security on which the Portfolio
has written a call option, the Portfolio will effect a closing transaction
prior to or concurrent with the sale of the security.
The Portfolio may realize a profit from a closing transaction if the price
of the purchase transaction is less than the premium received from writing
the option, or the price received from a sale transaction is more than the
premium paid to buy the option; the Portfolio may realize a loss from a
closing transaction if the price of the purchase transaction is more than the
premium received from writing the option, or the price received from a sale
transaction is less than the premium paid to buy the option. Because
increases in the market of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing transactions in particular
options with the result that the Portfolio would have to exercise the options
in order to realize any profit. If the Portfolio is unable to effect a
closing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or the Portfolio
delivers the underlying security upon exercise. Reasons for the absence of a
liquid secondary market may include the following: (i) there may be
insufficient trading interest in certain options, (ii) restrictions may be
imposed by a national securities exchange on which the option is traded
("Exchange") on opening or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v)
the facilities of an Exchange or the Options Clearing Corporation ("OCC") may
not at all times be adequate to handle current trading volume, or (vi) one or
more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC
as a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may buy a security and then write a call
option against that security. The exercise price of the call the Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when
it is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and- write transactions
using at-the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance moderately
during the option period. Buy-and-write transactions using out-of-the-money
call options may be used when it is expected that the premiums received from
writing the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Portfolio's maximum gain will
be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Portfolio's purchase price of the
security and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and- write transactions. If the market price of the
underlying security rises or otherwise is above the exercise
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price, the put option will expire worthless and the Portfolio's gain will be
limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the Portfolio may
elect to close the position or take delivery of the security at the exercise
price and the Portfolio's return will be the premium received from the put
options minus the amount by which the market price of the security is below
the exercise price.
The Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, the Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
The Portfolio may buy call options to attempt to hedge against an increase
in the price of securities that the Portfolio may buy in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Portfolio.
In purchasing an option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option brought by the Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends
or voting rights with respect to the underlying securities, nor do they
represent any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to
protect the value of the Portfolio's investments from interest rate or
currency exchange rate fluctuations, the Portfolio may enter into interest
rate swaps, and may buy or sell interest rate caps and floors. The Portfolio
expects to enter into these transactions primarily to attempt to preserve a
return or spread on a particular investment or portion of its portfolio. The
Portfolio also may enter into these transactions to attempt to protect
against any increase in the price of securities the Portfolio may consider
buying at a later date. The Portfolio does not intend to use these
transactions as a speculative investment. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The exchange commitments can involve payments to be made
in the same currency or in different currencies. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter
instruments and their use involves risks specific to the markets in which
they are entered into. The Portfolio will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap
will be calculated on a daily basis and an amount of cash or high-grade
liquid assets having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If the Portfolio enters into an interest rate swap on other than a
net basis, the Portfolio would maintain a segregated account in the full
amount accrued on a daily basis of the Portfolio's obligations with respect
to the swap. The Portfolio will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying
ability of the other
13
<PAGE>
party thereto is rated in one of the three highest rating categories of at
least one nationally recognized statistical rating organization at the time
of entering into such transaction. The Sub-Adviser will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
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. The Sub-Adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent the Portfolio sells (i.e., writes) caps and
floors, it will maintain in a segregated account cash or high-grade liquid
assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Portfolio's obligations with respect to any
caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio; although the Portfolio does not
presently intend to engage in such transactions in excess of 5% of its total
assets. These transactions may in some instances involve the delivery of
securities or other underlying assets by the Portfolio or its counterparty to
collateralize obligations under the swap. Under the documentation currently
used in those markets, the risk of loss with respect to interest rate swaps
is limited to the net amount of the interest payments that the Portfolio is
contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Portfolio would risk the loss of the
net amount of the payments that the Portfolio contractually is entitled to
receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques, that become
available as the Sub-Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. The Sub-Adviser may use these
opportunities to the extent they are consistent with the Portfolio's
investment objective and are permitted by the Portfolio's respective
investment limitations and applicable regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts,
options on futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon skills and
experience which are different from those needed to select the other
instruments in which the Portfolio invests. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected
manner, the Portfolio may not achieve the desired benefits of futures,
options, swaps and forwards or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to options on currencies,
forward contracts and other negotiated or over-the-counter instruments, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. In addition, the correlation between movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to the Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability
of the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid
14
<PAGE>
adverse tax consequences. As a result, no assurance can be given that the
Portfolio will be able to use those instruments effectively for the purposes
set forth above.
In connection with certain of its hedging transactions, the Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be
disposed of for so long as the Portfolio maintains the positions giving rise
to the segregation requirement. Segregation of a large percentage of the
Portfolio's assets could impede implementation of the Portfolio's investment
policies or the Portfolio's ability to meet redemption requests or other
current obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception
of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation. Similarly,
options on currencies may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the buyer of an option
cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, an option writer and a
buyer or seller of futures or forward contracts could lose amounts
substantially in excess of any premium received or initial margin or
collateral posted due to the potential additional margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing
the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such options
must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. If the OCC
determines that foreign government restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or place undue
burdens on the OCC or its clearing member, they may impose special procedures
on exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices, or
prohibitions.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the- counter in
foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
15
<PAGE>
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) low
trading volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
PETER R. BROWN, DIRECTOR (DOB 5/10/28), 1475 South Belcher Road, Largo,
Florida 34641. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Rear Admiral
(Ret.) U.S. Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS, DIRECTOR (DOB 7/15/30), 35 Winston Drive, Clearwater,
Florida 34616. Retired (1988 - present); Senior Vice-President, Treasurer
(1966 - 1988), Western Reserve Life Assurance Co. of Ohio; Vice President,
Treasurer (1968 - 1988), Director (1968 -1987), Pioneer Western Corporation;
Vice President of the Fund (1986 - December, 1990).
RUSSELL A. KIMBALL, JR., DIRECTOR (DOB 8/17/44), 1160 Gulf Boulevard,
Clearwater, Florida 34630. General Manager, Sheraton Sand Key Resort (resort
hotel), Clearwater, Florida (1975 - present).
G. JOHN HURLEY (1, 2), EXECUTIVE VICE PRESIDENT AND DIRECTOR (DOB 9/12/48).
Executive Vice President (June, 1993 - present), Chief Operating Officer
(March, 1994 - present), Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September, 1990 - present), Trustee
(June, 1990 - present) and Executive Vice President (June, 1988 - September,
1990) of IDEX Fund, IDEX II Series Fund and IDEX Fund 3; President, Chief
Executive Officer and Director of InterSecurities, Inc. (May, 1988 -
present); Assistant Vice President of AEGON USA Managed Portfolios, Inc.
(September, 1991 - August, 1992); Vice President of Pioneer Western
Corporation (May, 1988 - February, 1991).
JOHN R. KENNEY (1, 2), CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (DOB
2/8/38). Chairman of the Board of Directors (1987 - present), Chief
Executive Officer (1982 - present), President, (1978 - 1987 and December,
1992 - present) Director (1978 -present), Western Reserve Life Assurance Co.
of Ohio; Chairman of the Board of Directors and Chief Executive Officer
(1988 to February, 1991), President (1988 - 1989), Director (1976 -
February, 1991), Executive Vice President (1972 - 1988), Pioneer Western
Corporation (financial services), Largo, Florida; President and Director
(1985 - September, 1990) and Director (December, 1990 - present); Idex
Management, Inc. (investment adviser), Largo, Florida; Trustee (1987 -
present), Chairman (December, 1989 - September, 1990 and November, 1990 -
present) and President and Chief Executive Officer (November, 1986 -
September, 1990), IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment
companies), all of Largo, Florida.
RICHARD B. FRANZ, II (1, 2), TREASURER (DOB 7/12/50). Senior Vice President
(1987 -present), Chief Financial Officer (1987 -December, 1995) and
Treasurer (1988 - present), Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 - February, 1991), Pioneer Western
Corporation (financial services), Largo, Florida; Treasurer (1988 -
September, 1990 and November, 1990 - present), IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies), all of Largo, Florida.
REBECCA A. FERRELL (1, 2), SECRETARY, VICE PRESIDENT AND COUNSEL (DOB
12/10/60). Assistant Vice President and Counsel (June, 1995 - present),
Attorney (August, 1993 - June, 1995), Western Reserve Life Assurance Co. of
Ohio; Secretary and Assistant Vice President (March, 1994 - September, 1995)
Secretary, Vice President and Counsel (September, 1995 - present) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3; Attorney (September, 1992 -
August, 1993), Hearne,
16
<PAGE>
Graziano, Nader & Buhr, P.A.; Legal Writing Instructor (August, 1991 - June,
1992), Florida State University College of Law; Teaching Assistant, English
(August, 1990 - July, 1991), University of South Florida.
ALAN M. YAEGER (1, 2), EXECUTIVE VICE PRESIDENT (DOB 10/21/46). Executive
Vice President (June, 1993 - present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 - June, 1993) and Actuary (1972
- present), Western Reserve Life Assurance Co. of Ohio.
- -----------------------------------------------------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 34618-5068.
(2) Interested person as defined in the 1940 Act and affiliated person of
the Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser
("disinterested Director"). Each such Director also receives $500, plus
expenses, per each regular and special Board meeting attended. Because the
Portfolio had not commenced operations as of December 31, 1995, the Portfolio
did not pay any Directors' fees for the fiscal year ended December 31, 1995.
The following table provides compensation amounts paid to disinterested
Directors of the Fund for the fiscal year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS FROM
WRL SERIES FUND, INC.,
IDEX FUND, IDEX II
AGGREGATE COMPENSATION SERIES FUND AND
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. IDEX FUND 3
- ----------------------------------- --------------------------- -----------------------
<S> <C> <C>
Peter R. Brown, Director .......... $9,500 $32,500
Charles C. Harris, Director ...... $9,500 $32,000
Russell A. Kimball, Jr., Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise
be payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to
a disinterested Director or Trustee on a current basis for services rendered
as director. Deferred compensation amounts will accumulate based on the value
of Class A shares of a portfolio of IDEX II Series Fund (without imposition
of sales charge), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, the Directors and officers of the Fund beneficially
owned in the aggregate less than 1% of the Fund's shares through ownership of
Policies and Annuity Contracts indirectly invested in the Fund. The Board of
Directors has established an Audit Committee consisting of Messrs. Brown,
Harris and Kimball.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about
the Investment Adviser under the caption "Management of the Fund - Investment
Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio (the "Investment Adviser")
serves as the investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement dated March 13, 1995 with the Fund. The Investment Adviser
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), a stock life insurance company which is wholly-owned by AEGON USA,
Inc. ("AEGON"). AEGON is a financial services holding company whose primary
emphasis is on life and health insurance and annuity and investment products.
AEGON is a wholly-owned indirect subsidiary of AEGON nv, a Netherlands
corporation, which is a publicly traded international insurance group.
The Investment Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) on
17
<PAGE>
March 6, 1995. The Investment Advisory Agreement provides that subsequent to
its approval by the Portfolio's initial shareholder, it will continue in
effect for an initial term ending April 22, 1997, and from year to year
thereafter if approved annually (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Portfolio, and (b) by a
majority of the Directors who are not parties to such contract or "interested
persons" of any such party. The Investment Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of its assignment (within the meaning of the 1940
Act).
While the Investment Adviser is at all times subject to the direction of
the Board of Directors of the Fund, the Investment Advisory Agreement
provides that the Investment Adviser, subject to review by the Board of
Directors, is responsible for the actual management of the Fund and has
responsibility for making decisions to buy, sell or hold any particular
security. The Investment Adviser also is obligated to provide all the office
space, facilities, equipment and personnel necessary to perform its duties
under the Agreement. For further information about the management of the
Portfolio, see "The Sub-Adviser", page 18.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. No fees have been paid to the Investment Adviser
by the Portfolio for the year ended December 31, 1995 because the Portfolio
had not commenced operations as of that date.
Payment of Expenses. Under the terms of the Investment Advisory Agreement,
the Investment Adviser is responsible for providing investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management
of the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Investment Adviser
also pays all expenses incurred in connection with the formation and
organization of the Portfolio, including all costs and expenses of preparing
and filing the post-effective amendment to the Fund's registration statement
effecting the registration of the Portfolio and its shares under the 1940 Act
and the Securities Act of 1933. The Portfolio pays all other expenses
incurred in its operation and all of the Portfolio's general administrative
expenses.
Expenses that are borne directly by the Portfolio include redemption
expenses, expenses of portfolio transactions, expenses in connection with
ongoing registration or qualification requirements under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the custodian, fees and expenses
of Fund directors who are not "interested persons" of the Fund, legal
expenses, state franchise taxes, cost of auditing services, costs of printing
proxies, SEC fees, advisory fees, certain insurance premiums, costs of
corporate meetings, costs of maintenance of corporate existence, investor
services (including allocable telephone and personnel expenses),
extraordinary expenses, and other expenses properly payable by the Portfolio.
Depending upon the nature of the lawsuit, litigation costs may be borne by
the Portfolio.
Expenses that relate exclusively to a particular portfolio of the Fund,
such as brokerage commissions, custodian fees, and registration fees for
shares, are paid by that portfolio. Other expenses are allocated to the
portfolios in an equitable manner determined by the Portfolio's Investment
Adviser.
The Investment Adviser has voluntarily undertaken, until at least April
30, 1997, to pay expenses on behalf of the Portfolio to the extent normal
operating expenses (including investment advisory fees but excluding
interest, taxes, brokerage fees, commissions and extraordinary charges)
exceed, as a percentage of the Portfolio's average daily net assets, 1.00%.
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund - The Sub-Adviser" in the
Prospectus.
18
<PAGE>
Scottish Equitable Investment Management Limited (the "Sub-Adviser")
serves as the Sub- Adviser for the Portfolio pursuant to a Sub-Advisory
Agreement dated March 13, 1995. The Sub- Advisory Agreement was approved by
the Board of Directors of the Fund, including a majority of the Directors who
were not "interested persons" of the Fund (as defined in the 1940 Act) on
March 6, 1995. The Sub-Advisory Agreement provides that it will continue in
effect for an initial term ending April 22, 1997 and will continue from year
to year thereafter, if approved annually (a) by the Board of Directors of the
Fund or by a majority of the outstanding shares of the Portfolio, and (b) by
a majority of the Directors who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Sub-Advisory Agreement may be terminated without penalty on 60 days' written
notice at the option of either party or by the vote of the shareholders of
the Portfolio and terminates automatically in the event of its assignment
(within the meaning of the 1940 Act) or termination of the Investment
Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides
investment advisory assistance and portfolio management advice to the
Investment Adviser with respect to the Portfolio. Subject to review by the
Investment Adviser and the Board of Directors of the Fund, the Sub-Adviser is
responsible for the actual management of the Portfolio and for making
decisions to buy, sell or hold any particular security. The Sub-Adviser
provides the portfolio managers for the Portfolio. The Sub- Adviser bears all
of its expenses in connection with the performance of its services under the
Sub- Advisory Agreement, such as compensating and furnishing office space for
its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio. The method of computing
the Sub-Adviser's fee is set forth in the Prospectus. Because the Portfolio
had not commenced operations as of December 31, 1995, there were no
sub-advisory fees paid for the fiscal year ended December 31, 1995.
The Sub-Adviser is located at Edinburgh Park, Edinburgh EH12 9SE. The
Sub-Adviser is a wholly- owned subsidiary of Scottish Equitable plc
(formerly, Scottish Equitable Life Assurance Society). The Sub-Adviser is
also an indirect wholly-owned subsidiary of AEGON nv. As of December 31, 1995
the Sub-Adviser had approximately $15.9 billion in assets under management.
The Sub-Adviser provides investment management services to certain of its
affiliates and to external organizations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The International Equity Portfolio and
The Fund -Portfolio Turnover" in the Prospectus. In computing the portfolio
turnover rate for the Portfolio, securities whose maturities or expiration
dates at the time of acquisition are one year or less are excluded. Subject
to this exclusion, the turnover rate for the Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of portfolio securities owned by the
Portfolio during the fiscal year. The Portfolio's annual portfolio turnover
rate is expected to exceed 100%, but is not expected to exceed 200%.
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under
constantly changing economic conditions and market circumstances. Higher
turnover rates tend to result in higher brokerage fees. Securities initially
satisfying the basic objective and policies of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Sub-Adviser is primarily responsible for placement of the Portfolio's
securities transactions. In placing orders, it is the policy of the Portfolio
to obtain the most favorable net results, taking into account various
factors, including price, dealer spread or commissions, if any, size of the
transaction and difficulty of execution. While the Sub-Adviser generally will
seek reasonably competitive spreads or commissions, the Portfolio will not
19
<PAGE>
necessarily be paying the lowest spread or commission available. The
Portfolio does not have any obligation to deal with any broker, dealer or
group of brokers or dealers in the execution of transactions in portfolio
securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the
Sub-Adviser, whose policy is to obtain "best execution" (prompt and reliable
execution at the most favorable security price) of all portfolio
transactions. In placing portfolio transactions, the Sub-Adviser may give
consideration to brokers who provide supplemental investment research, in
addition to such research obtained for a flat fee, to the Sub-Adviser, and
pay spreads or commissions to such brokers or dealers furnishing such
services which are in excess of spreads or commissions which another broker
or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the broker's reliability; the quality of its
execution services on a continuing basis; the financial condition of the
firm; and research products and services provided, which include: (i)
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities and (ii) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends and portfolio strategy
and products and other services (such as third party publications, reports
and analyses, and computer and electronic access, equipment, software,
information and accessories) that assist the Sub-Adviser in carrying out its
responsibilities. Supplemental research obtained through brokers or dealers
will be in addition to and not in lieu of the services required to be
performed by the Sub-Adviser. The expenses of the Sub-Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. The Sub-Adviser may use such research products and services in
servicing other accounts in addition to the Portfolio. If the Sub-Adviser
determines that any research product or service has a mixed use, such that it
also serves functions that do not assist in the investment decision-making
process, the Sub-Adviser will allocate the costs of such service or product
accordingly. The portion of the product or service that a Sub-Adviser
determines will assist it in the investment decision-making process may be
paid for in brokerage commission dollars. Such allocation may create a
conflict of interest for the Sub-Adviser. Conversely, such supplemental
information obtained by the placement of business for the Sub-Adviser will be
considered by and may be useful to the Sub-Adviser in carrying out its
obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker.
Securities held by the Portfolio may also be held by other separate
accounts, mutual funds or other accounts for which the Investment Adviser or
Sub-Adviser serves as an adviser, or held by the Investment Adviser or
Sub-Adviser for their own accounts. Because of different investment
objectives or other factors, a particular security may be bought by the
Investment Adviser or Sub-Adviser for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Portfolio or other entities for which they act as investment adviser
or for their advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective entities and clients in a manner deemed equitable to all. To
the extent that transactions on behalf of more than one client of the
Investment Adviser or Sub-Adviser during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio
as well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
20
<PAGE>
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and
reviews the prices and commissions, if any, paid by the Portfolio to
determine if they were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to
consider sales of the Policies and Annuity Contracts by a broker-dealer as a
factor in the selection of broker-dealers to execute Portfolio transactions.
As stated above, any such placement of portfolio business will be subject to
the ability of the broker-dealer to provide best execution and to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are currently sold only to the Separate Accounts
to fund the benefits under the Policies and the Annuity Contracts. The
Portfolio may, in the future, offer its shares to other insurance company
separate accounts. The Separate Accounts invest in shares of the Portfolio in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts. Such allocation rights are further
described in the prospectuses and disclosure documents for the Policies and
the Annuity Contracts. Shares of the Portfolio are sold and redeemed at their
respective net asset values as described in the Prospectus.
NET ASSET VALUATION
The Portfolio calculates net asset value per share, and therefore effects
sales and redemptions of its shares, as of the close of the New York Stock
Exchange (the "Exchange") once on each day on which that Exchange is open.
Such calculation does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in such calculation
and if events occur which materially affect the value of these foreign
securities, they will be valued at fair market value as in good faith by the
Investment Adviser and the Sub-Adviser under the supervision of the Fund's
Board of Directors.
The value of a foreign security held by the Portfolio is determined in its
national currency as of the close of trading on the foreign exchange on which
it is traded, or as of 4:00 p.m., New York time, if that is earlier, and that
value is then converted into its U.S. dollar equivalent at foreign exchange
rates in effect at the close of the regular session of business on the
Exchange on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the current bid and asked
price is used. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of the New York Stock Exchange, and will
therefore not be reflected in the computation of the Portfolio's net asset
value. Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the New York Stock Exchange is
open. Trading in European or Far Eastern securities generally, or in a
particular country or countries, may not take place on every New York
business day. Furthermore, trading takes place 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 calculated.
Any other securities for which market quotations are not readily available
will be valued at their fair value as determined in good faith by the
Investment Adviser and the Sub-Adviser under the supervision of the Fund's
Board of Directors.
The net asset value of Portfolio shares is ordinarily determined, once
daily, as of the close of the regular session of business on the New York
Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time) on each day the
Exchange is open. (Currently the Exchange is closed on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day
21
<PAGE>
and Christmas Day.) The per share net asset value of the Portfolio is
determined by dividing the total value of the securities and other assets,
less liabilities, by the total number of shares outstanding.
In determining asset value, securities listed on the national securities
exchanges and traded on the NASDAQ National Market are valued at the closing
prices on such markets, or if such a price is lacking for the trading period
immediately preceding the time of determination, such securities are valued
at their current bid price. Other securities which are traded on the
over-the-counter market are valued at bid price. Money market instruments
maturing in 60 days or less are valued on the amortized cost basis.
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is
calculated.
TOTAL RETURN
Total return quotations are computed by finding the average annual
compounded rates of return over the relevant periods that would equate the
initial amount invested to the ending redeemable value, according to the
following equation:
P (1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value (at the end of the applicable
period of a hypothetical $1,000 payment made at the
beginning of the applicable period).
The total return quotation calculations reflect the deduction of a
proportionate share of the Portfolio's investment advisory fee and Portfolio
expenses and assume that all dividends and capital gains during the period
are reinvested in the Portfolio when made. The calculations also assume a
complete redemption as of the end of the particular period.
Total return quotation calculations do not reflect charges or deductions
against the Series Life Account or the Series Annuity Account or charges and
deductions against the Policies or the Annuity Contracts. Accordingly, these
rates of return do not illustrate how actual investment performance will
affect benefits under the Policies or the Annuity Contracts. Where relevant,
the prospectuses for the Policies and the Annuity Contracts contain
performance information about these products. Moreover, these rates of return
are not an estimate, projection or guarantee of future performance.
Additional Information regarding the investment performance of the
Portfolio appears in the Prospectus.
YIELD QUOTATIONS
The yield quotations for the Portfolio are based on a specific thirty-day
period and are computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
date of the period, according to the following formula:
a-b
YIELD = 2 [ ( --- + 1)(6)- 1]
cd
Where: a = dividends and interest earned during the period by the
Portfolio.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Because the Portfolio had not commenced operations as of December 31,
1995, no quotations of standardized or non-standardized performance
information are available.
TAXES
Shares of the Portfolio are offered only to the Separate Accounts that
fund the Policies and Annuity Contracts. See the respective prospectuses for
the Policies and Annuity Contracts for a
22
<PAGE>
discussion of the special taxation of insurance companies with respect to the
Separate Accounts and of the Policies, the Annuity Contracts and the holders
thereof.
The Portfolio intends to qualify and expects to continue to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify for that treatment, the
Portfolio must distribute to its Policyholders for each taxable year at least
90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain, and net gains from certain
foreign currency transactions) ("Distribution Requirement") and must meet
several additional requirements. These requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of securities or foreign currencies,
or other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or those
currencies ("Income Requirement"); (2) the Portfolio must derive less than
30% of its gross income each taxable year from the sale or other disposition
of securities, or any of the following, that were held for less than three
months - options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business
of investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the
Portfolio's taxable year, at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. Government securities, securities
of other RICs, and other securities that, with respect to any one issuer, do
not exceed 5% of the value of the Portfolio's total assets and that do not
represent more than 10% of the outstanding voting securities of the issuer;
and (4) at the close of each quarter of the Portfolio's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of
any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply
with the diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain limitations
on the proportion of the Portfolio's assets that may be represented by any
single investment (which includes all securities of the same issuer). For
purposes of section 817(h), all securities of the same issuer, all interests
in the same real property project, and all interests in the same commodity
are treated as a single investment. In addition, each U.S. Government agency
or instrumentality is treated as a separate issuer, while the securities of a
particular foreign government and its agencies, instrumentalities and
political subdivisions all will be considered securities issued by the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectuses for the
Policies or the Annuity Contracts.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only
shareholders are segregated asset accounts of life insurance companies held
in connection with variable annuity contracts and/or variable life insurance
policies.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures, and forward contracts derived by the
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not
23
<PAGE>
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.
If the Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging
position during the period of the hedge for purposes of determining whether
the Portfolio satisfies the Short-Short Limitation. Thus, only the net gain
(if any) from the designated hedge will be included in gross income for
purposes of that Limitation. The Portfolio will consider whether it should
seek to qualify for this treatment for its hedging transactions. To the
extent the Portfolio does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the
time when it otherwise would be advantageous to do so, in order for the
Portfolio to qualify as a RIC.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, the
Portfolio will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition
of that stock (collectively "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net
short-term capital loss), even if they are not distributed to the Portfolio;
those amounts would be subject to the Distribution Requirement. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolio's activities, and this discussion and
the discussion in the prospectuses and/or statements of additional
information for the Policies and Annuity Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable to the
Policies, Annuity Contracts and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio. The Fund is currently comprised of the following
portfolios: Money Market Portfolio; Bond Portfolio; Growth Portfolio; Global
Portfolio; Short-to-Intermediate Government Portfolio; Emerging Growth
Portfolio; Equity-Income Portfolio; Balanced Portfolio; Utility Portfolio;
Aggressive Growth Portfolio; Tactical Asset Allocation Portfolio; C.A.S.E.
Quality Growth Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Growth
Portfolio; Janus Balanced Portfolio; Leisure Portfolio; International Equity
Portfolio; Value Equity Portfolio; Meridian/INVESCO Global Sector Portfolio;
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio.
24
<PAGE>
REGISTRATION STATEMENT
There has been filed with the Securities and Exchange Commission,
Washington, D.C. a Registration Statement under the Securities Act of 1933,
as amended, with respect to the securities to which this Statement of
Additional Information relates. If further information is desired with
respect to the Portfolio or such securities, reference is made to the
Registration Statement and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
No financial statements for the Portfolio are available for the year ended
Decembr 31, 1995, because the Portfolio had not commenced operations as of
that date.
25
<PAGE>
<PAGE> 1
WRL SERIES FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of the WRL Series Fund, Inc.
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Money Market, Bond, Growth,
Short-To-Intermediate Government, Global, Equity-Income, Emerging Growth,
Aggressive Growth, Balanced, Utility, and Tactical Asset Allocation Portfolios
(eleven of the portfolios constituting the WRL Series Fund, Inc., hereafter
referred to as the "Portfolios") at December 31, 1995, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolios' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1996
- --------------------------------------------------------------------------------
2
<PAGE> 2
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
CORPORATE OBLIGATIONS (99.93%)
AUTOMOTIVE (5.83%)
Ford Motor Co.
5.75%, due 01/02/96............. $ 1,200,000 $ 1,199,425
General Motors Acceptance Corp.
5.71%, due 01/08/96............. 3,500,000 3,495,004
BANKING (4.33%)
Dresdner U.S. Finance, Inc.
5.78%, due 01/17/96............. 3,500,000 3,489,885
BEVERAGES (9.90%)
Coca-Cola Enterprises
5.70%, due 01/05/96............. 4,000,000 3,996,200
PepsiCo, Inc.
5.58%, due 02/09/96............. 4,000,000 3,974,580
COMPUTER TECHNOLOGY (4.32%)
CSC Enterprises
5.75%, due 01/31/96............. 3,500,000 3,482,111
ELECTRONICS (4.32%)
General Electric Capital
Corporation
5.67%, due 02/02/96............. 3,500,000 3,481,258
FINANCE (30.91%)
American Express Co.
5.50%, due 02/23/96............. 4,000,000 3,966,389
AVCO Financial
5.65%, due 01/30/96............. 3,500,000 3,482,972
Cargill Financial Services Corp.
5.71%, due 01/09/96............. 3,000,000 2,995,242
Countrywide Credit Industries,
Inc.
5.67%, due 02/02/96............. 4,000,000 3,978,580
Dean Witter Discover & Company
5.70%, due 01/26/96............. 3,000,000 2,987,175
Household International, Inc.
5.82%, due 01/10/96............. 3,500,000 3,493,776
Merrill Lynch & Co., Inc.
5.75%, due 01/12/96............. 4,000,000 3,991,694
HOUSEHOLD PRODUCTS (4.30%)
Proctor & Gamble Company
5.57%, due 03/07/96............. 3,500,000 3,463,176
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
CORPORATE OBLIGATIONS (CONTINUED)
INSURANCE (8.66%)
Prudential Funding Corp.
5.80%, due 01/17/96............. $ 3,500,000 $ 3,489,850
USAA Capital Corporation
5.69%, due 01/19/96............. 3,500,000 3,488,936
MACHINERY (4.95%)
John Deere Capital Corporation
5.73%, due 01/18/96............. 4,000,000 3,987,903
OIL & GAS (8.80%)
Chevron Oil Finance Co.
5.55%, due 01/16/96............. 3,600,000 3,590,565
Texaco, Inc.
5.68%, due 01/11/96............. 3,500,000 3,493,373
TELECOMMUNICATIONS (13.61%)
A T & T Capital Corporation
5.68%, due 01/22/96............. 3,500,000 3,487,299
A T & T Capital Corporation
5.60%, due 01/22/96............. 500,000 498,211
Bell Atlantic Corp.
5.80%, due 01/19/96............. 3,500,000 3,488,722
US West Communications Group
5.75%, due 01/26/96............. 3,500,000 3,484,906
------------
Total Corporate Obligations
(cost: $ 80,487,232)............ 80,487,232
------------
Total Investment Securities
(cost: $ 80,487,232)............ $ 80,487,232
=============
SUMMARY
Investments at value.............. 99.93% $ 80,487,232
Other Assets in
Excess of Liabilities........... 0.07% 56,440
------- ------------
Net Assets........................ 100.00% $ 80,543,672
------- ------------
------- ------------
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
3
<PAGE> 3
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
Automotive 5.83%
Banking 4.33%
Beverages 9.90%
Computer Technology 4.32%
Electronics 4.32%
Finance 30.91%
Household Products 4.30%
Insurance 8.66%
Machinery 4.95%
Oil & Gas 8.80%
Telecommunications 13.61%
Other 0.07%
Slower economic growth and low inflation allowed interest rates to fall in 1995,
and the bond market rallied. The year ended with the 30-year U.S. Treasury bond
yielding 5.96%, down from 7.87% on January 2, 1995, and the one-year U.S.
Treasury Bill at 5.13%, down from 7.16%. Yields on the Money Market Portfolio
followed a similar path. At this period's end, December 31, 1995, net yield for
the Portfolio was 5.4%.
The crosscurrents of economic activity and inflation expectations kept the
markets guessing as to which way, and by how much, the Federal Reserve Board
(Fed) would cause interest rates to move. The suspense ended on December 19,
1995, when the Fed lowered its key rates by a quarter of a percentage point. Now
the questions are whether and when rates will go down again.
Other current thinking is that the economy is showing enough signs of weakness
to justify another Fed action to lower interest rates. We would like to buy
one-year securities now, thinking that if we wait, we will have to invest at
lower rates. There have been some barriers to executing that strategy, however.
Companies have been reluctant to issue one-year debt, thinking they will soon be
able to do so at a lower rate. Also, overnight rates are currently higher than
one-year rates (an inverted yield curve). So we must be very selective when
buying long-term securities to avoid giving up too much yield. Another barrier
is a need for near-total liquidity in the Portfolio, since investors are free to
withdraw or exchange at any time.
Our strategy is to search for the best values in very short-term securities to
receive the benefits of the higher rates in that segment and maintain the Money
Market Portfolio's liquidity. This approach has given the Portfolio a weighted
average maturity of 26 days as of December 29, 1995. If we find opportunities to
do so, we will be lengthening the Portfolio's duration somewhat during the
coming months.
<TABLE>
<S> <C>
(LOGO)
(1)THE JANUS SYMBOL IS A /s/ Sharon Pichler
REGISTERED ------------------------------
SERVICE MARK OF JANUS CAPITAL Sharon Pichler
CORPORATION Money Market Portfolio Manager
</TABLE>
An investment in the Money Market Portfolio is neither insured nor guaranteed by
the U.S. Government and there can be no assurance that the Portfolio will be
able to maintain a stable net asset value of $1.00 per share.
- --------------------------------------------------------------------------------
4
<PAGE> 4
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 0)................................ $ 0
Short-term securities, at amortized cost.... 80,487,232
Cash........................................ 100,602
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 0
Dividends................................. 0
Other..................................... 0
-----------------
Total assets............................ 80,587,834
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 0
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 31,438
Dividends to shareholders................. 11,666
Other fees................................ 1,058
-----------------
Total liabilities....................... 44,162
-----------------
Total net assets...................... $ 80,543,672
===================
NET ASSETS:
Capital stock
($ .01 par value 150,000,000
authorized)............................... $ 805,437
Additional paid-in capital.................. 79,738,235
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 0
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 0
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 0
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 80,543,672
===================
Shares outstanding at December 31, 1995..... 80,543,672
===================
Net asset value per share................... $ 1.00
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest................................... $ 4,942,733
Dividends.................................. 0
----------------
Total investment income.............. 4,942,733
----------------
EXPENSES:
Investment advisory fees................... 422,357
Printing and shareholder reports........... 9,436
Custodian fees............................. 28,591
Legal fees................................. 491
Auditing and accounting fees............... 7,242
Directors fees............................. 528
Other fees................................. 0
----------------
Total expenses......................... 468,645
Less:
Advisory fee waiver and expense
reimbursement.......................... 0
Fees paid indirectly..................... 2,450
----------------
Net expenses......................... 466,195
----------------
Net investment income (loss)............... 4,476,538
----------------
Net realized gain (loss) on:
Investment securities.................. 0
----------------
Change in unrealized appreciation
(depreciation) on:
Investment securities.................. 0
----------------
Net gain (loss) on investments......... 0
----------------
Net increase (decrease) in net assets
resulting from operations................ $ 4,476,538
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
5
<PAGE> 5
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)............................................................ $ 4,476,538 $ 2,545,149
Net realized gain (loss) on investments................................................. 0 0
Change in unrealized appreciation (depreciation) on investments......................... 0 0
----------------- -----------------
Net increase (decrease) in net assets resulting from operations....................... 4,476,538 2,545,149
----------------- -----------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................... (4,476,538) (2,545,149)
Net realized gains...................................................................... 0 0
----------------- -----------------
Total distributions................................................................... (4,476,538) (2,545,149)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares....................................................... 114,390,840 114,696,321
Dividends and distributions reinvested.................................................. 4,476,538 2,545,149
Cost of shares repurchased.............................................................. (131,404,321) (69,943,338)
----------------- -----------------
Increase (decrease) in net assets from capital shares transactions.................... (12,536,943) 47,298,132
----------------- -----------------
Net increase (decrease) in net assets................................................. (12,536,943) 47,298,132
NET ASSETS:
Beginning of period..................................................................... 93,080,615 45,782,483
----------------- -----------------
End of period........................................................................... $ 80,543,672 $ 93,080,615
=================== ===================
Undistributed net investment income................................................... $ 0 $ 0
=================== ===================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................ 93,080,615 45,782,483
----------------- -----------------
Shares issued........................................................................... 114,390,840 114,696,321
Shares issued - reinvestment of dividends and distributions............................. 4,476,538 2,545,149
Shares redeemed......................................................................... (131,404,321) (69,943,338)
----------------- -----------------
Increase (decrease) in shares outstanding............................................... (12,536,943) 47,298,132
----------------- -----------------
Shares outstanding - end of period...................................................... 80,543,672 93,080,615
=================== ===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
6
<PAGE> 6
WRL SERIES FUND, INC.
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from operations:
Net investment income (loss)............... .05 .04 .02 .03 .05 .07 .07
Net realized and unrealized
gain (loss) on investments............... .00 .00 .00 .00 .00 .00 .00
-------- -------- -------- -------- -------- -------- -------
Total income (loss) from operations...... .05 .04 .02 .03 .05 .07 .07
-------- -------- -------- -------- -------- -------- -------
Distributions:
Dividends from net investment income....... (.05) (.04) (.02) (.03) (.05) (.07) (.07)
Distributions from net realized gains
on investments........................... .00 .00 .00 .00 .00 .00 .00
-------- -------- -------- -------- -------- -------- -------
Total distributions...................... .(05) (.04) (.02) (.03) (.05) (.07) (.07)
-------- -------- -------- -------- -------- -------- -------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ========== =========
Total return.................................. 5.40% 3.44% 2.45% 3.03% 5.25% 7.09% 8.09%
Ratios and supplemental data:
Net assets at end of period
(in thousands).............................. $ 80,544 $ 93,081 $ 45,782 $ 45,600 $ 33,695 $ 24,931 $ 6,233
Ratio of expenses to average net assets...... .56% .60% .66% .70% .70% .66% .70%
Ratio of net investment income (loss)
to average net assets...................... 5.30% 3.59% 2.41% 2.99% 5.07% 7.09% 7.82%
Portfolio turnover rate...................... n/a n/a n/a n/a n/a n/a n/a
<CAPTION>
1988 1987 1986+
------- ----- -----
<S> <C<C> <C> <C>
Net asset value, beginning of period................ $ 1.00 $1.00 $1.00
Income from operations:
Net investment income (loss)..................... .05 .04 .01
Net realized and unrealized
gain (loss) on investments..................... .00 .00 .00
------- ----- -----
Total income (loss) from operations............ .05 .04 .01
------- ----- -----
Distributions:
Dividends from net investment income............. (.05) (.04) (.01 )
Distributions from net realized gains
on investments................................. .00 .00 .00
------- ----- -----
Total distributions............................ (.05) (.04) (.01 )
------- ----- -----
Net asset value, end of period...................... $ 1.00 $1.00 $1.00
========= ======= ========
Total return........................................ 5.77% 4.56% 1.14%
Ratios and supplemental data:
Net assets at end of period
(in thousands).................................... $ 5,114 $ 582 $101
Ratio of expenses to average net assets............ .70% .89% .12%
Ratio of net investment income (loss)
to average net assets............................ 6.26% 4.83% 1.14%
Portfolio turnover rate............................ n/a n/a n/a
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was October 2, 1986. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
7
<PAGE> 7
WRL SERIES FUND, INC.
BOND PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (42.80%)
U.S. Treasury Bonds
6.88%, due 08/15/25............. $ 1,800,000 $ 2,029,266
U.S. Treasury Notes
7.88%, due 11/15/04............. 23,000,000 26,618,820
U.S. Treasury Bonds
7.75%, due 11/30/99............. 1,500,000 1,625,430
U.S. Treasury Notes
6.50%, due 05/15/05............. 8,000,000 8,513,520
U.S. Treasury Bonds
6.50%, due 08/15/05............. 2,000,000 2,131,020
U.S. Treasury Notes
5.88%, due 11/15/05............. 570,000 582,665
------------
Total U.S. Government Obligations
(cost: $ 37,297,831)............ 41,500,721
------------
CORPORATE DEBT SECURITIES (42.70%)
AEROSPACE (3.25%)
Raytheon Company
6.50%, due 07/15/05............. 1,000,000 1,028,750
Raytheon Company
7.38%, due 07/15/25............. 2,000,000 2,122,500
AUTOMOTIVE (2.20%)
General Motors Corporation
7.40%, due 09/01/25............. 2,000,000 2,135,000
BANKING (11.85%)
BankAmerica Corporation
7.20%, due 04/15/06............. 2,000,000 2,127,500
Chemical Banking Corporation
6.50%, due 01/15/09............. 2,000,000 2,010,000
NationsBank Corporation
6.88%, due 02/15/05............. 2,000,000 2,067,500
NBD Bancorp, Inc.
7.13%, due 05/15/07............. 3,000,000 3,198,750
Swiss Bank Corp.
7.00%, due 10/15/15............. 2,000,000 2,082,500
BEVERAGES (2.62%)
Coca-Cola Enterprises, Inc.
6.75%, due 09/15/23............. 2,500,000 2,540,625
CHEMICALS (3.45%)
Witco Corporation
7.75%, due 04/01/23............. 3,000,000 3,348,750
FINANCE (6.64%)
Commercial Credit Corp.
6.50%, due 06/01/05............. 1,000,000 1,017,500
Ford Motor Credit Company
6.75%, due 08/15/08............. 3,500,000 3,613,750
Texaco Capital, Inc.
7.50%, due 03/01/43............. 750,000 820,313
Transamerica Financial Corporation
6.50%, due 03/15/11............. 1,000,000 982,500
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
FOODS & FOOD SERVICE (3.25%)
Hershey Foods
6.70%, due 10/01/05............. $ 3,000,000 $ 3,150,000
HOLDING COMPANIES (2.13%)
Hanson Overseas BV
6.75%, due 09/15/05............. 2,000,000 2,070,000
INSURANCE (2.32%)
Aegon nv *
8.00%, due 08/15/06............. 2,000,000 2,252,500
PHARMACEUTICALS (3.32%)
Eli Lilly & Company
7.13%, due 06/01/25............. 3,000,000 3,217,500
RESTAURANTS (1.67%)
McDonald's Corporation
7.38%, due 07/15/33............. 1,500,000 1,621,875
------------
Total Corporate Debt Securities
(cost: $ 38,645,399)............ 41,407,813
------------
SHORT-TERM U.S. GOVERNMENT
OBLIGATIONS (5.12%)
Federal Home Loan Bank
5.40%, due 02/21/96............. 5,000,000 4,960,250
------------
Total Short-Term U.S. Government Obligations
(cost: $ 4,960,250)............. 4,960,250
------------
COMMERCIAL PAPER (8.14%)
General Electric Capital
Corporation
5.90%, due 01/03/96............. 4,000,000 3,997,377
Household Finance Corp.
5.70%, due 01/02/96............. 3,900,000 3,898,148
------------
Total Commercial Paper
(cost: $ 7,895,525)............. 7,895,525
------------
Total Investment Securities
(cost: $ 88,799,005).......... $ 95,764,309
=============
SUMMARY
Investments at value.............. 98.76% $ 95,764,309
Other Assets in
Excess of Liabilities........... 1.24% 1,207,576
------- ------------
Net Assets........................ 100.00% $ 96,971,885
------- ------------
------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* See footnote 2B to financial statements.
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
8
<PAGE> 8
WRL SERIES FUND, INC.
BOND PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
<TABLE>
<S> <C>
U.S. Government Obligations 42.80%
Aerospace 3.25%
Automotive 2.20%
Banking 11.85%
Beverages 2.62%
Chemicals 3.45%
Finance 6.64%
Foods & Food Service 3.25%
Insurance 2.32%
Pharmaceuticals 3.32%
Short-Term U.S. Government Obligation 5.12%
Commercial Paper 8.14%
Other 5.04%
</TABLE>
1995 proved to be a strong year for the bond market as a sharp decline in
interest rates produced an unusual and exciting surge in prices. Unfortunately,
the dramatic gains we have just seen do not happen very often. The year will
very likely prove to be an anomaly to the upside, just as 1994 has proven to be
an anomaly on the downside. This does not mean I'm pessimistic about the bond
market in 1996. Far from it. As long as economic growth is moderate and
inflation remains at acceptable levels, bonds should generate good returns. But
it will be difficult in 1996 to match the results achieved last year.
During the year, the yield on the benchmark 10-year U.S. Treasury bond dropped
from 7.82% at year-end 1994 to 6.18% as of September 30, and then to 5.58% at
the end of 1995. The 30-year U.S. Treasury yield followed a similar pattern for
the same periods, declining from 7.87% to 6.50% to 5.96%. For the year ended
December 31, 1995, the Lehman Brothers Government/Corporate Bond Index gained
19.2%. For the same period, the Bond Portfolio returned 22.99%.
I pursued a conservative strategy early in the year, when short-term rates were
still rising, the economy was growing vigorously, and higher inflation seemed a
significant threat. At the beginning of the year, the Portfolio was positioned
defensively, with 26.5% in cash, 22.3% in corporate bonds, and 51.2% in
Government bonds.
During the year the economy has gradually weakened. In spite of the 4.2% growth
in Gross Domestic Product (GDP) in the third quarter, the fourth quarter will
probably come in closer to 2%. Retail sales have been slow, especially during
the Christmas season, and the manufacturing sector has softened. The bond market
has correctly anticipated a weaker economy, and once again has been ahead of the
Federal Reserve Board, which lowered short-term interest rates twice during the
year. The last easing happened to occur on December 19, the same week interest
rates were lowered in both the German and UK markets, which caused global bond
markets to finish on an upstroke. As we ended 1995, the Portfolio was positioned
very differently: cash had been reduced to 14.5%, corporate bonds were increased
to 42.7%, and Government Bonds were trimmed to 42.8%.
Also, the U.S. bond market has been anticipating a positive outcome of the
budget battle in Washington, and any meaningful progress toward balancing the
budget has been viewed favorably. The shutdown in government services during the
fourth quarter, while frustrating in many areas, no doubt served to boost bond
prices.
As we look towards 1996, the economy will probably continue to slow early in the
year as weak Christmas sales and the layoff of Federal workers have a
flow-through effect. A responsible budget agreement will very likely prove
important to the market's performance, so I will monitor developments on that
front very closely.
<TABLE>
<S> <C>
(LOGO)
(1)THE JANUS SYMBOL IS A /s/ Ronald V. Speaker
REGISTERED ----------------------
SERVICE MARK OF JANUS CAPITAL Ronald V. Speaker
CORPORATION Bond Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 9
WRL SERIES FUND, INC.
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 75,943,230)....................... $ 82,908,534
Short-term securities, at amortized cost.... 12,855,775
Cash........................................ 84,887
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 1,180,693
Dividends................................. 0
Other..................................... 0
-----------------
Total assets............................ 97,029,889
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 0
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 38,148
Dividends to shareholders................. 0
Other fees................................ 19,856
-----------------
Total liabilities....................... 58,004
-----------------
Total net assets...................... $ 96,971,885
===================
NET ASSETS:
Capital stock
($ .01 par value 25,000,000 authorized)... $ 85,474
Additional paid-in capital.................. 97,435,126
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 17,596
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. (7,531,615)
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 6,965,304
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 96,971,885
===================
Shares outstanding at December 31, 1995..... 8,547,388
===================
Net asset value per share................... $ 11.35
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 5,809,135
Dividends................................... 0
------------
Total investment income............... 5,809,135
------------
EXPENSES:
Investment advisory fees.................... 409,862
Printing and shareholder reports............ 24,781
Custodian fees.............................. 29,089
Legal fees.................................. 1,249
Auditing and accounting fees................ 9,224
Directors fees.............................. 1,255
Other fees.................................. 27,503
------------
Total expenses........................ 502,963
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 7,648
------------
Net expenses.......................... 495,315
------------
Net investment income (loss)................ 5,313,820
------------
Net realized gain (loss) on:
Investment securities................... 2,182,123
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 9,317,232
------------
Net gain (loss) on investments.......... 11,499,355
------------
Net increase (decrease) in net assets
resulting from operations................. $ 16,813,175
============
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
10
<PAGE> 10
WRL SERIES FUND, INC.
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)........................................................... $ 5,313,820 $ 4,863,317
Net realized gain (loss) on investments................................................ 2,182,123 (9,689,964)
Change in unrealized appreciation (depreciation) on investments........................ 9,317,232 (1,576,688)
------------ ------------
Net increase (decrease) in net assets resulting from operations...................... 16,813,175 (6,403,335)
------------ ------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income.................................................................. (5,296,224) (4,881,503)
In excess of net investment income..................................................... 0 (23,774)
Net realized gains..................................................................... 0 0
------------ ------------
Total distributions.................................................................. (5,296,224) (4,905,277)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares...................................................... 26,382,392 15,154,642
Dividends and distributions reinvested................................................. 5,296,224 4,905,277
Cost of shares repurchased............................................................. (17,287,599) (28,401,923)
------------ ------------
Increase (decrease) in net assets from capital shares transactions................... 14,391,017 (8,342,004)
------------ ------------
Net increase (decrease) in net assets................................................ 25,907,968 (19,650,616)
NET ASSETS:
Beginning of period.................................................................... 71,063,917 90,714,533
------------ ------------
End of period.......................................................................... $ 96,971,885 $ 71,063,917
============ ============
Undistributed net investment income.................................................. $ 17,596 $ 0
============ ============
SHARE ACTIVITY:
Shares outstanding - beginning of period............................................... 7,252,963 8,070,229
------------ ------------
Shares issued.......................................................................... 2,425,769 1,405,712
Shares issued - reinvestment of dividends and distributions............................ 477,566 490,352
Shares redeemed........................................................................ (1,608,910) (2,713,330)
------------ ------------
Increase (decrease) in shares outstanding.............................................. 1,294,425 (817,266)
------------ ------------
Shares outstanding - end of period..................................................... 8,547,388 7,252,963
============ ============
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
11
<PAGE> 11
WRL SERIES FUND, INC.
BOND PORTFOLIO
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. BOND PORTFOLIO AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period................ $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29
Income from operations:
Net investment income (loss)..................... .69 .63 .72 .75 .86 .79 .75
Net realized and unrealized
gain (loss) on investments..................... 1.55 (1.44) .95 .32 1.30 (.16) .78
-------- -------- -------- -------- -------- -------- -------
Total income (loss) from operations............ 2.24 (.81) 1.67 1.07 2.16 .63 1.53
-------- -------- -------- -------- -------- -------- -------
Distributions:
Dividends from net investment income............. (.69) (.63) (.72) (.75) (.86) (.79) (.75)
Distributions from net realized gains on
investments.................................... .00 .00 (.89) (.32) (.03) .00 .00
-------- -------- -------- -------- -------- -------- -------
Total distributions............................ (.69) (.63) (1.61) (1.07) (.89) (.79) (.75)
-------- -------- -------- -------- -------- -------- -------
Net asset value, end of period...................... $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07
========== ========== ========== ========== ========== ========== =========
Total return........................................ 22.99% (6.94)% 13.38% 6.79% 18.85% 6.21% 14.65%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................... $ 96,972 $ 71,064 $ 90,715 $ 56,820 $ 22,291 $ 10,143 $ 7,025
Ratio of expenses to average net assets............ .61% .59% .64% .70% .70% .69% .70%
Ratio of net investment income (loss)
to average net assets............................ 6.45% 5.94% 5.94% 6.49% 8.02% 8.82% 8.60%
Portfolio turnover rate............................ 120.54% 131.73% 149.02% 80.73% 33.47% 18.09% 23.26%
<CAPTION>
1988 1987 1986+
------- ------- -------
<S> <C<C> <C> <C>
Net asset value, beginning of period................ $ 9.22 $ 10.28 $ 10.00
Income from operations:
Net investment income (loss)..................... .90 .25 .13
Net realized and unrealized
gain (loss) on investments..................... .07 (.89) .15
------- ------- -------
Total income (loss) from operations............ .97 (.64) .28
------- ------- -------
Distributions:
Dividends from net investment income............. (.90) (.38) .00
Distributions from net realized gains on
investments.................................... .00 (.04) .00
------- ------- -------
Total distributions............................ (.90) (.42) .00
------- ------- -------
Net asset value, end of period...................... $ 9.29 $ 9.22 $ 10.28
========= ========= =========
Total return........................................ 7.73% (5.66)% 11.49%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................... $ 3,372 $ 1,400 $ 127
Ratio of expenses to average net assets............ .70% .86% .12%
Ratio of net investment income (loss)
to average net assets............................ 8.96% 7.17% 1.51%
Portfolio turnover rate............................ 21.54% 134.76% 123.68%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was October 2, 1986. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
12
<PAGE> 12
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ --------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (0.50%)
U.S. Treasury Notes
5.50%, due 09/30/97.......... $ 6,000,000 $ 6,030,000
--------------
Total U.S. Government Obligations
(cost: $ 6,033,363)............ 6,030,000
--------------
CORPORATE DEBT SECURITIES (1.24%)
RETAIL & DEPARTMENT STORES (1.24%)
Ralphs Grocery Company
11.00%, due 06/15/05......... 15,000,000 14,850,000
--------------
Total Corporate Debt Securities
(cost: $ 14,906,203)........... 14,850,000
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ --------------
<S> <C> <C>
PREFERRED STOCKS (4.06%)
COMPUTER TECHNOLOGY (4.06%)
SAP AG - Vorzug................ 319,965 $ 48,516,809
--------------
Total Preferred Stocks
(cost: $ 24,311,900)........... 48,516,809
--------------
COMMON STOCKS (72.74%)
APPAREL & TEXTILES (0.51%)
Fila Holding S.p.A. - Sponsored
ADR.......................... 134,100 6,101,550
BANKING (5.95%)
Chemical Banking Corporation... 267,400 15,709,750
Citicorp....................... 415,730 27,957,843
First Interstate Bancorp....... 200,950 27,429,675
BEVERAGES (2.70%)
Coca-Cola Company.............. 435,375 32,326,594
BIO-TECHNOLOGY (1.24%)
Chiron Corporation*............ 134,050 14,812,525
COMPUTER TECHNOLOGY (22.14%)
Broderbund Software, Inc.*..... 172,025 10,450,519
Cisco Systems, Inc.*........... 415,100 30,976,838
First Data Corporation......... 691,800 46,264,125
HBO & Company.................. 246,450 18,884,231
Informix Corporation*.......... 522,625 15,678,750
Intuit, Inc.*.................. 180,800 14,102,400
Microsoft Corporation*......... 298,200 26,167,050
Netscape Communications
Corporation*................. 108,125 15,029,375
PeopleSoft, Inc.*.............. 299,450 12,876,350
PsiNet, Inc.*.................. 160,525 3,672,009
Shiva Corporation*............. 86,200 6,271,050
Sun Microsystems, Inc.*........ 1,408,300 64,253,688
CONTAINERS (0.05%)
Liqui-Box Corporation.......... 18,325 542,878
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ --------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONICS (4.37%)
Altera Corporation*............ 206,175 $ 10,257,206
General Electric Company....... 78,425 5,646,600
LSI Logic Corporation*......... 200,950 6,581,113
Stratacom, Inc.*............... 404,525 29,732,588
ENTERTAINMENT (1.45%)
Walt Disney Company............ 294,725 17,388,775
FINANCE (5.50%)
Charles Schwab Corporation..... 115,500 2,324,438
Federal Home Loan Mortgage
Corporation.................. 179,125 14,956,938
Federal National Mortgage
Association.................. 167,080 20,738,805
Merrill Lynch & Company,
Inc. ........................ 542,876 27,686,676
MEDICAL (5.94%)
Medtronic, Inc................. 219,000 12,236,625
Oxford Health Plans, Inc.*..... 333,450 24,633,619
PacifiCare Health Systems,
Inc. -
Class B*..................... 204,475 17,789,325
United Healthcare
Corporation.................. 249,725 16,356,988
PHARMACEUTICALS (8.20%)
Amgen, Inc.*................... 380,950 22,618,906
Astra AB - Class A Free........ 194,584 7,783,947
Eli Lilly & Company............ 145,200 8,167,500
Johnson & Johnson.............. 80,150 6,862,843
Pfizer, Inc. .................. 492,750 31,043,250
SmithKline Beecham - Class A... 35,300 389,128
SmithKline Beecham PLC - ADR... 380,850 21,137,175
RADIO & TELEVISION (0.67%)
Infinity Broadcasting
Corporation - Class A*....... 215,785 8,037,991
RETAIL & DEPARTMENT STORES (0.39%)
Starbucks Corporation*......... 221,900 4,659,900
SHOES & LEATHER GOODS (1.17%)
Nike, Inc. - Class B........... 200,900 13,987,662
TELECOMMUNICATIONS (12.46%)
Ascend Communications, Inc.*... 493,450 40,031,131
Glenayre Technologies, Inc.*... 340,925 21,222,581
L.M. Ericsson Telephone
Company - Sponsored ADR...... 1,017,050 19,832,475
Picturetel Corporation*........ 613,850 26,472,281
Premisys Communications, Inc.*.. 267,050 14,954,800
Tellabs, Inc.*................. 43,125 1,595,625
U.S. Robotics Corporation*..... 280,825 24,642,393
--------------
Total Common Stocks
(cost: $ 609,219,207).......... 869,276,484
--------------
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
13
<PAGE> 13
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ---------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT
OBLIGATIONS (5.85%)
Federal National Mortgage
Association
5.59%, due 01/10/96......... $ 50,000,000 $ 49,914,597
Federal National Mortgage
Association
5.47%, due 01/17/96......... 20,000,000 19,945,300
---------------
Total Short-Term U.S. Government
Obligations
(cost: $ 69,859,897).......... 69,859,897
---------------
COMMERCIAL PAPER (15.65%)
Household Finance Corp.
5.77%, due 01/04/96......... 40,000,000 39,967,944
General Electric Capital
Corporation
5.90%, due 01/03/96......... 40,000,000 39,973,778
Prudential Funding Corp.
5.63%, due 01/04/96......... 30,000,000 29,976,542
Texaco, Inc.
5.92%, due 01/04/96......... 30,000,000 29,975,333
Ford Motor Co.
5.75%, due 01/02/96......... 47,200,000 47,177,384
---------------
Total Commercial Paper
(cost: $ 187,070,981)......... 187,070,981
---------------
Total Investment Securities
(cost: $ 911,401,551)....... $ 1,195,604,171
---------------
---------------
SUMMARY
Investments at value.......... 100.04 % $ 1,195,604,171
Liabilities in Excess
of Other Assets............. (0.04)% (429,778)
--------- ---------------
Net Assets.................... 100.00 % $ 1,195,174,393
--------- ---------------
--------- ---------------
INVESTMENTS BY COUNTRY
Size of investment is indicated as a percentage of total
portfolio net assets.
<CAPTION>
MARKET VALUE PERCENTAGE
--------------- ----------
<S> <C> <C>
Germany........................ $ 48,516,809 4.06%
Sweden......................... 7,783,947 .65%
United Kingdom................. 389,128 .03%
United States.................. 1,138,484,509 95.26%
------------- ------
$ 1,195,174,393 100.00%
------------- ------
------------- ------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
14
<PAGE> 14
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
<TABLE>
<S> <C>
U.S. Government Obligations 0.50%
Corporate Debt Securities 1.24%
Preferred Stocks 4.06%
Banking 5.95%
Beverages 2.70%
Computer Technology 22.14%
Electronics 4.37%
Finance 5.50%
Medical 5.94%
Pharmaceuticals 8.20%
Telecommunications 12.46%
Short-Term U.S. Government Obligations 5.85%
Commercial Paper 15.65%
Other 5.44%
</TABLE>
The financial markets have just closed out one of the most exciting years on
record. Stocks posted remarkable gains in 1995 against a backdrop of moderate
economic growth, benign inflation, and falling interest rates. And, as if this
were not enough good news, corporate profits grew at double-digit rates for the
fourth year in a row, up a total of 127%. According to Standard & Poor's, this
is the first such sustained expansion since 1934-37.
Although the market produced substantial returns in 1995 -- the Dow Jones
Industrial Average gained 33.4% -- momentum fell off in technology and
telecommunication stocks during the fourth quarter. These sectors were important
contributors to the Growth Portfolio's performance during the previous nine
months. But late in the third quarter, we became concerned that, despite their
excellent earnings, the high valuations many of these companies were carrying
might leave them vulnerable. With that, we selectively trimmed the Portfolio's
technology and telecommunication holdings. That we did allowed us to avoid some
of the subsequent damage these groups suffered. At the same time, strong
performances from our pharmaceutical, health care, and financial stocks helped
sustain returns through the end of the year. Altogether, the Growth Portfolio
gained a total of 47.12% for the year ending December 31, 1995. This compares
favorably to the Dow Industrials which rose 33.4% for the same period, and the
Standard & Poor's Index of 500 Common Stocks which gained 37.58%.
Among the technology and telecommunication stocks we sold or trimmed at a profit
were Hewlett-Packard Company, Microsoft Corporation, LSI Logic Corporation, U.S.
Robotics Corp., Intel Corporation, and Texas Instruments, Inc. Cellular
manufacturer Nokia AB was liquidated as well. Some of these assets were put to
work in stocks like Altera, Ascend Communications, Inc. and Cisco Systems, Inc.
These companies gave the Growth Portfolio additional exposure to the
accelerating growth of the Internet.
Pharmaceutical and healthcare stocks performed well overall, and several
positions were either added or increased during the period. SmithKline Beecham,
a large multinational drug company, gave us solid returns last quarter, and Eli
Lilly & Company and Amgen, Inc. were both added. In addition, Pfizer, Inc. and
Oxford Health, a healthcare provider in the New York area, gave the Portfolio
some strong gains.
Financial stocks continue to look attractive in the current market. Citicorp,
Chemical Banking Corporation, and Merrill Lynch & Company, Inc. each have unique
industry characteristics and all are repurchasing significant amounts of their
own stocks. They are also benefiting from a positively-sloped yield curve, which
we believe will continue into the first of the new year.
We are expecting more volatile markets in 1996. Moderate growth and a benign
interest rate environment should support stock prices, but paradoxically,
earnings may be off, especially when compared to the really exceptional numbers
of 1995. So while the broad indexes should make progress, we may experience
greater internal volatility in individual stocks and industries. As a result,
our strategy will be to accumulate positions gradually and let them go more
aggressively. The Portfolio will also have additional balance among the groups
that have performed well for us this year, specifically technology,
telecommunications, pharmaceutical, healthcare, and financial services. We
believe this strategy will be effective in providing competitive returns in
1996.
<TABLE>
<S> <C> <C> <C>
(LOGO)
(1)THE JANUS SYMBOL IS A
REGISTERED /s/ Scott W. Schoelzel /s/ Thomas F. Marisco
SERVICE MARK OF JANUS CAPITAL ---------------------- ---------------------
CORPORATION Scott W. Schoelzel Thomas F. Marsico
Growth Portfolio Managers
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE> 15
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 654,470,673)...................... $ 938,673,293
Short-term securities, at amortized cost.... 256,930,878
Cash........................................ 33,818
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 31,050
Interest.................................. 150,799
Dividends................................. 295,175
Foreign receivable........................ 56,356
Foreign currency contracts................ 555,276
Other..................................... 0
-----------------
Total assets............................ 1,196,726,645
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 624,219
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 752,262
Dividends to shareholders................. 0
Other fees................................ 175,771
Foreign payable........................... 0
Foreign currency contracts................ 0
-----------------
Total liabilities....................... 1,552,252
-----------------
Total net assets...................... $ 1,195,174,393
===================
NET ASSETS:
Capital stock
($ .01 par value 125,000,000
authorized)............................... $ 377,494
Additional paid-in capital.................. 904,642,630
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 575,360
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 4,820,848
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 284,202,620
Foreign currency transactions............. 555,441
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 1,195,174,393
===================
Shares outstanding at December 31, 1995..... 37,749,399
===================
Net asset value per share................... $ 31.66
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 11,008,338
Dividends (net of foreign tax of
$ 104,644)................................ 6,312,452
-------------
Total investment income............... 17,320,790
-------------
EXPENSES:
Investment advisory fees.................... 7,847,750
Printing and shareholder reports............ 205,936
Custodian fees.............................. 189,984
Legal fees.................................. 10,429
Auditing and accounting fees................ 36,196
Directors fees.............................. 10,513
Other fees.................................. 181,060
-------------
Total expenses........................ 8,481,868
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 13,276
-------------
Net expenses.......................... 8,468,592
-------------
Net investment income (loss)................ 8,852,198
-------------
Net realized gain (loss) on:
Investment securities................... 157,659,617
Foreign currency transactions........... (2,827,328)
-------------
Total net realized gain (loss)........ 154,832,289
-------------
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 210,175,819
Foreign currency transactions........... 555,441
-------------
Total change in unrealized
appreciation (depreciation)......... 210,731,260
-------------
Net gain (loss) on investments.......... 365,563,549
-------------
Net increase (decrease) in net assets
resulting from operations................. $ 374,415,747
=============
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
16
<PAGE> 16
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)........................................................... $ 8,852,198 $ 7,567,047
Net realized gain (loss) on investments and foreign currency transactions.............. 154,832,289 (42,264,053)
Change in unrealized appreciation (depreciation) on investments and foreign currency
transactions......................................................................... 210,731,260 (40,706,686)
------------- -------------
Net increase (decrease) in net assets resulting from operations...................... 374,415,747 (75,403,692)
------------- -------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income.................................................................. (8,276,838) (7,567,047)
In excess of net investment income..................................................... 0 (5,606)
Net realized gains..................................................................... (106,305,203) 0
In excess of net realized gains........................................................ 0 (1,236,523)
------------- -------------
Total distributions.................................................................. (114,582,041) (8,809,176)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares...................................................... 111,725,690 116,495,908
Dividends and distributions reinvested................................................. 114,582,041 8,809,176
Cost of shares repurchased............................................................. (105,350,493) (161,518,580)
------------- -------------
Increase (decrease) in net assets from capital shares transactions................... 120,957,238 (36,213,496)
------------- -------------
Net increase (decrease) in net assets................................................ 380,790,944 (120,426,364)
NET ASSETS:
Beginning of period.................................................................... 814,383,449 934,809,813
------------- -------------
End of period.......................................................................... $ 1,195,174,393 $ 814,383,449
============= =============
Undistributed net investment income.................................................. $ 575,360 $ 0
============= =============
SHARE ACTIVITY:
Shares outstanding - beginning of period............................................... 34,205,930 35,614,033
------------- -------------
Shares issued.......................................................................... 3,712,711 4,627,689
Shares issued - reinvestment of dividends and distributions............................ 3,625,404 371,607
Shares redeemed........................................................................ (3,794,646) (6,407,399)
------------- -------------
Increase (decrease) in shares outstanding.............................................. 3,543,469 (1,408,103)
------------- -------------
Shares outstanding - end of period..................................................... 37,749,399 34,205,930
============= =============
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
17
<PAGE> 17
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. GROWTH PORTFOLIO AND THE STANDARD & POOR'S INDEX OF 500 COMMON STOCKS
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97
Income from operations:
Net investment income (loss)............ .26 .22 .28 .36 .27 .30 .19
Net realized and unrealized
gain (loss) on investments............ 10.97 (2.41) .79 .52 10.75 (.33) 6.29
---------- --------- --------- --------- --------- --------- --------
Total income (loss) from operations... 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48
Distributions:
Dividends from net investment income.... (.24) (.22) (.28) (.36) (.27) (.30) (.19)
Distributions from net realized gains on
investments........................... (3.14) .00 (.37) (.95) (1.97) (.04) (1.41)
Distributions in excess of net realized
gains on investments.................. .00 (.03) .00 .00 .00 .00 .00
---------- --------- --------- --------- --------- --------- --------
Total distributions................... (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60)
---------- --------- --------- --------- --------- --------- --------
Net asset value, end of period............. $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85
============ =========== =========== =========== =========== =========== ==========
Total return............................... 47.12% (8.31)% 3.97% 2.35% 59.79% (.22)% 47.04%
Ratios and supplemental data:
Net assets at end of period
(in thousands).......................... $1,195,174 $ 814,383 $ 934,810 $ 711,422 $ 393,511 $ 129,057 $ 74,680
Ratio of expenses to average net assets... .86% .84% .87% .86% .90% 1.00% 1.00%
Ratio of net investment income (loss)
to average net assets................... .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18%
Portfolio turnover rate................... 130.48% 107.33% 77.91% 77.70% 7.27% 157.01% 123.80%
<CAPTION>
1988 1987 1986+
-------- -------- -------
<S> <C<C> <C> <C>
Net asset value, beginning of period....... $ 11.14 $ 10.14 $ 10.00
Income from operations:
Net investment income (loss)............ .31 .21 .00
Net realized and unrealized
gain (loss) on investments............ 1.83 1.00 .14
-------- -------- -------
Total income (loss) from operations... 2.14 1.21 .14
Distributions:
Dividends from net investment income.... (.31) (.21) .00
Distributions from net realized gains on
investments........................... .00 .00 .00
Distributions in excess of net realized
gains on investments.................. .00 .00 .00
-------- -------- -------
Total distributions................... (.31) (.21) .00
-------- -------- -------
Net asset value, end of period............. $ 12.97 $ 11.14 $ 10.14
========== ========== =========
Total return............................... 18.62% 10.90% 5.84%
Ratios and supplemental data:
Net assets at end of period
(in thousands).......................... $ 28,497 $ 15,815 $ 716
Ratio of expenses to average net assets... 1.00% 1.00% .19%
Ratio of net investment income (loss)
to average net assets................... 2.50% 1.84% .03%
Portfolio turnover rate................... 76.27% 222.13% 8.55%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was October 2, 1986. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
18
<PAGE> 18
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (37.44%)
Federal Agricultural Mortgage
Corporation
7.03%, due 05/26/98.............. $ 300,000 $ 310,365
Government Trust Certificate -
Israel Class 1-C
U.S. Government Guaranteed
9.25%, due 11/15/01.............. 430,000 475,687
Government Trust Certificate -
Israel Class 1-B
U.S. Government Guaranteed
5.25%, due 03/15/98.............. 500,000 496,250
U.S. Treasury Bonds
8.88%, due 02/15/19.............. 500,000 674,245
U.S. Treasury Notes
7.50%, due 5/15/02............... 1,000,000 1,108,910
U.S. Treasury Notes
6.38%, due 01/15/00.............. 1,000,000 1,036,830
U.S. Treasury Notes
6.25%, due 02/15/03.............. 1,000,000 1,043,570
U.S. Treasury Notes
5.13%, due 4/30/98............... 1,500,000 1,496,775
U.S. Treasury Bonds
7.75%, due 11/30/99.............. 1,300,000 1,408,706
U.S Treasury Notes
7.25%, due 02/15/98.............. 750,000 780,105
------------
Total U.S. Government Obligations
(cost: $ 8,502,707)................ 8,831,443
------------
MORTGAGE-BACKED SECURITIES (11.26%)
Federal Home Loan Mortgage
Corporation
REMIC Trust
Series 1141 Class E
8.50%, due 01/15/19.............. 439,409 440,582
Federal National Mortgage
Association
REMIC Trust
Series 1989-40 Class B
9.50%, due 04/25/18.............. 244,634 246,689
Federal National Mortgage
Association
7.72%, due 12/16/96.............. 500,000 510,730
Federal National Mortgage
Association Strip
Series 66 - Class 1
7.50%, due 01/01/20.............. 324,842 332,063
Federal National Mortgage
Association Strip
Series 66 - Class 1
8.15%, due 12/01/99.............. 499,525 532,931
Prudential-Bache CMO Trust
Series 9 - Class E
9.88%, due 08/01/17.............. 574,805 591,796
------------
Total Mortgage-Backed Securities
(cost: $ 2,642,031)................ 2,654,791
------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
ASSET-BACKED SECURITIES (9.67%)
American Express Master Trust
Series 1994-2 Class A
7.60%, due 08/15/02.............. $ 1,000,000 $ 1,079,320
Choice Credit Card Master Trust
Series 1992-2 - Class B
7.20%, due 04/15/99.............. 100,000 103,798
Ford Credit Auto Loan Master Trust
Series 1992-1 Class A
6.88%, due 01/15/99.............. 100,000 102,351
Standard Credit Card Master Trust
Series 1993-2 Class A
5.95%, due 10/07/04.............. 1,000,000 994,880
------------
Total Asset-Backed Securities
(cost: $ 2,081,417)................ 2,280,349
------------
SUPRANATIONAL AGENCY OBLIGATIONS (8.07%)
African Development Bank
9.30%, due 07/01/00.............. 500,000 565,625
African Development Bank
7.75%, due 12/15/01.............. 500,000 541,875
International Bank For
Reconstruction & Development
7.90%, due 04/01/98.............. 250,000 261,875
International Bank For
Reconstruction & Development
8.02%, due 04/01/99.............. 500,000 535,000
------------
Total Supranational Agency Obligations
(cost: $ 1,853,279)................ 1,904,375
------------
CORPORATE DEBT SECURITIES (15.92%)
BANKING (4.24%)
Security Pacific Corporation**
5.63%, due 08/15/96.............. 1,000,000 999,366
ENERGY (2.23%)
Shell Canada Ltd.
7.38%, due 06/01/99.............. 500,000 526,250
FINANCE (3.04%)
General Electric Capital
Corporation
8.30%, due 09/20/09.............. 600,000 716,250
INSURANCE (3.24%)
Progressive Corporation
6.60%, due 01/15/04.............. 750,000 765,000
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
19
<PAGE> 19
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
REAL ESTATE (3.17%)
Kimco Realty Corporation
6.38%, due 02/10/99.............. $ 750,000 $ 748,110
------------
Total Corporate Debt Securities
(cost: $ 3,687,134)................ 3,754,976
------------
SHORT-TERM U.S. GOVERNMENT
OBLIGATIONS (12.67%)
Federal Home Loan Mortgage Corp.
5.57%, due 02/08/96.............. 750,000 745,358
Federal National Mortgage
Association
5.65%, due 01/12/96.............. 1,000,000 997,960
Federal National Mortgage
Association
5.67%, due 01/19/96.............. 750,000 747,638
Federal National Mortgage
Association
5.46%, due 01/26/96.............. 500,000 497,952
------------
Total Short-Term U.S. Government Obligations
(cost: $ 2,988,908).............. 2,988,908
------------
SHORT-TERM OBLIGATION (3.76%)
Prudential-Bache Securities*
5.39%, Repurchase Agreement dated
12/29/95 to be repurchased at
$ 887,049
on 01/02/96...................... 886,518 886,518
------------
Total Short-Term Obligation
(cost: $ 886,518).................. 886,518
------------
Total Investment Securities
(cost: $ 22,641,994)............. $ 23,301,360
------------
------------
SUMMARY
Investments at value............... 98.79% $ 23,301,360
Other Assets in
Excess of Liabilities............ 1.21% 286,373
------- ------------
Net Assets......................... 100.00% $ 23,587,733
------- ------------
------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* Collateralized by $ 4,175,265 Federal National Mortgage Association 9.00%
due 09/01/22; market value and accrued interest aggregated $ 902,250 for
this collateral at December 31, 1995.
** Floating rate note
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
20
<PAGE> 20
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets.
[GRAPH]
U.S. Government Obligations 37.44%
Mortgage-Backed Securities 11.26%
Asset-Backed Securities 9.67%
Supranational Agency Obligations 8.07%
Banking 4.24%
Finance 3.04%
Insurance 3.24%
Real Estate 3.17%
Short-Term U.S. Government Obligation 12.67%
Short-Term Obligation 3.67%
Other 3.44%
Following its outstanding performance in the first half of the year, the U.S.
bond market retreated somewhat before interest rate declines resumed midway
through the third quarter. Yield on two- and three-year Treasury notes declined
by 64 basis points in the last half of the year, closing the year at 5.15% and
5.21%, respectively, and bringing the full-year change to about 255 basis
points. The benchmark 30-year Treasury bond fell 67 basis points in the last six
months and 192 basis points during the year to yield 5.95% at 1995 year end.
The falling interest rates in 1995 were prompted by slower economic growth and
decelerating inflation. The market's perception changed in the first half of the
year from an anticipation of further Federal Reserve Board (Fed) tightening to
speculation that it would be inclined to ease monetary policy. Ultimately, in
the second half of 1995, the Fed did take such action. For the year, the Fed's
moves consisted of a 50-basis point increase in the target rate in February,
followed by 25-basis point decreases in the target rate in both July and
December, which left the rate unchanged versus last year-end at 5.50%.
The Short-to-Intermediate Government Portfolio achieved a respectable
performance level with a total return of 13.54% for the year ended December 31,
1995, compared to a return of 14.57% for the benchmark Merrill Lynch 1-10 Year
Government Index ("Index"). Particularly pleasing was the fact that the
Portfolio approximately matched the performance of the Index in the volatile
third quarter (the absolute returns were low but still positive). That period of
interest rate fluctuations resulted from uncertainty about the strength of the
economy and the concomitant inflation pressures, as well as uncertainty related
to the timing of an additional Fed ease.
The bull market for interest rates in 1995 provided an environment for excellent
performance in bonds. The Portfolio and Index total returns for the year were
13.54% and 14.57%, respectively, both of which reflect the very strong bond
market performance in 1995. This performance relative to the Index was
attributable to two principal factors relating to the structure of the portfolio
that primarily impacted performance the first six months of the year. First, the
portfolio's duration was kept slightly shorter than the Index for a portion of
the period, which reduced the benefit from principal increases in the declining
rate environment. Second, the portfolio's "barbell" maturity structure relative
to the Index, with an under-weighting in the two- to three-year area of the
yield curve, limited the benefit from the greater decline of intermediate-term
yields compared to short- and long-term yields.
The Short-to-Intermediate Government Portfolio's investment objective calls for
as high a level of current income as is consistent with preservation of capital.
This conservative orientation limits the number of options available to enhance
the performance of the Portfolio. Still, we achieved an acceptable level of
performance compared to our Index, especially during the second half of the
year, as a result of having a longer relative duration for most of the period.
The Portfolio's performance throughout the year was enhanced by incremental
yields from allocations to spread product (such as high-quality corporate,
supranational, asset-backed, and mortgage-backed securities).
Given our current neutral outlook on the market looking forward into 1996, the
Portfolio is positioned to benefit primarily from interest income, rather than
price appreciation. The average maturity of the portfolio (slightly more than
four years) rests around the mid-point of its 1-7 year permissible range and the
portfolio's duration was approximately 97% of the Index at the end of the year.
Although the portfolio maturity structure is approximately matched with the
Index, a slight bias toward a barbell remains, due partially to the our cash
requirements. The Portfolio's position provides the flexibility to adjust
quickly to changes from our present interest rate outlook.
<TABLE>
<S> <C>
[AEGON LOGO] /s/ Clifford A. Sheets
------------------------
Clifford A. Sheets
Short-to-Intermediate Government
Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE> 21
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 18,766,568)....................... $ 19,425,934
Short-term securities, at amortized cost.... 3,875,426
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 299,527
Dividends................................. 0
Other..................................... 0
-----------------
Total assets............................ 23,600,887
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 0
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 11,096
Dividends to shareholders................. 0
Other fees................................ 2,058
-----------------
Total liabilities....................... 13,154
-----------------
Total net assets...................... $ 23,587,733
===================
NET ASSETS:
Capital stock
($ .01 par value 100,000,000
authorized)............................... $ 22,645
Additional paid-in capital.................. 23,331,147
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 4,159
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. (429,584)
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 659,366
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 23,587,733
===================
Shares outstanding at December 31, 1995..... 2,264,543
===================
Net asset value per share................... $ 10.42
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 1,401,790
Dividends................................... 0
-----------------
Total investment income............... 1,401,790
-----------------
EXPENSES:
Investment advisory fees.................... 126,134
Printing and shareholder reports............ 4,737
Custodian fees.............................. 15,749
Legal fees.................................. 238
Auditing and accounting fees................ 7,211
Directors fees.............................. 242
Other fees.................................. 10,616
-----------------
Total expenses........................ 164,927
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 496
-----------------
Net expenses.......................... 164,431
-----------------
Net investment income (loss)................ 1,237,359
-----------------
Net realized gain (loss) on:
Investment securities................... (188,473)
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 1,624,946
-----------------
Net gain (loss) on investments.......... 1,436,473
-----------------
Net increase (decrease) in net assets
resulting from operations................. $ 2,673,832
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
22
<PAGE> 22
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)........................................................... $ 1,237,359 $ 1,110,326
Net realized gain (loss) on investments................................................ (188,473) (326,157)
Change in unrealized appreciation (depreciation) on investments........................ 1,624,946 (910,740)
----------------- -----------------
Net increase (decrease) in net assets resulting from operations...................... 2,673,832 (126,571)
----------------- -----------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income.................................................................. (1,233,200) (1,113,951)
Net realized gains..................................................................... 0 0
----------------- -----------------
Total distributions.................................................................. (1,233,200) (1,113,951)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares...................................................... 13,644,823 14,250,185
Dividends and distributions reinvested................................................. 1,233,200 1,113,951
Cost of shares repurchased............................................................. (13,087,126) (18,631,210)
----------------- -----------------
Increase (decrease) in net assets from capital shares transactions................... 1,790,897 (3,267,074)
----------------- -----------------
Net increase (decrease) in net assets................................................ 3,231,529 (4,507,596)
NET ASSETS:
Beginning of period.................................................................... 20,356,204 24,863,800
----------------- -----------------
End of period.......................................................................... $ 23,587,733 $ 20,356,204
=================== ===================
Undistributed net investment income.................................................. $ 4,159 $ 0
=================== ===================
SHARE ACTIVITY:
Shares outstanding - beginning of period............................................... 2,093,571 2,414,767
----------------- -----------------
Shares issued.......................................................................... 1,338,408 1,405,317
Shares issued - reinvestment of dividends and distributions............................ 119,758 113,598
Shares redeemed........................................................................ (1,287,194) (1,840,111)
----------------- -----------------
Increase (decrease) in shares outstanding.............................................. 170,972 (321,196)
----------------- -----------------
Shares outstanding - end of period..................................................... 2,264,543 2,093,571
=================== ===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
23
<PAGE> 23
WRL SERIES FUND, INC.
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
Comparison of change in value of $10,000 investment in the WRL Series Fund,
Inc. Short-to-Intermediate Government Portfolio and the Merrill Lynch 1-10 Year
Government
Bond Index
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1995 1994 1993 1992+
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........ $ 9.72 $ 10.30 $ 10.02 $ 10.00
Income from operations:
Net investment income (loss)............ .60 .50 .36 .02
Net realized and unrealized
gain (loss) on investments............ .70 (.58) .29 .02
-------- -------- -------- -------
Total income (loss) from operations... 1.30 (.08) .65 .04
-------- -------- -------- -------
Distributions:
Dividends from net investment income.... (.60) (.50) (.35) (.02)
Distributions from net realized gains
on investments........................ .00 .00 (.02) .00
-------- -------- -------- -------
Total distributions................... (.60) (.50) (.37) (.02)
-------- -------- -------- -------
Net asset value, end of period.............. $ 10.42 $ 9.72 $ 10.30 $ 10.02
========= ========= ========= ========
Total return................................ 13.54% (.43)% 4.58% .45%
Ratios and supplemental data:
Net assets at end of period
(in thousands).......................... $ 23,588 $ 20,356 $ 24,864 $ 2,509
Ratio of expenses to average net assets... .78% .81% 1.00% 1.00%
Ratio of net investment income (loss) to
average net assets...................... 5.84% 4.95% 3.44% 3.24%
Portfolio turnover rate................... 51.82% 93.70% 28.64% .00%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was December 3, 1992. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
24
<PAGE> 24
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -------------
<S> <C> <C>
PREFERRED STOCKS (4.94%)
BANKING (**)
Banco Bradesco SA.................. 515,000 $ 4,481
BEVERAGES (0.23%)
Cia. Cervejaria Brahma............. 1,631,000 671,157
COMPUTER TECHNOLOGY (3.09%)
SAP AG -- Vorzug................... 58,951 8,938,835
ELECTRONICS (0.39%)
Centrais Electricas Brasileiras
SA -- Series B................... 4,124,000 1,115,542
MEDICAL (0.94%)
Fresenius AG....................... 28,680 2,725,511
RETAIL & DEPARTMENT STORES (0.29%)
Fielmann AG........................ 13,852 716,266
Lojas Americanas SA*............... 5,710,000 133,614
TELECOMMUNICATIONS (**)
Telecomunicacoes Brasileiras SA.... 14,487 697
-------------
Total Preferred Stocks
(cost: $ 10,359,395)............... 14,306,103
-------------
COMMON STOCKS (89.19%)
AEROSPACE (0.98%)
Mitsubishi Heavy Industries Ltd.... 357,000 2,849,215
APPAREL & TEXTILES (0.70%)
Fila Holding S.p.A. -- Sponsored
ADR.............................. 44,275 2,014,514
AUTOMOTIVE (3.45%)
Bajaj Auto Limited*+............... 46,150 1,182,594
Honda Motor Co., Ltd............... 177,000 3,656,033
Volkswagen AG...................... 14,512 4,863,360
Yamaha Motor Co., Ltd.............. 31,000 276,571
BANKING (8.67%)
Bangkok Bank Company Ltd........... 48,492 589,299
Chase Manhattan Corporation........ 83,175 5,042,485
Citicorp........................... 81,275 5,465,744
Dai-Ichi Kangyo Bank............... 73,000 1,437,064
First Interstate Bancorp........... 13,100 1,788,150
Grupo Financiero Inbursa, SA de
CV -- Class B*................... 1,220,025 3,562,718
HSBC Holdings PLC.................. 149,600 2,263,735
Mitsui Trust & Banking............. 122,000 1,336,889
PT Bank Dagang Nasional
Indonesia+....................... 360,500 295,945
Sakura Bank Ltd.................... 124,000 1,575,252
Sanwa Bank Ltd..................... 65,000 1,323,701
Sparbanken Sverige AB*............. 33,693 429,777
BEVERAGES (0.04%)
Erciyas Biracilik Ve Malt
Sanayii -- ADR*+................. 13,425 125,655
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUILDING (0.30%)
PT Semen Cibinong.................. 348,500 $ 869,724
CHEMICALS (4.04%)
Ciba-Geigy AG...................... 4,306 3,799,853
Cytec Industries, Inc.*............ 5,125 319,672
Sgl Carbon AG*+.................... 50,242 3,896,906
Takeda Chemical Industries Ltd..... 94,000 1,549,651
The Carbide/Graphite Group, Inc.*.. 63,525 913,172
Waters Corporation*................ 66,200 1,208,150
COMMERCIAL SERVICES (5.39%)
Assa Abloy AB -- Class B Free*..... 368,446 3,448,360
Grand Optical Photoservice......... 16,580 1,621,698
Medaphis Corporation*.............. 24,625 911,125
Securitas AB -- Class B Free....... 139,932 6,653,873
Sysdeco Group AS*.................. 64,791 1,775,012
Triple P nv*....................... 122,000 1,220,000
COMPUTER TECHNOLOGY (9.90%)
Cisco Systems, Inc.*............... 7,725 576,478
First Data Corporation............. 2,875 192,266
Frontec AB -- Class B *............ 2,081 60,000
General Motors Corporation -- Class
E................................ 52,650 2,737,800
Getronics nv....................... 128,647 6,019,794
Group Axime*....................... 31,683 2,444,135
JBA Holdings PLC................... 239,120 1,451,618
NTT Data Communications Systems
Company.......................... 2,700 9,085,532
Sun Microsystems, Inc.*............ 70,350 3,209,720
Technology Solutions Company*...... 63,225 1,232,888
WM-Data AB -- Class B.............. 36,475 1,651,823
CONSUMER GOODS (3.26%)
Amway Japan Ltd.................... 36,000 1,522,110
Wolters Kluwer nv.................. 83,639 7,921,389
CONTAINERS (1.51%)
Crown Cork & Seal Company, Inc.*... 104,975 4,382,707
ELECTRIC UTILITIES (0.61%)
Consolidated Electric Power Asia
Ltd. -- ADR +.................... 20,400 370,692
Consolidated Electric Power Asia
Ltd.............................. 766,750 1,393,280
ELECTRONICS (3.27%)
Canon, Inc......................... 206,000 3,735,648
Omron Corporation.................. 123,000 2,922,325
Rohm Company....................... 22,000 1,226,726
Sony Corporation................... 13,800 828,375
Sony Corporation -- ADR............ 5,475 336,028
Victor Company of Japan Ltd.*...... 34,000 431,924
ENGINEERING & CONSTRUCTION (0.05%)
New World Infrastructure*+......... 75,600 144,708
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
25
<PAGE> 25
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENTERTAINMENT (0.36%)
TABcorp Holdings Limited........... 51,814 $ 146,508
Thorn EMI PLC...................... 37,447 881,693
FINANCE (1.28%)
Lloyds TSB Group PLC............... 285,377 1,521,970
Nordbanken AB*..................... 51,791 895,172
Sumitomo Trust & Banking........... 91,000 1,288,402
FOODS & FOOD SERVICE (3.15%)
Cultor Oy 2-Free................... 55,069 2,284,864
Cultor Oy Series 1................. 38,247 1,586,903
Huhtamaki Group -- Class I Free.... 37,423 905,750
Ito-Yokado Co...................... 24,000 1,480,217
Nutricia Vereenigde Bedrijven nv... 35,314 2,859,845
FOREST PRODUCTS & PAPER (0.12%)
Rotneros Bruks..................... 338,254 357,427
FURNITURE (0.55%)
Industrie Natuzzi S.p.A. -- ADR.... 35,025 1,589,260
HOLDING COMPANIES (7.06%)
Barco Industries nv................ 14,733 1,700,732
Citic Pacific Ltd.*................ 1,000,500 3,422,560
First Pacific Company Ltd.*........ 48,000 53,389
Grupo Carso SA de CV*.............. 261,050 1,392,519
Kinnevik AB -- Class B Free........ 438,723 13,742,174
Malbak Limited 144A -- GDR+........ 17,200 119,134
HOME FURNISHINGS (0.28%)
AMRE, Inc.*........................ 54,700 799,988
HOTEL & MOTEL (2.26%)
HFS, Inc.*......................... 79,900 6,531,826
JEWELRY & WATCHES (0.76%)
Bulgari S.p.A.*+................... 258,800 2,211,639
MANUFACTURING (0.57%)
Getinge Industrier AB -- Class B... 5,619 256,585
Orkla AS -- Class A................ 27,999 1,394,452
MEDICAL (0.75%)
Gelman Sciences, Inc.*............. 10,050 253,763
HEALTHSOUTH Corporation*........... 28,200 821,325
Scandinavian Mobility International
AS*+............................. 9,766 234,412
Takare PLC......................... 306,329 856,092
METALS (**)
SSAB Svenskt Stal AB -- Class A.... 940 9,649
OFFICE EQUIPMENT (0.72%)
Oce-Van Der Grinten nv............. 34,070 2,074,640
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL & GAS (1.29%)
Petroleum Geo-Services -- ADR*..... 27,700 $ 692,500
YPF Sociedad Anonima SA --
Sponsored ADR.................... 140,975 3,048,585
PHARMACEUTICALS (12.30%)
Astra AB -- Class A Free........... 76,815 3,072,833
Eisai Company Ltd.................. 55,000 965,377
Gehe AG............................ 8,208 4,186,878
Gehe AG -- New*.................... 2,239 1,111,599
Pfizer, Inc........................ 16,600 1,045,800
Roche Holding AG................... 1,380 10,948,096
R. P. Scherer Corporation*......... 60,125 2,953,641
Sandoz AG*......................... 5,627 5,166,155
Sankyo Co. Ltd..................... 59,000 1,327,386
SmithKline Beecham -- Class A...... 167,500 1,846,420
SmithKline Beecham PLC -- ADR...... 29,825 1,655,288
Yamanouchi Pharmaceutical.......... 61,000 1,313,227
PUBLISHING (0.22%)
News Corporation Ltd............... 135,635 634,825
RADIO & TELEVISION (1.01%)
Bell Cablemedia PLC -- ADR*........ 4,675 74,800
Central European Media Enterprises
Ltd.*............................ 95,125 1,950,063
Grupo Televisa SA -- Sponsored
GDR.............................. 18,625 419,063
Heritage Media Corporation -- Class
A*............................... 13,150 336,969
Telewest PLC -- ADR*............... 5,500 132,688
REAL ESTATE (0.97%)
Mitsubishi Estate Co., Ltd......... 121,000 1,513,673
Mitsui Fudosan Co., Ltd............ 104,000 1,280,838
RETAIL & DEPARTMENT STORES (2.44%)
Credit Saison Co., Ltd............. 119,800 2,857,914
Daimaru, Inc....................... 48,000 372,379
General Nutrition Companies*....... 54,600 1,255,800
Hankyu Department Store............ 40,000 585,724
Isetan Co.......................... 85,000 1,401,280
PT Matahari Putra Prima............ 329,250 580,224
SHOES & LEATHER GOODS (0.72%)
Adidas AG*......................... 27,034 1,433,779
Gymboree Corp.*.................... 31,875 657,422
TELECOMMUNICATIONS (6.04%)
DDI Corporation.................... 388 3,010,085
Korea Mobile Telecom 144A --
GDR*+............................ 51,771 2,057,898
Millicom International Cellular
SA*.............................. 32,825 1,001,163
Nippon Telegraph & Telephone
Corporation...................... *** 1,781
Nokia AB -- K Shares............... 38,460 1,524,818
Nokia #144 -- A Shares +........... 10,000 387,248
Nynex CableComms Group*............ 11,000 191,125
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
26
<PAGE> 26
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Paging Network, Inc.*.............. 139,400 $ 3,397,876
Telecom Argentina Stet -- France
Telecom SA -- ADR................ 1,125 53,578
Telecom Italia S.p.A............... 224,751 395,618
Telecomunicacoes Brasileiras SA --
Sponsored ADR.................... 70,479 3,393,719
Telefonica de Argentina SA -- ADR.. 73,875 2,013,095
Videotron Holdings PLC -- ADR*..... 5,500 70,125
TOBACCO PRODUCTS (2.38%)
PT Hanjaya Mandala Sampoerna*...... 661,500 6,893,040
TRANSPORTATION (1.79%)
Swissair AG*....................... 7,093 5,180,074
-------------
Total Common Stocks
(cost: $ 217,008,025).............. 258,209,222
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- -------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT
OBLIGATIONS (3.43%)
Federal Home Loan Bank
5.40%, due 02/21/96......... $10,000,000 $ 9,920,500
-------------
Total Short-Term U.S. Government
Obligations
(cost: $ 9,920,500)........... 9,920,500
-------------
COMMERCIAL PAPER (3.76%)
General Electric Capital
Corporation
5.75%, due 01/03/96......... 5,000,000 4,996,806
Ford Motor Co.
5.75%, due 01/02/96......... 5,900,000 5,897,172
-------------
Total Commercial Paper
(cost: $ 10,893,978).......... 10,893,978
-------------
Total Investment Securities
(cost: $ 248,181,898)....... $ 293,329,803
==============
SUMMARY
Investments at value.......... 101.32 % $ 293,329,803
Liabilities in Excess
of Other Assets............. (1.32)% (3,824,156)
-------- -------------
Net Assets.................... 100.00 % $ 289,505,647
-------- -------------
-------- -------------
INVESTMENTS BY COUNTRY
Size of investment is indicated as a percentage of total
portfolio net assets.
<CAPTION>
MARKET VALUE PERCENTAGE
------------- ----------
<S> <C> <C>
Australia........................ $ 781,332 0.27%
Belgium.......................... 1,700,732 0.59%
Brazil........................... 1,925,504 0.67%
Denmark.......................... 234,412 0.08%
Finland.......................... 6,689,582 2.31%
France........................... 4,065,835 1.40%
Germany.......................... 27,873,130 9.63%
Hong Kong........................ 7,277,670 2.51%
Indonesia........................ 8,638,931 2.98%
Italy............................ 2,607,256 0.90%
Japan............................ 51,155,300 17.67%
Mexico........................... 4,955,236 1.71%
Netherlands...................... 18,875,664 6.52%
Norway........................... 3,169,464 1.09%
Sweden........................... 30,577,670 10.57%
Switzerland...................... 25,094,177 8.67%
Thailand......................... 589,299 0.20%
United Kingdom................... 6,557,803 2.27%
United States.................... 86,736,650 29.96%
------------- ----------
Total.......................... $ 289,505,647 100.00%
------------- ----------
------------- ----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Industry percentage is less than .01%.
*** Less than one share held.
+ Securities are registered pursuant to rule 144A and may be deemed to be
restricted for resale.
ADR American Depository Receipt
GDR Global Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
27
<PAGE> 27
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
Preferred Stocks 4.94%
Automotive 3.45%
Banking 8.67%
Chemicals 4.04%
Commercial Services 5.39%
Computer Technology 9.90%
Consumer Goods 3.26%
Electronics 3.27%
Foods & Food Service 3.15%
Holding Companies 7.06%
Hotel & Motel 2.26%
Pharmaceuticals 12.30%
Retail & Department Stores 2.44%
Telecommunications 6.04%
Tobacco Products 2.38%
Short-Term U.S. Government Obligations 3.43%
Commercial Paper 3.76%
Other 14.26%
Several European markets posted records last year, but few kept pace with the
U.S. rally, at least when measured in U.S. dollars. In the Pacific Rim, the
Japanese recession continued into year end, though signs of strength emerged in
the second half of the year. Domestically, in the history of U.S. financial
markets it's hard to find a better environment than existed in 1995. Low
interest rates, low inflation, and excellent corporate earnings fueled a broad
market advance, and both equities and fixed-income securities produced some of
the best results of the last fifty years. Despite the sharp pullback in
technology and telecommunications sectors -- market leaders for much of the
year -- the advance continued through the fourth quarter. Returns did not,
however, maintain the blistering pace set in the previous nine months.
In this environment, the Global Portfolio gained 23.06% for the year ended
December 31, 1995. By comparison, the Morgan Stanley Capital International World
Index rose 21.28%. Both returns are with dividends reinvested.
Even though key European interest rates fell in 1995, on the whole, rates
remained stubbornly higher. As a result, returns in the larger markets like
Germany, France and the UK were kept in check. Nevertheless, the potential of
our European growth stocks, especially in the pharmaceuticals, medical, and
printing areas, remain compelling. Both Roche Holding AG and SmithKline Beecham
enjoy strong balance sheets, excellent earnings growth, and profitable product
lines, and sell at lower price/earnings multiples than similar growth stories in
the U.S. Wolters Kluwer nv is also building market franchise through
acquisitions of professional printing and publishing companies worldwide. In
Germany, Fresenius AG (medical products), Fielmann AG (retailing), Gehe AG
(pharmaceuticals), and SAP AG (software) contributed to portfolio returns.
Swedish stocks that appreciated included Assa Abloy AB (locks and security
devices) and Sparbanken Sverige AB (banking), which had substantial gains.
Elsewhere, DDI Corporation, an independent Japanese long-distance provider and
cellular operator, should profit from consumer enthusiasm for cellular
communications in Japan, where the cellular market is still in the early stages.
On the domestic front, the Global Portfolio had a number of standouts during the
quarter. HFS, Inc. is the franchisor of many popular hotel and motel chains,
including Howard Johnson's, Ramada, and Super 8. The company recently acquired
real estate broker Century 21, and is applying the same profitable cross-selling
strategy it uses in its hotel business to the residential real estate market.
One of the new acquisitions, AMRE, Inc., provides an example of the HFS
strategy. AMRE contracts with Sears to do home remodeling and now has entered
into an agreement with HFS for referrals from Century 21's customer base.
Another outstanding performer during the quarter was Sun Microsystems, Inc.,
which appreciated earlier in the year, only to give back some of its gains in
the fourth quarter. Sun remains a significant holding, however, because it has
an excellent product line including commercial workstations and networks used in
conjunction with the Internet. Sun also has a new computer language called JAVA
that, though still in the testing phase, is already getting a lot of attention
from software developers.
In the U.S., while I expect increased volatility in the equity markets in 1996,
moderate economic growth and low interest rates should create a favorable
environment for stocks. Market volatility can also have the positive effect of
creating buying opportunities and increasing demand for high-quality stocks that
have more predictable earnings streams. Additionally, as foreign markets and
economies continue to deregulate and open to global investment, new and exciting
opportunities should increase. Most mature economies are experiencing moderate
growth, low inflation, and stable interest rates, which provide a positive
environment for equities, and many developing economies are working to attain a
similar climate. Over time, these efforts should continue to create exciting
markets.
<TABLE>
<S> <C>
(LOGO) /s/ Helen Young Hayes
(1)THE JANUS SYMBOL IS A ------------------------
REGISTERED SERVICE MARK OF JANUS Helen Young Hayes
CAPITAL CORPORATION Global Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE> 28
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 227,367,420)...................... $ 272,515,325
Short-term securities, at amortized cost.... 20,814,478
Cash........................................ 38,780
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 4,054,102
Interest.................................. 0
Dividends................................. 12,654
Foreign receivable........................ 58,674
Foreign currency contracts................ 3,298,068
Other..................................... 87
-----------------
Total assets............................ 300,792,168
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 8,387,330
Accounts payable and accrued liabilities:
Due to foreign sub-custodian.............. 740,629
Investment advisory fees.................. 178,818
Dividends to shareholders................. 0
Other fees................................ 103,840
Foreign payable........................... 0
Foreign currency contracts................ 1,875,904
-----------------
Total liabilities....................... 11,286,521
-----------------
Total net assets...................... $ 289,505,647
===================
NET ASSETS:
Capital stock
($ .01 par value 100,000,000
authorized)............................... $ 186,589
Additional paid-in capital.................. 242,913,688
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... (803,810)
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 610,600
Net unrealized appreciation (depreciation)
on:
Investment securities................... 45,147,905
Foreign currency transactions........... 1,450,675
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 289,505,647
===================
Shares outstanding at December 31, 1995..... 18,658,875
===================
Net asset value per share................... $ 15.52
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 1,479,551
Dividends (net of foreign tax of
$ 410,348)................................ 3,020,313
-----------------
Total investment income............... 4,499,864
-----------------
EXPENSES:
Investment advisory fees.................... 2,075,054
Printing and shareholder reports............ 88,269
Custodian fees.............................. 286,847
Legal fees.................................. 4,414
Auditing and accounting fees................ 19,864
Directors fees.............................. 4,495
Other fees.................................. 88,562
-----------------
Total expenses........................ 2,567,505
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 8,905
-----------------
Net expenses.......................... 2,558,600
-----------------
Net investment income (loss)................ 1,941,264
-----------------
Net realized gain (loss) on:
Investment securities................... 12,447,015
Foreign currency transactions........... (4,190,026)
-----------------
Total net realized gain (loss)........ 8,256,989
-----------------
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 41,005,180
Foreign currency transactions........... 2,676,925
-----------------
Total change in unrealized
appreciation (depreciation)......... 43,682,105
-----------------
Net gain (loss) on investments.......... 51,939,094
-----------------
Net increase (decrease) in net assets
resulting from operations................. $ 53,880,358
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
29
<PAGE> 29
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)............................................................ $ 1,941,264 $ 1,463,813
Net realized gain (loss) on investments and foreign currency transactions............... 8,256,989 8,122,174
Change in unrealized appreciation (depreciation) on investments and foreign
currency transactions................................................................. 43,682,105 (10,790,715)
----------------- -----------------
Net increase (decrease) in net assets resulting from operations....................... 53,880,358 (1,204,728)
----------------- -----------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................... 0 (1,463,813)
In excess of net investment income...................................................... 0 (133,574)
Net realized gains...................................................................... (11,272,429) (8,229,252)
In excess of net realized gains......................................................... 0 (430,412)
----------------- -----------------
Total distributions................................................................... (11,272,429) (10,257,051)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares....................................................... 33,603,270 171,489,373
Dividends and distributions reinvested.................................................. 11,272,429 10,257,051
Cost of shares repurchased.............................................................. (59,756,345) (7,600,214)
----------------- -----------------
Increase (decrease) in net assets from capital shares transactions.................... (14,880,646) 174,146,210
----------------- -----------------
Net increase (decrease) in net assets................................................. 27,727,283 162,684,431
NET ASSETS:
Beginning of period..................................................................... 261,778,364 99,093,933
----------------- -----------------
End of period........................................................................... $ 289,505,647 $ 261,778,364
=================== ===================
Undistributed net investment income................................................... $ (803,810) $ 0
=================== ===================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................ 19,954,849 7,275,408
----------------- -----------------
Shares issued........................................................................... 2,319,062 12,454,611
Shares issued - reinvestment of dividends and distributions............................. 726,386 781,173
Shares redeemed......................................................................... (4,341,422) (556,343)
----------------- -----------------
Increase (decrease) in shares outstanding............................................... (1,295,974) 12,679,441
----------------- -----------------
Shares outstanding - end of period...................................................... 18,658,875 19,954,849
=================== ===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
30
<PAGE> 30
WRL SERIES FUND, INC.
GLOBAL PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. GLOBAL PORTFOLIO AND THE MORGAN STANELY CAPITAL INTERNATIONAL WORLD INDEX]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1995 1994 1993 1992+
--------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 13.12 $ 13.62 $ 10.16 $ 10.00
Income from operations:
Net investment income (loss)....................... .10 .10 .04 (.02)
Net realized and unrealized
gain (loss) on investments....................... 2.91 .10 3.72 .18
--------- --------- -------- -------
Total income (loss) from operations.............. 3.01 .20 3.76 .16
--------- --------- -------- -------
Distributions:
Dividends from net investment income............... .00 (.10) (.04) .00
Dividends in excess of net investment income....... .00 (.01) .00 .00
Distributions from net realized gains
on investments................................... (.61) (.56) (.26) .00
Distributions in excess of net realized gains
on investments................................... .00 (.03) .00 .00
--------- --------- -------- -------
Total distributions.............................. (.61) (.70) (.30) .00
--------- --------- -------- -------
Net asset value, end of period......................... $ 15.52 $ 13.12 $ 13.62 $ 10.16
========== ========== ========= ========
Total return........................................... 23.06% .25% 35.05% 1.62%
Ratios and supplemental data:
Net assets at end of period
(in thousands)..................................... $ 289,506 $ 261,778 $ 99,094 $ 508
Ratio of expenses to average net assets.............. .99% 1.01% 1.09% 2.48%
Ratio of net investment income (loss)
to average net assets.............................. .75% .73% .30% (2.23)%
Portfolio turnover rate.............................. 130.60% 192.06% 79.93% .00%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was December 3, 1992. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
Foreign securities involve special risks described in the prospectus that should
be considered carefully before investing.
- --------------------------------------------------------------------------------
31
<PAGE> 31
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (6.20%)
U.S. Treasury Notes
7.50%, due 01/31/96............. $ 2,500,000 $ 2,504,725
U.S. Treasury Notes
6.13%, due 05/31/97............. 4,300,000 4,353,234
U.S. Treasury Notes
6.00%, due 11/30/97............. 4,500,000 4,564,395
U.S. Treasury Notes
5.88%, due 05/31/96............. 4,500,000 4,511,565
-------------
Total U.S. Government Obligations
(cost: $ 15,861,466).............. 15,933,919
-------------
CORPORATE DEBT SECURITIES (12.29%)
BANKING (1.27%)
First Union Corporation
7.25%, due 02/15/03............. 2,600,000 2,746,250
Norwest Financial, Inc.
6.20%, due 09/15/99............. 505,000 512,575
BEVERAGES (0.16%)
PepsiCo, Inc.
7.88%, due 08/15/96............. 409,000 415,135
CHEMICALS (0.57%)
M.A. Hanna Company
9.38%, due 09/15/03............. 1,250,000 1,462,500
ELECTRIC UTILITIES (0.52%)
Potomac Electric Power Company
5.00%, due 09/01/02............. 1,400,000 1,330,000
ELECTRONICS (0.90%)
Avnet, Inc.
6.88%, due 03/15/04............. 2,199,000 2,314,448
FOODS & FOOD SERVICE (0.40%)
Dole Food Company
6.75%, due 07/15/00............. 1,000,000 1,016,250
INSURANCE (1.03%)
Torchmark Corporation
8.63%, due 03/01/17............. 2,500,000 2,637,500
MEDICAL (0.24%)
Meditrust Corporation
6.88%, due 11/15/98............. 600,000 609,000
OIL & GAS (2.87%)
Dresser Industries, Inc.
6.25%, due 06/01/00............. 1,100,000 1,116,500
Oneok, Inc.
9.75%, due 12/01/20............. 1,000,000 1,218,750
Transcontinental Gas Power &
Light Company
9.13%, due 02/01/17............. 4,800,000 5,046,000
RAILROADS (1.18%)
Union Pacific Corporation
6.25%, due 03/15/99............. 3,000,000 3,030,000
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
<S> <C> <C>
CORPORATE DEBT SECURITIES (CONTINUED)
RETAIL & DEPARTMENT STORES (2.29%)
May Department Stores Company
10.75%, due 06/15/18............ $ 75,000 $ 80,250
May Department Stores Company
9.13%, due 12/01/16............. 5,500,000 5,802,500
TELECOMMUNICATIONS (0.44%)
GTE Corporation
10.75%, due 09/15/17............ 1,000,000 1,123,750
TOBACCO PRODUCTS (0.42%)
RJR Nabisco, Inc.
8.30%, due 04/15/99............. 1,000,000 1,068,750
-------------
Total Corporate Debt Securities
(cost: $ 31,135,399).............. 31,530,158
-------------
CONVERTIBLE BONDS (2.11%)
COMPUTER TECHNOLOGY (1.10%)
Danka Business Systems PLC+
6.75%, due 04/01/02............. 2,000,000 2,830,000
INSURANCE (1.01%)
American Travellers Corporation
6.50%, due 10/01/05............. 1,900,000 2,600,625
-------------
Total Convertible Bonds
(cost: $ 3,900,000)............... 5,430,625
-------------
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (7.98%)
FINANCE (1.02%)
Time Warner Financing............. 83,500 $ 2,609,375
FOREST PRODUCTS & PAPER (2.27%)
International Paper Company....... 49,000 2,192,750
James River Corporation of
Virginia -- Series P............ 78,800 3,654,350
OIL & GAS (1.20%)
Valero Energy Corporation......... 60,000 3,090,000
TOBACCO PRODUCTS (1.74%)
RJR Nabisco Holdings Corp. -
Series C........................ 700,000 4,462,500
TRANSPORTATION (1.75%)
Laidlaw One, Inc.................. 174,000 4,502,250
-------------
Total Convertible Preferred Stocks
(cost: $ 19,611,053).............. 20,511,225
-------------
COMMON STOCKS (66.83%)
AEROSPACE (1.30%)
Raytheon Company.................. 70,800 3,345,300
APPAREL & TEXTILES (0.91%)
Intimate Brands, Inc.............. 156,000 2,340,000
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
32
<PAGE> 32
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BANKING (1.47%)
Mellon Bank Corporation........... 70,000 $ 3,762,500
BEVERAGES (1.72%)
Adolph Coors Company - Class B.... 200,000 4,425,000
BUILDING (1.39%)
Sherwin-Williams Company.......... 87,700 3,573,775
CHEMICALS (7.80%)
E. I. Dupont De Nemours &
Company......................... 46,000 3,214,250
Lawter International, Inc. ....... 337,500 3,923,438
Loctite Corporation............... 74,500 3,538,750
M.A. Hanna Company................ 101,650 2,846,200
Nalco Chemical Company............ 130,100 3,919,263
Olin Corporation.................. 35,000 2,598,750
COMMERCIAL SERVICES (1.18%)
Olsten Corporation................ 76,700 3,029,650
COMPUTER TECHNOLOGY (1.97%)
Danka Business Systems
PLC - ADR....................... 41,900 1,550,300
Hewlett-Packard Company........... 42,000 3,517,500
CONSUMER GOODS (0.79%)
Colgate-Palmolive Company......... 28,700 2,016,175
ELECTRONICS (6.72%)
AMP, Inc. ........................ 77,000 2,954,875
Duracell International, Inc. ..... 70,000 3,622,500
Emerson Electric Company.......... 32,000 2,616,000
General Electric Company.......... 60,000 4,320,000
National Service Industries....... 114,800 3,716,650
ENTERTAINMENT (1.36%)
Walt Disney Company............... 59,400 3,504,600
ENVIRONMENTAL SERVICES (1.79%)
WMX Technologies, Inc. ........... 154,100 4,603,738
FINANCE (2.25%)
Federal National Mortgage
Association..................... 20,000 2,482,500
H&R Block, Inc. .................. 81,100 3,284,550
FOODS & FOOD SERVICE (5.07%)
H.J. Heinz Company................ 157,500 5,217,188
Kellogg Company................... 60,000 4,635,000
Philip Morris Companies, Inc. .... 35,000 3,167,500
HOLDING COMPANIES (1.51%)
Hanson PLC - ADR.................. 255,000 3,888,750
LEISURE (1.23%)
Callaway Golf Company............. 140,000 3,167,500
MACHINERY (1.05%)
Acme-Cleveland Corporation........ 143,600 2,692,500
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MANUFACTURING (3.62%)
Stewart & Stevenson Services,
Inc............................. 105,000 $ 2,651,250
Thomas & Betts Corporation........ 33,600 2,478,000
Tyco International Ltd. .......... 117,000 4,168,125
MEDICAL (3.07%)
Columbia/HCA Healthcare
Corporation..................... 69,400 3,522,050
C.R. Bard, Inc. .................. 135,000 4,353,750
MINING (0.98%)
Freeport McMoRan, Inc............. 68,000 2,516,000
OIL & GAS (6.53%)
Amoco Corporation................. 60,700 4,362,812
Atlantic Richfield Company........ 34,000 3,765,500
Exxon Corporation................. 57,400 4,599,175
Mobil Corporation................. 35,900 4,020,800
PHARMACEUTICALS (3.28%)
Pharmacia & Upjohn, Inc........... 122,525 4,747,843
Schering-Plough Corp.............. 67,000 3,668,250
PHOTOGRAPHY (1.64%)
Eastman Kodak Company............. 62,900 4,214,300
PUBLISHING (1.81%)
A.H. Belo Corp. - Class A......... 133,800 4,649,550
REAL ESTATE (1.99%)
Crescent Real Estate Equities,
Inc. ........................... 70,600 2,409,225
Storage USA, Inc.................. 82,500 2,691,562
RETAIL & DEPARTMENT STORES (1.89%)
Home Depot, Inc. ................. 51,612 2,470,924
J.C. Penney Company, Inc. ........ 50,000 2,381,250
TELECOMMUNICATIONS (2.51%)
Airtouch Communications, Inc.*.... 105,400 2,977,550
Alltel Corporation................ 117,900 3,478,050
-------------
Total Common Stock
(cost: $ 142,291,835)............. 171,600,668
-------------
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
SHORT-TERM OBLIGATION (5.38%)
Salomon Brothers**
5.38%, Repurchase Agreement
dated 12/29/95 to be
repurchased at $ 13,826,791
on 01/02/96..................... $ 13,818,539 $ 13,818,539
-------------
Total Short-Term Obligation
(cost: $ 13,818,539).......................... 13,818,539
-------------
Total Investment Securities
(cost: $ 226,618,292)......................... $ 258,825,134
==============
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
33
<PAGE> 33
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
SUMMARY
Investments at value............ 100.79 % $ 258,825,134
Liabilities in Excess
of Other Assets............... (0.79)% (2,019,464)
-------- -------------
Net Assets...................... 100.00 % $ 256,805,670
-------- -------------
-------- -------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $ 13,179,854 Treasury Bill zero coupon due 06/13/96 and
$ 1,284,560 Treasury Bill zero coupon due 06/06/96; market value and
accrued interest aggregated $ 12,875,399 and $ 1,256,043 respectively for
this collateral at December 31, 1995.
+ Securities are registered pursuant to rule 144A and may be deemed to be
restricted for resale.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
34
<PAGE> 34
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
<TABLE>
<S> <C>
U.S. Government Obligations 6.20%
Corporate Debt Securities 12.29%
Convertible Bonds 2.11%
Convertible Preferred Stocks 7.98%
Chemicals 7.80%
Electronics 6.72%
Finance 2.25%
Foods & Food Service 5.07%
Manufacturing 3.62%
Medical 3.07%
Oil & Gas 6.53%
Pharmaceuticals 3.28%
Telecommunications 2.51%
Short-Term Obligation 5.38%
Other 25.19%
</TABLE>
The Equity-Income Portfolio, with its objective of growth and income generation,
invests in common stocks, convertible securities, intermediate-term government
and corporate bonds, and cash. For the year ended December 31, 1995, the
Equity-Income Portfolio gained 24.66%. By comparison, the Standard & Poor's
Index of 500 Common Stocks index rose 37.58% and the Lehman Brothers
Government/Corporate Intermediate Bond Index advanced 15.3% for the
corresponding period. At year end, the asset mix for the Portfolio was 66.8%
stocks, 10.1% convertible securities, 12.3% corporate bonds, 6.2% U.S. Treasury
bonds, and 4.6% cash equivalents.
The strong returns from financial assets continued through the third and fourth
calendar quarter, leaving 1995 with the best total return from the S&P 500 since
1958. The sectors leading the market shifted dramatically in the fourth quarter.
As signs of a slowing economy persisted, investors moved towards companies with
the ability to generate consistent growth in a more difficult economic
environment. This shift favored the healthcare, consumer non-durable, financial,
and energy sectors. Technology, retail, consumer cyclicals, and basic industry
sectors fared poorly as the level and sustainability of their earnings growth
became more uncertain. These trends benefitted the Portfolio as we had begun to
emphasize the more consistent sectors early in the third quarter. New holdings
or rising weightings in these sectors included H.J. Heinz Company, Columbia/HCA
Healthcare Corporation, Pharmacial, Upjohn, Inc. and Federal National Mortgage
Association.
The second half also witnessed a rotation back into larger capitalization
stocks. After outpacing the S&P 500 in the third quarter, the Russell 2000 Index
lagged substantially in the fourth quarter, with a 2.2% gain versus the S&P
500's 6.0% advance. This shift resulted in the smaller-company indexes like the
Russell 2000 and even the technology-laden NASDAQ Composite lagging the S&P 500
for the year. During the period, we held several larger growth companies like
General Electric Company, Kellogg Company, and Philip Morris Companies, Inc., as
well as several undergoing restructuring such as Eastman Kodak Company, Colgate-
Palmolive Company, H&R Block, Inc., and Hanson PLC.
Our discipline emphasizes sustainable unit growth over cost cutting that can
temporarily buoy earnings growth. We believe the medium-sized growth companies
with above-average growth prospects and lower valuations are more attractive
than many larger companies. We also believe the record level of merger and
acquisition activity and readily available credit will continue to result in
business combinations at above-market prices for the strong franchise companies
we identify.
With our objective of generating a current yield above that of the S&P 500, less
than 1% of the holdings in the Portfolio pay no dividends. We are underweighted
in technology because of the lack of dividends and because heading into the
second half of 1995, our assessment was this sector was expensive in relation to
historical valuations. This sector has indeed corrected severely in the fourth
quarter, and our small sector holding allowed us to avoid the large price
declines suffered by even the leading companies in that area.
With investor expectations at elevated levels, the uncertainty created by the
presidential race, the budget, the level of corporate profit growth, and the
unknown extent of the economic slowdown, we forecast an increase in the stock
market's volatility in 1996. The Equity-Income Portfolio remains focused on
stocks of companies with strong balance sheets, established market shares within
their industries, and high and sustainable profitability levels. Investing in
fundamentally sound companies and avoiding overvalued sectors of the market will
play a larger role in the returns available to investors during 1996.
<TABLE>
<S> <C> <C> <C>
[LKCM LOGO] /s/ Luther King /s/ Scot C. Hollmann /s/ Patrick Clegg
--------------- -------------------- -----------------
Luther King Scot C. Hollmann Patrick Clegg
Equity-Income Portfolio Managers
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE> 35
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 212,799,753)...................... $ 245,006,595
Short-term securities, at amortized cost.... 13,818,539
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 851,347
Dividends................................. 410,032
Foreign receivable........................ 3,680
Other..................................... 0
-----------------
Total assets............................ 260,090,193
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 3,070,975
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 160,589
Dividends to shareholders................. 0
Other fees................................ 52,959
-----------------
Total liabilities....................... 3,284,523
-----------------
Total net assets...................... $ 256,805,670
===================
NET ASSETS:
Capital stock
($ .01 par value 100,000,000
authorized)............................... $ 199,625
Additional paid-in capital.................. 223,831,232
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 17,969
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 550,002
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 32,206,842
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 256,805,670
===================
Shares outstanding at December 31, 1995..... 19,962,450
===================
Net asset value per share................... $ 12.86
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 3,523,806
Dividends (net of foreign tax of
$ 19,256)................................. 5,094,751
-----------------
Total investment income............... 8,618,557
-----------------
EXPENSES:
Investment advisory fees.................... 1,746,022
Printing and shareholder reports............ 67,478
Custodian fees.............................. 33,309
Legal fees.................................. 3,354
Auditing and accounting fees................ 14,535
Directors fees.............................. 3,426
Other fees.................................. 33,298
-----------------
Total expenses........................ 1,901,422
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 11
-----------------
Net expenses.......................... 1,901,411
-----------------
Net investment income (loss)................ 6,717,146
-----------------
Net realized gain (loss) on:
Investment securities................... 9,894,197
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 31,505,904
-----------------
Net gain (loss) on investments.......... 41,400,101
-----------------
Net increase (decrease) in net assets
resulting from operations................. $ 48,117,247
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
36
<PAGE> 36
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss).......................................................... $ 6,717,146 $ 4,099,175
Net realized gain (loss) on investments............................................... 9,894,197 (2,641,183)
Change in unrealized appreciation (depreciation) on investments....................... 31,505,904 (1,894,090)
----------------- -------------------
Net increase (decrease) in net assets resulting from operations..................... 48,117,247 (436,098)
----------------- -------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................. (6,700,560) (4,097,792)
Net realized gains.................................................................... (6,702,504) 0
----------------- -------------------
Total distributions................................................................. (13,403,064) (4,097,792)
----------------- -------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares..................................................... 49,617,709 102,858,390
Dividends and distributions reinvested................................................ 13,403,064 4,097,792
Cost of shares repurchased............................................................ (24,796,488) (9,115,514)
----------------- -------------------
Increase (decrease) in net assets from capital shares transactions.................. 38,224,285 97,840,668
----------------- -------------------
Net increase (decrease) in net assets............................................... 72,938,468 93,306,778
NET ASSETS:
Beginning of period................................................................... 183,867,202 90,560,424
----------------- -------------------
End of period......................................................................... $ 256,805,670 $ 183,867,202
=================== ====================
Undistributed net investment income................................................. $ 17,969 $ 1,383
=================== ====================
SHARE ACTIVITY:
Shares outstanding - beginning of period.............................................. 16,863,575 8,060,755
----------------- -------------------
Shares issued......................................................................... 4,064,325 9,254,687
Shares issued - reinvestment of dividends and distributions........................... 1,059,083 379,699
Shares redeemed....................................................................... (2,024,533) (831,566)
----------------- -------------------
Increase (decrease) in shares outstanding............................................. 3,098,875 8,802,820
----------------- -------------------
Shares outstanding - end of period.................................................... 19,962,450 16,863,575
=================== ====================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
37
<PAGE> 37
WRL SERIES FUND, INC.
EQUITY-INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Comparison of change in value of $10,000 investment in the WRL Series Fund,
Inc. Equity-Income Portfolio, the Standard & Poor's index of 500 Common Stock
and Lehman Brothers Government/Corporate Intermediate Bond Index
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1995 1994 1993+
--------- --------- --------
<S> <C> <C> <C>
Net asset value, beginning of period........................... $ 10.90 $ 11.23 $ 10.00
Income from operations:
Net investment income (loss)............................... .37 .31 .19
Net realized and unrealized
gain (loss) on investments............................... 2.33 (.33) 1.33
--------- --------- --------
Total income (loss) from operations...................... 2.70 (.02) 1.52
--------- --------- --------
Distributions:
Dividends from net investment income....................... (.37) (.31) (.19)
Distributions from net realized gains
on investments........................................... (.37) .00 (.10)
--------- --------- --------
Total distributions...................................... (.74) (.31) (.29)
--------- --------- --------
Net asset value, end of period................................. $ 12.86 $ 10.90 $ 11.23
========== ========== =========
Total return................................................... 24.66% (.53)% 13.49%
Ratios and supplemental data:
Net assets at end of period
(in thousands)............................................. $ 256,806 $ 183,867 $ 90,560
Ratio of expenses to average net assets...................... .87% .89% 1.00%
Ratio of net investment income (loss)
to average net assets...................................... 3.07% 2.78% 1.70%
Portfolio turnover rate...................................... 52.59% 53.50% 27.41%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was March 1, 1993. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
38
<PAGE> 38
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (96.53%)
APPAREL & TEXTILES (2.33%)
Fila Holding S.p.A. - Sponsored
ADR............................. 20,000 $ 910,000
Gadzooks, Inc.*................... 10,000 252,500
Liz Claiborne, Inc................ 27,000 749,250
Nautica Enterprises, Inc.*........ 20,000 875,000
Quiksilver, Inc.*................. 19,100 652,981
St. John Knits, Inc. ............. 22,000 1,168,750
Tommy Hilfiger Corporation*....... 50,000 2,118,750
BANKING (4.62%)
Bank of Boston Corporation........ 65,000 3,006,250
Baybanks, Inc. ................... 25,000 2,456,250
City National Corporation......... 40,000 560,000
Coast Savings Financial, Inc.*.... 27,400 948,725
Cullen/Frost Bankers, Inc. ....... 20,000 1,000,000
First American Corporation........ 20,000 947,500
First Bank System, Inc. .......... 15,000 744,375
MBNA Corporation.................. 15,000 553,125
Mercantile Bancorporation......... 25,000 1,150,000
North Fork Bancorporation, Inc.... 20,000 505,000
Peoples Heritage Financial
Group, Inc...................... 25,000 568,750
Star Banc Corporation............. 15,000 892,500
BEVERAGES (0.19%)
Coca-Cola Enterprises, Inc. ...... 20,000 535,000
BIO-TECHNOLOGY (0.18%)
Quintiles Transnational
Corporation*.................... 12,500 512,500
BUILDING (1.09%)
Beazer Homes USA, Inc.*........... 20,000 412,500
Centex Corporation................ 25,000 868,750
Granite Construction, Inc......... 26,600 837,900
Toll Brothers, Inc.*.............. 45,000 1,035,000
CHEMICALS (2.25%)
Agrium, Inc....................... 20,000 900,000
Albemarle Corporation............. 30,000 581,250
B.F. Goodrich Company............. 20,000 1,362,500
FMC Corporation*.................. 5,000 338,125
Hercules, Inc. ................... 15,000 845,625
IMC Global, Inc. ................. 60,000 2,452,500
COMMERCIAL SERVICES (3.72%)
Accustaff, Inc.*.................. 15,000 660,000
Alternative Resources
Corporation*.................... 20,000 605,000
Cambridge Technology Partners,
Inc.*........................... 15,000 862,500
Corestaff, Inc.*.................. 4,000 146,000
Corrections Corporation
of America*..................... 60,000 2,227,500
Equifax, Inc...................... 70,000 1,496,250
HA-LO Industries, Inc.*........... 10,000 307,500
Health Mgmt Systems, Inc.*........ 20,000 780,000
Interpublic Group of
Companies, Inc. ................ 20,000 867,500
Measurex Corp. ................... 25,000 706,250
Medaphis Corporation*............. 21,800 806,600
National Media Corporation*....... 15,000 315,000
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMMERCIAL SERVICES (CONTINUED)
Oxford Resources Corp - Class
A*.............................. 35,000 $ 787,500
Sitel Corp.*...................... 5,000 153,125
COMPUTER TECHNOLOGY (15.40%)
3Com Corporation*................. 35,000 1,631,875
America Online, Inc.* ............ 35,000 1,312,500
Aspen Technology, Inc.*........... 15,000 506,250
Bay Networks, Inc.*............... 60,000 2,467,500
Cabletron Systems, Inc.*.......... 15,000 1,215,000
Cadence Design Systems, Inc.*..... 67,500 2,835,000
Ceridian Corporation*............. 10,000 412,500
Ciber, Inc.*...................... 8,000 187,000
CKS Group, Inc.*.................. 5,000 195,000
Clarify, Inc.*.................... 5,000 150,000
Cycare Systems, Inc.*............. 15,500 397,188
Dell Computer Corporation*........ 50,000 1,731,250
Discreet Logic, Inc.*............. 9,600 240,000
Global Village Communication*..... 25,000 484,375
HBO & Company..................... 60,000 4,597,500
HPR, Inc.*........................ 5,000 150,625
IDX Systems Corporation*.......... 5,000 173,750
Informix Corporation*............. 50,000 1,500,000
Inso Corporation*................. 10,800 459,000
Kronos, Inc.*..................... 15,400 731,500
McAfee Associates, Inc.*.......... 50,000 2,193,750
Medic Computer Systems, Inc.*..... 35,000 2,117,500
Meta-Software, Inc.*.............. 2,000 33,500
MetaTools, Inc.*.................. 5,000 130,000
Micros Systems, Inc.*............. 19,500 960,375
Mylex Corporation*................ 40,000 765,000
National Data Corporation......... 30,000 742,500
Netscape Communications
Corporation*.................... 5,000 695,000
Network Appliance, Inc.*.......... 3,600 144,450
Network General Corporation*...... 20,000 667,500
Oracle Systems Corporation*....... 15,000 635,625
Pairgain Technologies, Inc.*...... 22,500 1,231,875
Parametric Technology Company*.... 25,000 1,662,500
PeopleSoft, Inc.*................. 30,000 1,290,000
Pixar, Inc.*...................... 1,400 40,425
Premenos Technology
Corporation*.................... 3,000 79,125
PRI Automation, Inc.*............. 20,000 702,500
Project Software & Development,
Inc.*........................... 20,000 697,500
Pure Software, Inc.*.............. 6,000 193,500
Quarterdeck Corporation*.......... 30,000 825,000
RadiSys Corporation*.............. 10,000 117,500
Reynolds & Reynolds Company -
Class A......................... 30,000 1,166,250
ROSS Technology, Inc.*............ 6,000 58,500
Scopus Technology, Inc.*.......... 2,500 63,125
Security Dynamics Technologies,
Inc.*........................... 12,500 681,250
Structural Dynamics Research
Corporation*.................... 20,000 587,500
Sun Microsystems, Inc.*........... 55,000 2,509,375
Sungard Data Systems, Inc.*....... 40,000 1,140,000
Sync Research, Inc.*.............. 2,500 113,125
UUNET Technologies, Inc.*......... 10,000 630,000
Visio Corporation*................ 5,000 141,250
Zoran Corporation*................ 3,000 62,250
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
39
<PAGE> 39
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COSMETICS (0.09%)
Thermolase Corporation*........... 10,000 $ 258,750
ELECTRONICS (9.25%)
Allen Group, Inc.................. 30,000 671,250
Altera Corporation*............... 25,000 1,243,750
Analog Devices, Inc.*............. 25,000 884,375
Atmel Corporation*................ 25,000 559,375
BMC Industries, Inc. ............. 20,000 465,000
C-Cube Microsystems, Inc.*........ 45,000 2,812,500
Cyberoptics Corporation*.......... 35,000 1,391,250
Harman International
Industries, Inc. ............... 25,000 1,003,125
Input/Output, Inc.*............... 40,000 2,310,000
International Rectifier
Corporation*.................... 50,000 1,250,000
Jabil Circuit, Inc.*.............. 30,000 337,500
Kemet Corporation*................ 40,000 955,000
Kent Electronics Corp.*........... 20,000 1,167,500
KLA Instruments Corporation*...... 20,000 521,250
Linear Technology Corporation..... 50,000 1,962,500
Macromedia, Inc.*................. 30,000 1,567,500
Oak Technology, Inc.*............. 22,500 950,625
Raychem Corporation............... 17,500 995,312
Robotic Vision Systems, Inc.*..... 30,000 723,750
SCI Systems, Inc.*................ 50,000 1,550,000
Sundstrand Corporation............ 20,000 1,407,500
ThermoSpectra Corporation*........ 5,000 78,125
UCAR International, Inc.*......... 15,000 506,250
Ultratech Stepper, Inc.*.......... 20,000 515,000
Watkins-Johnson Company........... 20,000 875,000
ENTERTAINMENT (0.98%)
Mirage Resorts, Inc.*............. 50,000 1,725,000
Regal Cinemas, Inc.*.............. 37,500 1,115,625
ENVIRONMENTAL SERVICES (1.14%)
Sanifill, Inc.*................... 30,000 1,001,250
United Waste Systems, Inc.*....... 30,000 1,117,500
U.S. Filter Corporation*.......... 25,000 665,625
U.S.A. Waste Services, Inc.*...... 26,000 490,750
FINANCE (4.40%)
Aames Financial Corp.............. 20,000 557,500
Bank of New York
Company, Inc. .................. 50,000 2,437,500
Finova Group, Inc. ............... 20,000 965,000
First Investors Financial Services
Group*.......................... 5,000 40,625
Green Tree Financial
Corporation..................... 70,000 1,846,250
Mercury Finance Company........... 35,000 463,750
Student Loan Marketing
Association..................... 22,500 1,482,188
Sunamerica, Inc. ................. 40,000 1,900,000
TCF Financial Corporation......... 50,000 1,656,250
The Money Store, Inc. ............ 18,750 292,969
United Companies Financial
Corporation..................... 40,000 1,055,000
FOODS & FOOD SERVICE (0.23%)
Richfood Holdings, Inc. .......... 25,000 668,750
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOTEL & MOTEL (0.85%)
HFS, Inc.*........................ 20,000 $ 1,635,000
La Quinta Inns, Inc. ............. 30,000 821,250
HOUSEHOLD PRODUCTS (0.49%)
First Brands Corporation.......... 25,000 1,190,625
USA Detergents, Inc.*............. 10,000 235,000
HOUSING (0.28%)
Clayton Homes, Inc. .............. 37,500 801,562
INSTRUMENTS (1.08%)
Millipore Corporation............. 35,000 1,439,375
Tektronix, Inc. .................. 15,000 736,875
Thermedics, Inc.*................. 25,000 693,750
Zygo Corporation*................. 10,000 251,250
INSURANCE (3.64%)
American Bankers Insurance Group.. 35,000 1,365,000
American Travellers
Corporation*.................... 15,000 421,875
CMAC Investment Corporation....... 15,000 660,000
Compdent Corporation*............. 6,800 282,200
Exel Limited...................... 20,000 1,220,000
First Commonwealth, Inc.*......... 2,000 52,000
Fremont General Corporation....... 20,000 735,000
Mercury General Corporation....... 20,000 955,000
Old Republic International
Corporation..................... 30,000 1,065,000
Penncorp Financial Group, Inc. ... 38,200 1,122,125
Reliastar Financial Corp.......... 20,000 887,500
TIG Holdings, Inc................. 20,000 570,000
United Dental Care, Inc.*......... 15,000 618,750
Vesta Insurance Group, Inc. ...... 10,000 545,000
MACHINERY (1.77%)
Black & Decker Corporation........ 22,100 779,025
Cognex Corporation*............... 40,000 1,390,000
Dover Corporation................. 20,000 737,500
Duriron Company, Inc. ............ 25,000 584,375
Greenfield Industries, Inc. ...... 30,000 937,500
Snap-On, Inc. .................... 15,000 678,750
MANUFACTURING (0.44%)
Danaher Corporation............... 40,000 1,270,000
MEDICAL (10.78%)
Boston Scientific Corporation*.... 50,000 2,450,000
Circon Corporation*............... 36,600 741,150
Coherent, Inc.*................... 10,000 405,000
Enterprise Systems, Inc.*......... 2,400 73,200
Guidant Corporation............... 55,000 2,323,750
Gulf South Medical Supply,
Inc.*........................... 20,000 605,000
Health Management Associates,
Inc.*........................... 53,750 1,404,218
HEALTHSOUTH Corporation*.......... 45,000 1,310,625
Invacare Corporation.............. 40,000 1,010,000
Maxicare Health Plans, Inc.*...... 25,000 671,875
MediSense, Inc.*.................. 20,000 632,500
MedPartners/Mullikin, Inc.*....... 25,000 825,000
Medtronic, Inc. .................. 40,000 2,235,000
Mentor Corporation................ 40,000 920,000
MiniMed, Inc.*.................... 26,600 332,500
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
40
<PAGE> 40
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL (CONTINUED)
National Surgery Centers, Inc.*... 5,000 $ 115,000
Nellcor Puritan Bennett, Inc.*.... 20,000 1,160,000
OccuSystems, Inc.*................ 25,000 500,000
Omnicare, Inc. ................... 50,000 2,237,500
PhyCor, Inc.*..................... 70,000 3,539,375
Physician Reliance Network,
Inc.*........................... 25,000 993,750
Physician Sales & Service,
Inc.*........................... 40,000 1,140,000
Renal Treatment Centers, Inc.*.... 20,000 880,000
Research Medical, Inc.*........... 37,000 999,000
Respironics, Inc. ................ 20,000 420,000
Spine-Tech, Inc.*................. 15,000 348,750
Sybron Corporation*............... 30,000 712,500
Total Renal Care Holdings,
Inc.*........................... 4,500 132,750
United Healthcare Corporation..... 20,000 1,310,000
Universal Health Services, Inc. --
Class B*........................ 15,000 665,625
METALS (0.48%)
Mueller Industries, Inc.*......... 20,000 585,000
Precision Castparts Corporation... 20,000 795,000
MINING (0.80)%
Minerals Technologies, Inc........ 15,000 547,500
Potash Corporation of
Saskatchewan, Inc............... 25,000 1,771,875
OFFICE EQUIPMENT (1.00%)
Alco Standard Corporation......... 50,000 2,281,250
Nu-Kote Holding, Inc. -- Class
A*.............................. 35,000 595,000
OIL & GAS (4.81%)
BJ Services Company -- Warrants*.. 14,000 106,750
BJ Services Company*.............. 39,378 1,141,962
Cairn Energy USA, Inc.*........... 10,000 140,000
Camco International, Inc.......... 25,000 700,000
Chesapeake Energy Corporation*.... 37,500 1,246,875
Diamond Offshore Drilling,
Inc.*........................... 25,000 843,750
DLB Oil & Gas, Inc.*.............. 25,000 240,625
Global Marine, Inc.*.............. 75,000 656,250
Kerr-McGee Corporation............ 25,000 1,587,500
Newfield Exploration Company*..... 25,000 675,000
Phoenix Resource
Companies, Inc.................. 20,000 345,000
Pogo Producing Company............ 40,000 1,130,000
Pride Petroleum Services, Inc.*... 60,000 637,500
Smith International, Inc.*........ 50,000 1,175,000
Sonat Offshore Drilling Company,
Inc............................. 45,000 2,013,750
Tidewater, Inc.................... 30,000 945,000
Varco International, Inc.*........ 25,000 300,000
PACKAGING (0.34%)
Sealed Air Corporation*........... 16,000 450,000
Sonoco Products Co................ 20,000 525,000
PHARMACEUTICALS (1.40%)
Cardinal Health, Inc.............. 12,500 684,375
Dura Pharmaceuticals, Inc.*....... 40,000 1,390,000
Watson Pharmaceutical, Inc.*...... 40,000 1,960,000
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PUBLISHING (1.53%)
Desktop Data, Inc.*............... 5,000 $ 122,500
Gartner Group, Inc. -- Class A*... 35,000 1,675,625
Meredith Corporation.............. 40,000 1,675,000
Scientific Games Holdings
Corporation*.................... 25,000 943,750
RADIO & TELEVISION (1.53%)
Clear Channel
Communications, Inc.*........... 40,000 1,765,000
Evergreen Media
Corporation -- Class A*......... 30,000 960,000
Infinity Broadcasting
Corporation -- Class A*......... 45,000 1,676,250
RAILROADS (0.61%)
Conrail, Inc...................... 25,000 1,750,000
RESTAURANTS (1.44%)
Applebee's International, Inc..... 35,000 796,250
Boston Chicken, Inc.*............. 35,000 1,124,375
Lone Star Steakhouse & Saloon,
Inc.*........................... 35,000 1,343,125
Outback Steakhouse, Inc.*......... 25,000 896,875
RETAIL & DEPARTMENT STORES (6.59%)
Baby Superstore, Inc.*............ 10,000 570,000
Bed Bath & Beyond, Inc.*.......... 15,000 582,187
Boise Cascade Office Products
Corporation*.................... 15,000 641,250
Casey's General Stores, Inc....... 40,000 875,000
CompUSA, Inc.*.................... 25,000 778,125
Consolidated Stores Corporation*.. 55,000 1,196,250
Corporate Express, Inc.*.......... 50,000 1,506,250
Eastbay, Inc.*.................... 4,000 79,000
Eckerd Corporation*............... 20,000 892,500
Fastenal Company.................. 30,000 1,267,500
Garden Ridge Corp.*............... 10,000 387,500
General Nutrition Companies*...... 50,000 1,150,000
Henry Schein, Inc.*............... 5,700 168,150
Just For Feet, Inc.*.............. 30,000 1,072,500
Kroger Company*................... 40,000 1,500,000
Micro Warehouse, Inc.*............ 20,000 865,000
Petco Animal Supplies, Inc.*...... 15,000 438,750
Safeway, Inc.*.................... 20,000 1,030,000
Staples, Inc.*.................... 55,000 1,340,625
Starbucks Corporation*............ 40,000 840,000
Sunglass Hut International,
Inc.*........................... 30,000 712,500
Vons Companies, Inc.*............. 20,000 565,000
Zale Corporation*................. 35,000 564,375
SHOES & LEATHER GOODS (0.49%)
Wolverine World Wide, Inc......... 45,000 1,417,500
TELECOMMUNICATIONS (7.84%)
Ascend Communications, Inc.*...... 70,000 5,678,750
Aspect Telecommunication
Corporation*.................... 27,500 921,250
AT&T Capital Corporation.......... 20,000 765,000
Cascade Communications Corp.*..... 15,000 1,278,750
Cellular Communications, Inc. -
Class A*........................ 10,000 497,500
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
41
<PAGE> 41
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Cincinnati Bell, Inc.............. 40,000 $ 1,390,000
DSP Communications, Inc.*......... 25,000 1,090,625
ECI Telecommunications Limited.... 20,000 456,250
Frontier Corporation.............. 50,000 1,500,000
Glenayre Technologies, Inc.*...... 20,000 1,245,000
LCI International, Inc.*.......... 60,000 1,230,000
MIDCOM Communications, Inc.*...... 15,000 273,750
Palmer Wireless, Inc.*............ 15,000 330,000
Picturetel Corporation*........... 25,000 1,078,125
U.S. Robotics Corporation*........ 45,000 3,948,750
VTEL Corporation*................. 50,000 925,000
TRANSPORTATION (2.47%)
Airborne Freight Corporation...... 25,000 665,625
Comair Holdings Inc............... 37,500 1,007,812
Consolidated Delivery & Logistics,
Inc.*........................... 33,900 372,900
Continental Airlines, Inc. -
Class A*........................ 10,000 425,000
Continental Airlines, Inc. -
Class B *....................... 30,000 1,305,000
Fritz Companies, Inc.*............ 20,000 830,000
Midwest Express Holdings, Inc.*... 15,000 416,250
Northwest Airlines Corp. -
Class A*........................ 41,000 2,091,000
-------------
Total Common Stocks
(cost: $ 210,126,820)............. 278,497,729
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
<S> <C> <C>
SHORT-TERM U.S. GOVERNMENT
OBLIGATION (6.22%)
Federal Home Loan Mortgage
Corp.
5.75%, due 01/02/96.......... $ 17,955,000 $ 17,946,397
-------------
Total Short-Term U.S. Government
Obligations
(cost: $ 17,946,397)......... 17,946,397
-------------
Total Investment Securities
(cost: $ 228,073,217)........ $ 296,444,126
-------------
-------------
SUMMARY
Investments at value........... 102.75 % $ 296,444,126
Liabilities in Excess
of Other Assets.............. (2.75)% (7,924,891)
-------- -------------
Net Assets..................... 100.00 % $ 288,519,235
-------- -------------
-------- -------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
42
<PAGE> 42
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
Apparel & Textiles 2.33%
Banking 4.62%
Commercial Services 3.72%
Computer Technology 15.40%
Electronics 9.25%
Finance 4.40%
Insurance 3.64%
Medical 10.78%
Oil & Gas 4.81%
Retail & Department Stores 6.59%
Telecommunications 7.84%
Transportation 2.47%
Short-Term U.S. Government Obligations 6.22%
Other 17.93%
The Emerging Growth Portfolio gained 46.79% during the year ended December 31,
1995, rising with a market that continued to rally in response to good earnings
and falling interest rates. The Portfolio beat all the major comparable indexes
including the NASDAQ Composite, the S&P Midcap Index, and the Russell 2000,
which gained 40.9%, 30.9%, and 28.4%, respectively, for the same period.
Technology and finance led in the fourth quarter as the market appears to be
rotating more among sectors, meaning it now might be more of a "stock pickers'
market" rather than a sector betting market. Investors seem to be looking for
companies that can maintain solid growth even as the economy slows. The Emerging
Growth Portfolio, with its emphasis on small-company growth stocks, is ideally
positioned with investments in those types of companies.
The investment style we employ is a bottom-up approach which focuses on stock
selection rather than "market timing" or "sector rotation". Risk is controlled
by maintaining a broadly diversified portfolio, not by making big bets on any
one sector or stock. Usually the Portfolio remains fully invested. The objective
is to outperform the market by picking the best stocks in each sector. This
investment style is designed to deliver consistent results.
Stocks are selected based on a company's potential to deliver upside earnings
surprises. To find such companies, we look for rising earnings estimates and
improving valuations. Investments are made in the highest growth companies in
each sector that meet the screening criteria. In general, these will be smaller
companies with revenues less than $1 billion.
Our biggest gainers during the period were: C-Cube Microsystems, Inc. (specialty
semiconductors), Ascend Communications, Inc. (telecommunications equipment),
Macromedia, Inc. (software), HFS, Inc. (hotel/motel), and Phycor, Inc.
(physician practice management).
We remain optimistic about the prospect for smaller capitalization growth
stocks. Small stocks are still selling at reasonable valuation levels when
compared to larger stocks, and would benefit strongly from any cut in the
capital gains tax.
<TABLE>
<S> <C> <C>
/s/ Gary Lewis
---------------------------------
Gary Lewis
[VAN KAMPEN AMERICAN CAPITAL LOGO] Emerging Growth Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE> 43
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 210,126,820).................... $ 278,497,729
Short-term securities, at amortized cost.... 17,946,397
Cash........................................ 13,705
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 901,092
Interest.................................. 0
Dividends................................. 107,585
Other..................................... 0
-----------------
Total assets............................ 297,466,508
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 8,680,577
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 177,974
Dividends to shareholders................. 0
Other fees................................ 88,722
-----------------
Total liabilities....................... 8,947,273
-----------------
Total net assets...................... $ 288,519,235
===================
NET ASSETS:
Capital stock
($ .01 par value 100,000,000
authorized)............................... $ 177,582
Additional paid-in capital.................. 219,203,866
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 16,877
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 750,001
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 68,370,909
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 288,519,235
===================
Shares outstanding at December 31, 1995..... 17,758,249
===================
Net asset value per share................... $ 16.25
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest..................................... $ 925,956
Dividends (net of foreign tax of $ 6,884).... 1,230,543
-----------------
Total investment income................ 2,156,499
-----------------
EXPENSES:
Investment advisory fees..................... 1,838,573
Printing and shareholder reports............. 97,365
Custodian fees............................... 71,508
Legal fees................................... 4,963
Auditing and accounting fees................. 17,062
Directors fees............................... 4,959
Other fees................................... 64,126
-----------------
Total expenses......................... 2,098,556
Less:
Advisory fee waiver and expense
reimbursement............................ 0
Fees paid indirectly....................... 6,375
-----------------
Net expenses........................... 2,092,181
-----------------
Net investment income (loss)................. 64,318
-----------------
Net realized gain (loss) on:
Investment securities.................... 35,450,575
Change in unrealized appreciation
(depreciation) on:
Investment securities.................... 52,134,219
-----------------
Net gain (loss) on investments........... 87,584,794
-----------------
Net increase (decrease) in net assets
resulting from operations................ $ 87,649,112
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
44
<PAGE> 44
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
OPERATIONS:
Net investment income (loss)............................................................ $ 64,318 $ 93,436
Net realized gain (loss) on investments................................................. 35,450,575 (21,381,696)
Change in unrealized appreciation (depreciation) on investments......................... 52,134,219 9,437,298
----------------- -----------------
Net increase (decrease) in net assets resulting from operations....................... 87,649,112 (11,850,962)
----------------- -----------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................... (49,487) (91,390)
Net realized gains...................................................................... (11,919,087) 0
----------------- -----------------
Total distributions................................................................... (11,968,574) (91,390)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares....................................................... 49,653,525 110,299,870
Dividends and distributions reinvested.................................................. 11,968,574 91,390
Cost of shares repurchased.............................................................. (31,433,111) (18,271,675)
----------------- -----------------
Increase (decrease) in net assets from capital shares transactions.................... 30,188,988 92,119,585
----------------- -----------------
Net increase (decrease) in net assets................................................. 105,869,526 80,177,233
NET ASSETS:
Beginning of period..................................................................... 182,649,709 102,472,476
----------------- -----------------
End of period........................................................................... $ 288,519,235 $ 182,649,709
=================== ===================
Undistributed net investment income................................................... $ 16,877 $ 2,046
=================== ===================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................ 15,817,298 8,217,028
----------------- -----------------
Shares issued........................................................................... 3,437,728 9,166,228
Shares issued - reinvestment of dividends and distributions............................. 739,247 7,914
Shares redeemed......................................................................... (2,236,024) (1,573,872)
----------------- -----------------
Increase (decrease) in shares outstanding............................................... 1,940,951 7,600,270
----------------- -----------------
Shares outstanding - end of period...................................................... 17,758,249 15,817,298
=================== ===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
45
<PAGE> 45
WRL SERIES FUND, INC.
EMERGING GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. EMERGING GROWTH PORTFOLIO AND THE STANDARD & POOR'S INDEX OF 500
COMMON STOCKS
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1995 1994 1993+
--------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period........................................ $ 11.55 $ 12.47 $ 10.00
Income from operations:
Net investment income (loss)............................................ .01 .01 (.04)
Net realized and unrealized
gain (loss) on investments............................................ 5.42 (.92) 2.51
--------- --------- ---------
Total income (loss) from operations................................... 5.43 (.91) 2.47
--------- --------- ---------
Distributions:
Dividends from net investment income.................................... .00 (.01) .00
Distributions from net realized gains
on investments........................................................ (.73) .00 .00
--------- --------- ---------
Total distributions................................................... (.73) (.01) .00
--------- --------- ---------
Net asset value, end of period.............................................. $ 16.25 $ 11.55 $ 12.47
========== ========== ==========
Total return................................................................ 46.79% (7.36)% 24.71%
Ratios and supplemental data:
Net assets at end of period
(in thousands).......................................................... $ 288,519 $ 182,650 $ 102,472
Ratio of expenses to average net assets................................... .91% .92% 1.00%
Ratio of net investment income (loss)
to average net assets................................................... .03% .06% (.30)%
Portfolio turnover rate................................................... 124.13% 72.62% 12.79%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was March 1, 1993. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
46
<PAGE> 46
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- -------------
<S> <C> <C>
COMMON STOCKS (97.09%)
AEROSPACE (2.01%)
Lockheed Martin Corporation...... 14,509 $ 1,146,211
McDonnell Douglas Corporation.... 22,200 2,042,400
APPAREL & TEXTILES (1.22%)
Tommy Hilfiger Corporation*...... 45,800 1,940,775
COMMERCIAL SERVICES (2.19%)
CUC International, Inc.*......... 900 30,713
Service Corporation
International.................. 78,200 3,440,800
COMPUTER TECHNOLOGY (23.32%)
3Com Corporation*................. 34,700 1,617,887
Adaptec, Inc.*.................... 35,000 1,435,000
ADFlex Solutions, Inc.*........... 24,000 642,000
Bay Networks, Inc.*............... 82,350 3,386,644
Broderbund Software, Inc.*........ 25,000 1,518,750
Cisco Systems, Inc.*.............. 40,200 2,999,925
Compaq Computer Corporation*...... 32,000 1,536,000
Dell Computer Corporation*........ 35,800 1,239,575
Digital Equipment Corporation*.... 80,600 5,168,475
Electronics For Imaging, Inc.*.... 69,600 3,045,000
First Data Corporation............ 69,707 4,661,645
Informix Corporation *............ 80,000 2,400,000
Pinnacle Systems, Inc.*........... 5,000 123,750
PRI Automation, Inc.*............. 26,500 930,813
Seagate Technology, Inc.*......... 70,000 3,325,000
Silicon Graphics, Inc.*........... 43,100 1,185,250
Softkey International, Inc.*...... 76,200 1,762,125
ELECTRONICS (12.38%)
Altera Corporation*............... 66,400 3,303,400
Intel Corporation................. 49,000 2,780,750
Linear Technology Corporation..... 67,800 2,661,150
Maxim Intergrated Products,
Inc.*........................... 136,000 5,236,000
Microchip Technology, Inc.*....... 106,000 3,869,000
Triquint Semiconductor, Inc.*..... 9,000 121,500
Xilinx, Inc.*..................... 54,500 1,662,250
ENVIRONMENTAL SERVICES (1.73%)
United Waste Systems, Inc.*....... 17,000 633,250
U.S.A. Waste Services, Inc.*...... 111,900 2,112,113
FINANCE (1.90%)
Advanta Corporation -- Class B.... 20,000 727,500
Lehman Brothers Holdings, Inc..... 30,500 648,124
The Money Store, Inc.............. 105,000 1,640,625
HOTEL & MOTEL (0.43%)
La Quinta Inns, Inc............... 25,000 684,374
HOUSING (1.08%)
Clayton Homes, Inc................ 80,000 1,710,000
INSTRUMENTS (0.76%)
Tencor Instruments*............... 35,200 858,000
Thermo Electron Corporation*...... 6,450 335,400
INSURANCE (2.96%)
American International Group,
Inc............................. 24,900 2,303,250
Travelers Group, Inc.............. 38,100 2,395,537
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MANUFACTURING (2.04%)
Asm Lithography Holding nv*....... 77,000 $ 2,560,250
Oakley, Inc.*..................... 20,000 680,000
MEDICAL (14.06%)
Columbia/HCA Healthcare
Corporation..................... 60,000 3,045,000
Health Management
Associates, Inc.*............... 12,750 333,094
Healthsource, Inc.*............... 118,600 4,269,600
IDEXX Laboratories, Inc.*......... 40,000 1,880,000
Liposome Company, Inc.*........... 45,500 910,000
MedPartners/Mullikin, Inc.*....... 55,000 1,815,000
Medtronic, Inc.................... 18,000 1,005,750
Omnicare, Inc..................... 20,800 930,800
Oxford Health Plans, Inc.*........ 51,000 3,767,625
Summit Technology, Inc.*.......... 112,500 3,796,875
United Healthcare Corporation..... 8,000 524,000
OFFICE EQUIPMENT (1.06%)
Alco Standard Corporation......... 37,000 1,688,125
PHARMACEUTICALS (8.66%)
Biochem Pharma, Inc.*............. 85,100 3,414,637
Cardinal Health, Inc.............. 75,600 4,139,100
Eli Lilly & Company............... 48,000 2,700,000
Merck & Company, Inc.*............ 31,500 2,071,125
SmithKline Beecham PLC -- ADR..... 25,000 1,387,500
RADIO & TELEVISION (1.09%)
Viacom, Inc. -- Class B*.......... 36,500 1,729,188
RESTAURANTS (4.81%)
Boston Chicken, Inc.*............. 60,000 1,927,500
Landry's Seafood Restaurants,
Inc.*........................... 21,400 365,138
Lone Star Steakhouse & Saloon,
Inc.*........................... 121,100 4,647,213
Outback Steakhouse, Inc.*......... 19,000 681,625
RETAIL & DEPARTMENT STORES (7.24%)
Cintas Corporation................ 29,000 1,290,500
GAP, Inc.......................... 47,200 1,982,400
OfficeMax, Inc.*.................. 199,750 4,469,406
Viking Office Products, Inc.*..... 25,000 1,162,500
VISX, Inc.*....................... 26,500 1,033,500
Williams-Sonoma, Inc.*............ 83,000 1,535,500
TELECOMMUNICATIONS (8.15%)
ADC Telecommunications, Inc.*..... 58,000 2,117,000
DSC Communications Corporation*... 51,400 1,895,375
Glenayre Technologies, Inc.*...... 56,250 3,501,562
Network Equipment Technologies,
Inc.*........................... 16,400 448,950
Tellabs, Inc.*.................... 58,000 2,146,000
U.S. Robotics Corporation......... 32,000 2,808,000
-------------
Total Common Stocks
(cost: $ 132,020,826)............. 153,920,799
-------------
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
47
<PAGE> 47
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- -------------
<S> <C> <C>
SHORT-TERM OBLIGATION (4.03%)
Prudential-Bache Securities**
5.39%, Repurchase Agreement
dated 12/29/95 to be repurchased
at $ 6,394,173 on 01/02/96...... $ 6,390,346 $ 6,390,346
-------------
Total Short-Term Obligation
(cost: $ 6,390,346)............... 6,390,346
-------------
Total Investment Securities
(cost: $ 138,411,172)........... $ 160,311,145
-------------
-------------
SUMMARY
Investments at value.............. 101.12 % $ 160,311,145
Liabilities in Excess
of Other Assets................. (1.12)% (1,777,091)
-------- -------------
Net Assets........................ 100.00 % $ 158,534,054
-------- -------------
-------- -------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $ 4,490,163 Federal Home Loan Mortgage Corporation 7.46%
due 10/01/24; $ 653,761 Federal Home Loan Mortgage Corporation 6.08% due
09/01/25; $ 2,463,832 Federal Home Loan Mortgage Corporation 6.19% due
07/01/24; market value and accrued interest aggregated $ 3,871,201,
$ 654,401 and $ 1,992,559 respectively for the collateral at December 31,
1995.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
48
<PAGE> 48
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
Commercial Services 2.19%
Computer Technology 23.32%
Electronics 12.38%
Insurance 2.96%
Manufacturing 2.04%
Medical 14.06%
Pharmaceuticals 8.66%
Restaurants 4.81%
Retail & Department Stores 7.24%
Telecommunications 8.15%
Short-Term Obligation 4.03%
Other 10.16%
For the six month period ended December 31, 1995 the Aggressive Growth Portfolio
returned 4.51% versus a gain of 14.45% for the Standard & Poor's Index of 500
Common Stocks. The Portfolio's relative underperformance to the S&P over this
time period was due primarily to a weak fourth quarter in which the Portfolio
was negatively impacted by a substantial commitment to technology-related
stocks, Despite a weak quarter, the Aggressive Growth Portfolio had a very
impressive 38.02% return for the full year, outperforming all major indexes,
including the S&P 500 which returned 37.58%.
As we entered the second half of 1995, we were faced with an economy which had
been decelerating for two quarters. In response, the Federal Reserve Board
lowered rates by 1/4 point in July. At the same time, mostly due to this
slowdown in the economy and lack of inflation, the bond market was rallying
sharply. The stock market in general rose quickly, with the widely-followed Dow
Jones Industrial Average breaking one record after another. Technology stocks
continued to respond strongly to extremely favorable second quarter earnings in
all sectors, especially semiconductors and related semiconductor equipment. The
third quarter ended with Gross Domestic Product (GDP) up a surprising 4.2%. This
better-than-expected number for GDP was caused in part by a build-up in
inventories, suggesting that the fourth quarter numbers would be lower than the
third quarter.
As the fourth quarter progressed, it became clear that the economy was
decelerating sharply, especially at the consumer level. This began to have
negative implications for certain technology stocks -- especially
commodity-based semiconductors (DRAM's and SRAM's). We had a substantial
commitment -- almost 50% of the portfolio -- to technology-related stocks
entering the fourth quarter. Significant sell-offs began to occur and we began
to liquidate select technology holdings. By December, we had reduced the
portfolio's technology-related exposure to approximately 35%, retaining stocks
which we felt still had good fundamentals.
The period from late November through December was exceedingly volatile and our
remaining technology holdings seemingly dropped and recovered on alternating
weeks. Nearing Christmas, investors became more concerned about the outlook for
consumer spending and the economy in general. This was exacerbated by Fed
inaction in November as well as the continuation of difficult budget talks. The
shutdown of the Government due to lack of a budget agreement also resulted in
the absence of important economic statistics, impacting the psychology of both
the stock and bond markets. Many Wall Street analysts began to recommend the
sale of specific technology stocks which brought the entire sector under
pressure.
In general, growth stocks fell dramatically as investors took profits and
rotated into defensive stocks, sending the averages higher but depressing growth
stocks. We had predicted that the Fed would lower rates in December, and this
proved to be an accurate forecast. This action eliminated some negativity in the
market and we regained some of our lost momentum.
Technology stocks have continued to be subject to periods of excessive profit
taking. We believe that this phenomenon has been greatly overdone and that many
of our holdings are exceedingly undervalued at present levels. Recently we did a
study that shows that if our top thirteen technology holdings were to get to
their high 1995 price/earnings multiples based on 1996 earnings, the average
appreciation would be in excess of 70%. We are extremely reluctant, therefore,
to sell companies that are doing well at this price. We believe that this
strategy will, in the end, prevail.
Looking out to 1996, we forecast that: the economy will grow, but at a slow
rate; the Fed will be anxious to supply credit in small increments; inflation,
after a brief commodity-based scare, will be low; corporate profits will rise
but not as strong as 1995; and the stock market will have a good year, possibly
reaching 6000 at some time during the year. Altogether, we are convinced that
1996 will be another excellent year for the Aggressive Growth Portfolio.
<TABLE>
<C> <S>
/s/ David D. Alger
------------------------------------------
David D. Alger
[FRED ALGER MANAGEMENT, INC. LOGO] Aggressive Growth Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
49
<PAGE> 49
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 132,020,826)...................... $ 153,920,799
Short-term securities, at amortized cost.... 6,390,346
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 484,906
Interest.................................. 957
Dividends................................. 33,795
Other..................................... 0
-------------
Total assets............................ 160,830,803
-------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 2,142,802
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 98,172
Dividends to shareholders................. 0
Other fees................................ 55,775
-------------
Total liabilities....................... 2,296,749
-------------
Total net assets...................... $ 158,534,054
=============
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)... $ 119,645
Additional paid-in capital.................. 136,947,761
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 0
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. (433,325)
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 21,899,973
-------------
Net assets applicable to outstanding
shares of capital......................... $ 158,534,054
=============
Shares outstanding at December 31, 1995..... 11,964,511
=============
Net asset value per share................... $ 13.25
=============
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 283,756
Dividends (net of foreign tax of $ 3,581)... 343,597
-----------------
Total investment income............... 627,353
-----------------
EXPENSES:
Investment advisory fees.................... 849,097
Interest expense............................ 161,975
Printing and shareholder reports............ 44,843
Custodian fees.............................. 30,752
Legal fees.................................. 2,331
Auditing and accounting fees................ 8,325
Directors fees.............................. 2,251
Other fees.................................. 43,042
-----------------
Total expenses........................ 1,142,616
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 95
-----------------
Net expenses.......................... 1,142,521
-----------------
Net investment income (loss)................ (515,168)
-----------------
Net realized gain (loss) on:
Investment securities................... 4,512,355
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 20,073,057
-----------------
Net gain (loss) on investments.......... 24,585,412
-----------------
Net increase (decrease) in net assets
resulting from operations................. $ 24,070,244
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
50
<PAGE> 50
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994*
<S> <C> <C>
OPERATIONS:
Net investment income (loss).......................................................... $ (515,168) $ 31,739
Net realized gain (loss) on investments............................................... 4,512,355 (244,421)
Change in unrealized appreciation (depreciation) on investments....................... 20,073,057 1,826,916
----------------- ------------------
Net increase (decrease) in net assets resulting from operations..................... 24,070,244 1,614,234
----------------- ------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................. 0 (31,238)
In excess of net investment income.................................................... (501) 0
Net realized gains.................................................................... (4,186,091) 0
----------------- ------------------
Total distributions................................................................. (4,186,592) (31,238)
----------------- ------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares..................................................... 133,357,432 39,557,658
Dividends and distributions reinvested................................................ 4,186,592 31,238
Cost of shares repurchased............................................................ (37,719,938) (2,345,576)
----------------- ------------------
Increase (decrease) in net assets from capital shares transactions.................. 99,824,086 37,243,320
----------------- ------------------
Net increase (decrease) in net assets............................................... 119,707,738 38,826,316
NET ASSETS:
Beginning of period................................................................... 38,826,316 0
----------------- ------------------
End of period......................................................................... $ 158,534,054 $ 38,826,316
=================== ====================
Undistributed net investment income................................................. $ 0 $ 501
=================== ====================
SHARE ACTIVITY:
Shares outstanding - beginning of period.............................................. 3,937,879 0
----------------- ------------------
Shares issued......................................................................... 10,492,134 4,179,652
Shares issued - reinvestment of dividends and distributions........................... 315,955 3,290
Shares redeemed....................................................................... (2,781,457) (245,063)
----------------- ------------------
Increase (decrease) in shares outstanding............................................. 8,026,632 3,937,879
----------------- ------------------
Shares outstanding - end of period.................................................... 11,964,511 3,937,879
=================== ====================
</TABLE>
* The inception of this portfolio was March 1, 1994.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
51
<PAGE> 51
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. AGGRESSIVE GROWTH PORTFOLIO, THE VALUE LINE (ARITHMETIC) INDEX
AND THE STANDARD & POOR'S INDEX OF 500 COMMON STOCKS
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994+
--------- ------------
<S> <C> <C>
Net asset value, beginning of period..................... $ 9.86 $ 10.00
Income from operations:
Net investment income (loss)......................... (.06) .02
Net realized and unrealized
gain (loss) on investments......................... 3.96 (.14)
--------- ------------
Total income (loss) from operations................ 3.90 (.12)
--------- ------------
Distributions:
Dividends from net investment income................. .00 (.02)
Distributions from net realized gains
on investments..................................... (.51) .00
--------- ------------
Total distributions................................ (.51) (.02)
--------- ------------
Net asset value, end of period........................... $ 13.25 $ 9.86
========== ==============
Total return............................................. 38.02% (1.26)%
Ratios and supplemental data:
Net assets at end of period
(in thousands)....................................... $ 158,534 $ 38,826
Ratio of expenses to average net assets................ 1.07% 1.00%
Ratio of net investment income (loss)
to average net assets................................ (.48)% .20%
Portfolio turnover rate................................ 108.04% 89.73%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was March 1, 1994. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
52
<PAGE> 52
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (31.83%)
U.S. Treasury Bonds
7.25%, due 05/15/16............ $ 800,000 $ 913,016
U.S. Treasury Bonds
7.50%, due 11/15/16............ 800,000 937,976
U.S. Treasury Bonds
7.25%, due 08/15/22............ 800,000 924,440
U.S. Treasury Bonds
6.25%, due 08/15/23............ 1,500,000 1,543,020
U.S. Treasury Notes
7.00%, due 04/15/99............ 700,000 735,595
U.S. Treasury Notes
6.38%, due 08/15/02............ 700,000 734,678
U.S. Treasury Notes
6.00%, due 10/15/99............ 800,000 818,896
U.S. Treasury Notes
7.25%, due 08/15/04............ 800,000 889,864
U.S. Treasury Notes
7.13%, due 09/30/99............ 700,000 742,056
U.S. Treasury Notes
6.50%, due 05/15/05............ 800,000 851,352
U.S. Treasury Notes
7.25%, due 11/15/96............ 800,000 813,344
------------
Total U.S. Government Obligations
(cost: $ 9,286,679).............. 9,904,237
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
COMMON STOCKS (64.08%)
AUTOMOTIVE (2.33%)
Chrysler Corporation............. 13,100 $ 725,413
BANKING (9.04%)
Dime Bancorp, Inc.* ............. 64,000 744,000
H.F. Ahmanson & Company.......... 25,000 662,500
Pacific Crest Capital, Inc.*..... 90,000 652,500
Washington Mutual, Inc........... 26,000 750,750
BUILDING (2.42%)
Masco Corporation................ 24,000 753,000
COMPUTER TECHNOLOGY (2.42%)
Hewlett-Packard Company.......... 9,000 753,750
ELECTRONICS (2.55%)
General Electric Company......... 11,000 792,000
ENERGY (2.45%)
Enron Corporation................ 20,000 762,500
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCE (2.31%)
Student Loan Marketing
Association.................... 10,900 $ 718,038
HOUSING (2.58%)
Merry Land & Investment Company,
Inc............................ 34,000 803,250
INSURANCE (7.61%)
Equitable of Iowa Companies...... 25,000 803,125
USF&G Corporation................ 44,010 742,668
Western National Corporation..... 51,000 822,375
MEDICAL (7.16%)
Foundation Health Corporation*... 17,000 731,000
Humana, Inc.*.................... 25,000 684,375
US Healthcare, Inc............... 17,500 813,750
OIL & GAS (5.25%)
Dresser Industries, Inc.......... 32,000 780,000
Sonat, Inc....................... 24,000 855,000
PUBLISHING (2.50%)
Dun & Bradstreet Corporation..... 12,000 777,000
REAL ESTATE (13.17%)
Equity Residential Properties
Trust.......................... 24,000 735,000
Health and Retirement Property
Trust.......................... 42,000 682,500
Liberty Property Trust........... 35,000 726,250
Shurgard Storage Centers, Inc. -
Class A........................ 24,000 648,000
Storage Trust Realty............. 37,000 841,750
Storage USA, Inc................. 14,200 463,275
TELECOMMUNICATIONS (2.29%)
AT&T Corporation................. 11,000 712,250
------------
Total Common Stocks
(cost: $ 17,372,463)............. 19,936,019
------------
OTHER INVESTMENT SECURITIES (1.55%)
FINANCE (1.55%)
Templeton Russia Fund, Inc.*..... 35,000 481,250
------------
Total Other Investment Securities
(cost: $ 508,910)................ 481,250
------------
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
53
<PAGE> 53
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
SHORT-TERM OBLIGATION (1.87%)
Prudential-Bache Securities**
5.39%, Repurchase Agreement
dated 12/29/95 to be
repurchased at $ 583,592 on
01/02/96....................... $ 583,242 $ 583,242
------------
Total Short-Term Obligation
(cost: $ 583,242)................ 583,242
------------
Total Investment Securities
(cost: $ 27,751,294)........... $ 30,904,748
------------
------------
SUMMARY
Investments at value............. 99.33% $ 30,904,748
Other Assets in
Excess of Liabilities.......... 0.67% 209,697
------- ------------
Net Assets....................... 100.00% $ 31,114,445
------- ------------
------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $ 2,746,917 Federal National Mortgage Association 9.00%
due 09/01/22; market value and accrued interest aggregated $ 594,908 for
this collateral at December 31, 1995.
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
54
<PAGE> 54
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
U.S. Government Obligations 31.83%
Automotive 2.33%
Banking 9.04%
Building 2.42%
Computer Technology 2.42%
Electronics 2.55%
Energy 2.45%
Finance 2.31%
Housing 2.58%
Insurance 7.61%
Medical 7.16%
Oil & Gas 5.25%
Publishing 2.50%
Real Estate 13.17%
Telecommunications 2.29%
Short-Term Obligation 1.87%
Other 2.22%
The strength in both the equity and the bond market for the last period exceeded
most expectations. If anything, our strategy remained unduly cautious. Still,
for the year ended December 31, 1995, the Balanced Portfolio returned 19.80%. By
comparison, the Standard & Poor's Index of 500 Common Stocks gained 37.58% and
the Lehman Brothers Government/Corporate Intermediate Index was up 15.33% for
the same period. As investors we remained disciplined in terms of adhering to
our purchase criteria emphasizing a value orientation. This process, by its
nature, tends to exclude stocks trading at multiples much higher than the
general market.
Looking out to 1996, we're seeing a downshifting in corporate earnings
expectations from what was a nearly 20% growth rate in 1995. The consensus
expectations for next year's earnings indicates a 7% uptick compared with the
1995 base period. With our nation's economic growth starting to slow, one has to
question a 7% projection; I think a lower rate is more realistic. If the real
economy does deliver more modest results, one has to approach the 1996 stock
market with a higher degree of caution than in 1995.
The real economy, as opposed to the financial markets, has indeed shown definite
signs of slowing its rate of growth. Although few analysts are willing to
predict recession, we would note that industrial raw material prices peaked as
long ago as last July and have been in a fairly steady, although volatile,
decline since then. And retail sales during the Christmas season were a
disappointment in almost all retail categories. Moreover, the relentless
downtick in employment in American manufacturing has continued unabated now for
almost a year.
This pattern of slowing growth seems to be the case for most of our overseas
trading partners as well. With that, assumptions about how U.S. exports would
continue to provide a growth component to our own Gross Domestic Product are now
suspect, even with a relatively weak U.S. dollar. Meanwhile, as the budget
impasse continues in Washington, expectations of a possible capital gains tax
reduction (on balance a strong stimulus to future economic growth) grow dim with
a resulting loss of positive investor sentiment.
Still, we remain perhaps more bullish than one might expect on the financial
markets for the coming year. The underlying positive factor in the markets is
the potential for downward drifting interest rates. To that end, the maturities
of the fixed-income portion of the Balanced Portfolio remain longer than
historic norms -- duration is approximately 7.5 years and average maturity is
around 13.5 years. If the Federal Reserve chooses to continue the process of
reducing short rates, which we think is their most probable course, we will
likely see price/earnings ratios supported by lower interest rates, even while
earnings may come in at levels lower than current expectations. This is
admittedly a rather delicate balancing act, with the positive impact of interest
rates running into reduced earnings expectations as we move through 1996.
The Balanced Portfolio remains defensively positioned. It is deliberately
interest-rate sensitive, not only with regard to bond holdings, but equities as
well. We are positioned in select early-cycle beneficiaries, like the autos,
which have proven historically to be interest-rate sensitive. Holdings in
insurance companies, savings and loans, and the real estate investment trusts
should also benefit from a declining interest rate environment. All the while,
we'll be paying very close attention to earnings reports as we move into the new
year.
[AEGON LOGO] /s/ Michael Van Meter
------------------------------------
Michael Van Meter
Balanced Portfolio Manager
- --------------------------------------------------------------------------------
55
<PAGE> 55
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 27,168,052)....................... $ 30,321,506
Short-term securities, at amortized cost.... 583,242
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 2,163,458
Interest.................................. 155,662
Dividends................................. 82,615
Foreign receivable........................ 1,184
Other..................................... 0
-----------------
Total assets............................ 33,307,667
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 2,166,978
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 19,227
Dividends to shareholders................. 0
Other fees................................ 7,017
-----------------
Total liabilities....................... 2,193,222
-----------------
Total net assets...................... $ 31,114,445
===================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)... $ 29,258
Additional paid-in capital.................. 28,656,393
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 1,887
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. (726,547)
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 3,153,454
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 31,114,445
===================
Shares outstanding at December 31, 1995..... 2,925,799
===================
Net asset value per share................... $ 10.63
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 684,725
Dividends (net of foreign tax of $ 2,269)... 628,973
-----------------
Total investment income............... 1,313,698
-----------------
EXPENSES:
Investment advisory fees.................... 195,339
Printing and shareholder reports............ 10,317
Custodian fees.............................. 17,359
Legal fees.................................. 506
Auditing and accounting fees................ 7,211
Directors fees.............................. 521
Other fees.................................. 6,623
-----------------
Total expenses........................ 237,876
Less:
Advisory fee waiver and expense
reimbursement........................... 0
Fees paid indirectly...................... 48
-----------------
Net expenses.......................... 237,828
-----------------
Net investment income (loss)................ 1,075,870
-----------------
Net realized gain (loss) on:
Investment securities................... (304,159)
Foreign currency transactions........... (310)
-----------------
Total net realized gain (loss)........ (304,469)
-----------------
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 3,757,433
Foreign currency transactions........... 385
-----------------
Total change in unrealized
appreciation (depreciation)......... 3,757,818
-----------------
Net gain (loss) on investments.......... 3,453,349
-----------------
Net increase (decrease) in net assets
resulting from operations............... $ 4,529,219
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
56
<PAGE> 56
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994*
<S> <C> <C>
OPERATIONS:
Net investment income (loss)......................................................... $ 1,075,870 $ 357,478
Net realized gain (loss) on investments and foreign currency transactions............ (304,469) (422,221)
Change in unrealized appreciation (depreciation) on investments and translation of
foreign currency transactions...................................................... 3,757,818 (604,364)
----------------- ------------------
Net increase (decrease) in net assets resulting from operations.................... 4,529,219 (669,107)
----------------- ------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................................ (1,074,367) (356,951)
Net realized gains................................................................... 0 0
----------------- ------------------
Total distributions................................................................ (1,074,367) (356,951)
----------------- ------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares.................................................... 12,933,665 21,414,453
Dividends and distributions reinvested............................................... 1,074,367 356,951
Cost of shares repurchased........................................................... (5,770,415) (1,323,370)
----------------- ------------------
Increase (decrease) in net assets from capital shares transactions................. 8,237,617 20,448,034
----------------- ------------------
Net increase (decrease) in net assets.............................................. 11,692,469 19,421,976
NET ASSETS:
Beginning of period.................................................................. 19,421,976 0
----------------- ------------------
End of period........................................................................ $ 31,114,445 $ 19,421,976
=================== ====================
Undistributed net investment income................................................ $ 1,887 $ 527
=================== ====================
SHARE ACTIVITY:
Shares outstanding - beginning of period............................................. 2,102,921 0
----------------- ------------------
Shares issued........................................................................ 1,309,039 2,203,355
Shares issued - reinvestment of dividends and distributions.......................... 105,008 38,513
Shares redeemed...................................................................... (591,169) (138,947)
----------------- ------------------
Increase (decrease) in shares outstanding............................................ 822,878 2,102,921
----------------- ------------------
Shares outstanding - end of period................................................... 2,925,799 2,102,921
=================== ====================
</TABLE>
* The inception of this portfolio was March 1, 1994.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
57
<PAGE> 57
WRL SERIES FUND, INC.
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. BALANCED PORTFOLIO, THE STANDARD & POOR'S INDEX OF 500 COMMON STOCKS AND
LEHMAN BROTHERS GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994+
-------- ------------
<S> <C> <C>
Net asset value, beginning of period.................. $ 9.24 $ 10.00
Income from operations:
Net investment income (loss)...................... .44 .34
Net realized and unrealized
gain (loss) on investments...................... 1.38 (.76)
-------- ------------
Total income (loss) from operations............. 1.82 (.42)
-------- ------------
Distributions:
Dividends from net investment income.............. (.43) (.34)
Distributions from net realized gains
on investments.................................. .00 .00
-------- ------------
Total distributions............................. (.43) (.34)
-------- ------------
Net asset value, end of period........................ $ 10.63 $ 9.24
========= =============
Total return.......................................... 19.80% (5.73)%
Ratios and supplemental data:
Net assets at end of period
(in thousands).................................... $ 31,114 $ 19,422
Ratio of expenses to average net assets............. .97% 1.00%
Ratio of net investment income (loss)
to average net assets............................. 4.38% 4.27%
Portfolio turnover rate............................. 98.55% 57.73%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was March 1, 1994. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
58
<PAGE> 58
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
CORPORATE DEBT SECURITIES (0.81%)
FINANCE (0.81%)
Equitable Companies, Inc.
6.13%, due 12/15/24.............. $ 175,000 $ 199,718
------------
Total Corporate Debt Securities
(cost: $ 180,260).................. 199,718
------------
CONVERTIBLE BONDS (1.52%)
COMPUTER TECHNOLOGY (0.43%)
3Com Corporation 144A+
10.25%, due 11/01/01............. 70,000 107,275
ELECTRONICS (0.76%)
Analog Devices, Inc.
3.50%, due 12/01/00.............. 70,000 75,600
National Semiconductor Corporation
144A+
6.50%, due 10/01/02.............. 60,000 55,950
VLSI Technology, Inc.
8.25%, due 10/01/05.............. 60,000 55,500
RETAIL & DEPARTMENT STORES (0.33%)
Federated Department Stores, Inc.
5.00%, due 10/01/03.............. 80,000 80,100
------------
Total Convertible Bonds
(cost: $ 379,054)................ 374,425
------------
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (15.19%)
BANKING (0.22%)
First USA, Inc..................... 1,400 $ 55,300
BUILDING (0.55%)
Kaufman & Broad Homes Corporation -
Series B......................... 9,000 133,875
COMPUTER TECHNOLOGY (0.98%)
General Motors Corporation -
Series C......................... 3,300 241,725
FINANCE (3.45%)
Merrill Lynch & Company, Inc....... 6,200 321,625
Sunamerica, Inc. -
Series E......................... 3,000 196,500
Sunamerica, Inc. -
Series D......................... 6,900 330,338
FOREST PRODUCTS & PAPER (1.37%)
International Paper Company+....... 2,400 107,400
James River Corporation of Virginia -
Series P......................... 9,800 229,075
METALS (1.52%)
Reynolds Metals Company............ 7,400 374,625
OIL & GAS (0.93%)
Williams Companies, Inc............ 3,100 227,850
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
TELEPHONE UTILITIES (2.21%)
Compania Inversiones
Telecommunications - 144A+....... 9,700 $ 544,412
TOBACCO PRODUCTS (3.96%)
RJR Nabisco Holdings Corp. -
Series C......................... 153,000 975,375
------------
Total Convertible Preferred Stocks
(cost: $ 3,564,779).............. 3,738,100
------------
COMMON STOCKS (77.91%)
BANKING (0.30%)
PNC Bank Corporation............... 2,300 74,175
ELECTRIC UTILITIES (38.52%)
Baltimore Gas and Electric
Company.......................... 10,200 290,700
CINergy Corporation................ 9,400 287,875
CMS Energy Corporation............. 20,600 615,425
DPL, Inc. ......................... 24,300 601,425
DQE, Inc. ......................... 19,750 607,312
Duke Power Company................. 16,600 786,425
Florida Progress Corporation....... 9,800 346,675
FPL Group, Inc. ................... 20,900 969,237
General Public Utilities
Corporation...................... 10,900 370,600
Illinova Corporation............... 17,900 537,000
National Power PLC - ADR*.......... 15,430 142,728
NIPSCO Industries, Inc. ........... 13,400 512,550
Ohio Edison Company................ 6,600 155,100
PacifiCorp......................... 16,800 357,000
Peco Energy Company................ 11,700 352,462
Pinnacle West Capital
Corporation...................... 21,400 615,250
Southern Company................... 19,200 472,800
Texas Utilities Company............ 13,500 555,187
Unicom Corporation................. 4,300 140,825
Utilicorp United, Inc. ............ 14,100 414,187
Western Resources, Inc. ........... 10,500 350,437
ENERGY (2.55%)
Enron Corporation.................. 12,200 465,125
Enron Global Power & Pipelines
L.L.C. .......................... 6,500 161,688
FOODS & FOOD SERVICE (1.03%)
Philip Morris Companies, Inc. ..... 2,800 253,400
MEDICAL (1.84%)
Meditrust Corporation.............. 13,000 453,375
OIL & GAS (5.01%)
Exxon Corporation.................. 4,200 336,525
Panhandle Eastern Corporation...... 5,100 142,163
Sonat, Inc. ....................... 12,400 441,750
Williams Companies, Inc. .......... 7,100 311,513
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
59
<PAGE> 59
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS (20.21%)
A T & T Corporation................ 16,300 $ 1,055,425
Ameritech Corporation.............. 12,100 713,900
Bellsouth Corporation.............. 20,500 891,750
Cable & Wireless PLC - Sponsored
ADR.............................. 2,200 46,475
Compania de Telecomunicaciones de
Chile SA - ADR................... 2,100 174,038
MCI Communications Corporation..... 35,500 927,437
Nokia Corp. - Series A - ADR....... 5,900 229,363
SBC Communications, Inc. .......... 13,800 793,500
Telecomunicacoes Brasileiras SA -
ADR.............................. 3,000 142,125
TELEPHONE UTILITIES (4.37%)
GTE Corporation.................... 19,000 836,000
Telefonica de Espana SA - ADR...... 5,700 238,688
UTILITIES (4.08%)
MCN Corporation.................... 18,600 432,450
Pacific Enterprises................ 16,000 452,000
Westcoast Energy, Inc.............. 8,100 118,463
------------
Total Common Stocks
(cost: $ 16,815,850)............... 19,172,528
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
SHORT-TERM OBLIGATION (4.86%)
HSBC Securities, Inc.**
5.50%, Repurchase Agreement dated
12/29/95 to be repurchased at
$ 1,195,730 on 01/02/96.......... $ 1,195,000 $ 1,195,000
------------
Total Short-Term Obligation
(cost: $ 1,195,000)................ 1,195,000
------------
Total Investment Securities
(cost: $ 22,134,943)............. $ 24,679,771
------------
------------
SUMMARY
Investments at value............... 100.29 % $ 24,679,771
Liabilities in Excess
of Other Assets.................. (0.29)% (72,282)
-------- ------------
Net Assets......................... 100.00 % $ 24,607,489
-------- ------------
-------- ------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $ 1,225,000 U.S. Treasury Notes 5.13% due 04/30/98;
market value and accrued interest aggregated $ 1,222,320 for this
collateral at December 31, 1995.
+ Securities are registered pursuant to rule 144A and may be deemed to be
restricted for resale.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
60
<PAGE> 60
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
YEAR ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
<TABLE>
<S> <C>
Corporate Debt Securities 0.81%
Convertible Bonds 1.52%
Convertible Preferred Stocks 15.19%
Electric Utilities 38.52%
Energy 2.55%
Oil & Gas 5.01%
Telecommunications 20.21%
Telephone Utilities 4.37%
Utilities 4.08%
Short-Term Obligations 4.86%
Other 2.88%
</TABLE>
1995 was the year in which utilities rose from the ashes of 1994 like the
Phoenix. In the previous year, utilities had been hurt by rapidly rising
interest rates and fears of restructuring. The predominantly
electric-utility-weighted Dow Jones Utility Average lost 15.81% on a total
return basis in 1994, while the telephone-heavy Standard & Poor's Utility Index
fell 8.31%. But in 1995, rapidly falling interest rates, subsiding restructuring
fears, and strong earnings growth led to a handsome 31.61% gain in the Dow Jones
Utility Average and a stunning gain of 42.11% in the S&P Utility Index for the
full year.
By comparison, the Utility Portfolio posted a very respectable total return of
25.25%. This relative underperformance was due in part to the Portfolio's
conservative structure, which holds certain convertible securities to help
cushion the interest-rate sensitivity of utility stocks. It is this strategy
that has allowed the Portfolio to perform well versus its peer group during weak
utility markets, and over long periods of time with below-average risk rankings.
Another significant reason for the Portfolio's underperformance in 1995 was its
relative underweighting in the Baby Bells, which as a group advanced over 50%
for the year. While we believe that the coming of long distance, cellular, and
cable competition will lead to lower profit margins for the Baby Bells, it
appears that true competition may now be years away. In the meantime, the
telephone companies are enjoying strong subscriber growth while cost-cutting
efforts are enhancing earnings. As a result, we have of late increased our
portfolio weighting in the U.S. telecom sector from 9% to over 20%.
We did participate in several positive stock performances in 1995. These
included: William Cos., which rose 75% on a total return basis; GTE, which rose
45%; DQE Inc., which rose 53%; Pinnacle West, which rose 45%; PNC Financial,
which rose 52%; and AT&T Corp., which rose 29%.
We currently have 38% of the portfolio in domestic electric utilities. Because
of this group's relative underperformance in 1995, we believe it is poised to
perform well in 1996. Additionally, the reform movement to bring down
competitive barriers is proceeding much more slowly than expected, while
companies continue to cut costs. The natural gas stocks which comprise 10% of
our portfolio are reacting to an excellent start to the winter. We also believe
the weakness in international markets over the last two years had led to some
attractive valuations there. Consequently, we have initiated positions in
Compania de Telecomunicaciones de Chile-SA and Telecommunicacoes Brasileiras-SA.
The international utility markets offer superior growth and some of the best
relative valuations in years.
Our focus in 1996 will be to seek companies with competitive management that
have accelerating earnings and above-average dividend growth potential. The key
variable determining utility stocks' 1996 performance will continue to be
earnings and interest rates. The yield on long-term treasuries fell by 192 basis
points in 1995, giving utilities their initial thrust. It's difficult to foresee
a similar decline in 1996, but with an accommodative Federal Reserve, an
election, and a slowing economy, it is equally as difficult to expect much
upside risk to interest rates. Earnings growth was a pleasant surprise in 1995
as companies benefited from increased efficiencies in the face of a slower than
expected industry restructuring, particularly for telephone and electric
utilities. We expect this positive trend to continue.
Overall, we are optimistic as we enter 1996. Each of the utility sectors is
enjoying relatively positive fundamentals and the defensive nature of this asset
class will provide a strong measure of protection when we ultimately have a
general bear market. While we do not expect a repeat of 1995 for utility stocks,
we do believe that most investors will be pleased with 1996's performance.
<TABLE>
<CAPTION>
[LOGO] /s/ Christopher H. Wiles
<S> <C> ------------------------
Christopher H. Wiles
Utility Portfolio Manager
- --------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 61
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 20,939,943)........................ $ 23,484,771
Short-term securities, at amortized cost..... 1,195,000
Cash......................................... 2,615
Receivables:
Fund shares sold........................... 0
Securities sold............................ 19,883
Interest................................... 6,976
Dividends.................................. 72,764
Foreign receivable......................... 125
Other...................................... 0
-----------------
Total assets............................. 24,782,134
-----------------
LIABILITIES:
Fund shares purchased........................ 0
Securities purchased......................... 156,531
Accounts payable and accrued liabilities:
Custody fees............................... 0
Investment advisory fees................... 13,585
Dividends to shareholders.................. 0
Other fees................................. 4,529
Foreign payable............................ 0
-----------------
Total liabilities........................ 174,645
-----------------
Total net assets....................... $ 24,607,489
===================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized).... $ 22,122
Additional paid-in capital................... 22,044,707
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)............................ 249
Accumulated undistributed net realized
gain (loss) on:
Investment transactions.................. (4,417)
Net unrealized appreciation (depreciation)
on:
Investment securities...................... 2,544,828
-----------------
Net assets applicable to outstanding
shares of capital.......................... $ 24,607,489
===================
Shares outstanding at December 31, 1995...... 2,212,175
===================
Net asset value per share.................... $ 11.12
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME: DECEMBER 31, 1995
<S> <C>
Interest.................................... $ 118,159
Dividends (net of foreign tax of $ 3,957)... 842,556
-----------------
Total investment income............... 960,715
-----------------
EXPENSES:
Investment advisory fees.................... 128,859
Printing and shareholder reports............ 8,135
Custodian fees.............................. 34,769
Legal fees.................................. 384
Auditing and accounting fees................ 6,944
Directors fees.............................. 411
Other fees.................................. 7,164
-----------------
Total expenses........................ 186,666
Less:
Advisory fee waiver and expense
reimbursement........................... 14,417
Fees paid indirectly...................... 437
-----------------
Net expenses................................ 171,812
-----------------
Net investment income (loss)................ 788,903
-----------------
Net realized gain (loss) on:
Investment securities................... 275,952
Foreign currency transactions........... 6,300
-----------------
Total net realized gain (loss)........ 282,252
-----------------
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 2,876,027
Foreign currency transactions........... 27
-----------------
Total change in unrealized
appreciation (depreciation)......... 2,876,054
-----------------
Net gain (loss) on investments.......... 3,158,306
-----------------
Net increase (decrease) in net assets
resulting from operations................. $ 3,947,209
===================
</TABLE>
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
62
<PAGE> 62
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994*
<S> <C> <C>
OPERATIONS:
Net investment income (loss)........................................................ $ 788,903 $ 238,336
Net realized gain (loss) on investments and foreign currency transactions........... 282,252 (95,580)
Change in unrealized appreciation (depreciation) on investments and translation of
foreign currency transactions..................................................... 2,876,054 (331,226)
------------------ ------------------
Net increase (decrease) in net assets resulting from operations................... 3,947,209 (188,470)
------------------ ------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income............................................................... (788,904) (238,086)
Net realized gains.................................................................. (191,089) 0
------------------ ------------------
Total distributions............................................................... (979,993) (238,086)
------------------ ------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares................................................... 18,320,350 12,803,011
Dividends and distributions reinvested.............................................. 979,993 238,086
Cost of shares repurchased.......................................................... (8,142,104) (2,132,507)
------------------ ------------------
Increase (decrease) in net assets from capital shares transactions................ 11,158,239 10,908,590
------------------ ------------------
Net increase (decrease) in net assets............................................. 14,125,455 10,482,034
NET ASSETS:
Beginning of period................................................................. 10,482,034 0
------------------ ------------------
End of period....................................................................... $ 24,607,489 $ 10,482,034
==================== ====================
Undistributed net investment income............................................... $ 249 $ 250
==================== ====================
SHARE ACTIVITY:
Shares outstanding - beginning of period............................................ 1,127,702 0
------------------ ------------------
Shares issued....................................................................... 1,789,282 1,324,342
Shares issued - reinvestment of dividends and distributions......................... 91,339 25,588
Shares redeemed..................................................................... (796,148) (222,228)
------------------ ------------------
Increase (decrease) in shares outstanding........................................... 1,084,473 1,127,702
------------------ ------------------
Shares outstanding - end of period.................................................. 2,212,175 1,127,702
==================== ====================
</TABLE>
* The inception of this portfolio was March 1, 1994.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
63
<PAGE> 63
WRL SERIES FUND, INC.
UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. UTILITY PORTFOLIO, THE DOW JONES UTILITIES AVERAGE INDEX AND THE STANDARD &
POOR'S INDEX OF 500 COMMON STOCKS]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994+
-------- --------
<S> <C> <C>
Net asset value, beginning of period........................ $ 9.30 $ 10.00
Income from operations:
Net investment income (loss)............................ .46 .43
Net realized and unrealized
gain (loss) on investments............................ 1.93 (.70)
-------- --------
Total income (loss) from operations................... 2.39 (.27)
-------- --------
Distributions:
Dividends from net investment income.................... (.46) (.43)
Distributions from net realized gains
on investments........................................ (.11) .00
-------- --------
Total distributions................................... (.57) (.43)
-------- --------
Net asset value, end of period.............................. $ 11.12 $ 9.30
========= =========
Total return................................................ 25.25% (4.58)%
Ratios and supplemental data:
Net assets at end of period
(in thousands).......................................... $ 24,607 $ 10,482
Ratio of expenses to average net assets................... 1.00% 1.00%
Ratio of net investment income (loss)
to average net assets................................... 4.56% 5.36%
Portfolio turnover rate................................... 78.34% 36.13%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was March 1, 1994. The total return is not
annualized.
The notes to the financial statements are in integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
64
<PAGE> 64
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (31.72%)
U.S. Treasury Notes
7.13%, due 10/15/98.............. $ 3,000,000 $ 3,144,450
U.S. Treasury Notes
7.50%, due 11/15/01.............. 2,000,000 2,204,240
U.S. Treasury Notes
6.25%, due 01/31/97.............. 1,500,000 1,516,560
U.S. Treasury Notes
7.00%, due 04/15/99.............. 2,000,000 2,101,700
U.S. Treasury Notes
7.50%, due 05/15/02.............. 2,000,000 2,217,820
U.S. Treasury Notes
6.75%, due 05/31/97.............. 2,000,000 2,041,040
U.S. Treasury Notes
5.50%, due 07/31/97.............. 2,000,000 2,010,080
U.S. Treasury Notes
6.38%, due 08/15/02.............. 2,000,000 2,099,080
U.S. Treasury Notes
6.25%, due 02/15/03.............. 2,000,000 2,087,140
U.S. Treasury Notes
5.38%, due 05/31/98.............. 2,000,000 2,006,380
U.S. Treasury Notes
6.50%, due 04/30/99.............. 2,000,000 2,073,360
U.S. Treasury Notes
7.50%, due 10/31/99.............. 2,000,000 2,146,940
U.S. Treasury Notes
7.38%, due 11/15/97.............. 2,000,000 2,074,920
U.S. Treasury Notes
6.88%, due 03/31/00.............. 3,000,000 3,170,670
U.S. Treasury Notes
7.25% due 11/15/96............... 2,000,000 2,033,360
U.S. Treasury Notes
6.25%, due 05/31/00.............. 3,000,000 3,101,610
U.S. Treasury Notes
7.75% due 02/15/01............... 2,000,000 2,208,240
------------
Total U.S. Government Obligations
(cost: $ 37,356,910)............... 38,237,590
------------
U.S. GOVERNMENT AGENCY (0.90%)
Private Export Funding Corp.
7.30%, due 01/31/02.............. 1,000,000 1,080,000
------------
Total U.S. Government Agency
(cost: $ 1,054,490)................ 1,080,000
------------
MORTGAGE-BACKED SECURITIES (1.70%)
Federal Home Loan Bank
7.48%, due 06/28/01.............. 1,000,000 1,033,140
Federal Home Loan Mortgage
Corporation
6.57%, due 09/18/00.............. 1,000,000 1,019,250
------------
Total Mortgage-Backed Securities
(cost: $ 2,019,258)................ 2,052,390
------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- ------------
<S> <C> <C>
CORPORATE DEBT SECURITIES (12.12%)
BANKING (0.96%)
Mellon Financial
9.25%, due 08/15/01.............. $ 1,000,000 $ 1,158,750
BEVERAGES (0.87%)
PepsiCo, Inc.
7.75%, due 10/01/98.............. 1,000,000 1,050,000
FINANCE (5.96%)
American Express Company
6.50%, due 08/01/00.............. 1,000,000 1,026,250
Federal Home Loan Bank
6.19%, due 11/20/01.............. 1,000,000 1,013,900
Federal National Mortgage
Association
6.18%, due 07/22/98.............. 1,000,000 1,003,020
Federal National Mortgage
Association
6.81%, due 05/15/00.............. 1,000,000 1,023,520
Ford Motor Credit Company
8.38%, due 01/15/00.............. 1,000,000 1,083,750
General Motors Acceptance
Corporation
6.63%, due 10/15/05.............. 1,000,000 1,023,750
Paine Webber Group
6.25%, due 06/15/98.............. 1,000,000 1,005,000
MACHINERY (0.87%)
Ingersoll-Rand Co.
6.97%, due 08/11/04.............. 1,000,000 1,053,750
MANUFACTURING (0.85%)
Masco Corporation
6.63%, due 09/15/99.............. 1,000,000 1,022,500
RETAIL & DEPARTMENT STORES (0.86%)
Wal-Mart Stores, Inc.
6.75%, due 05/15/02.............. 1,000,000 1,042,500
TELECOMMUNICATIONS (1.75%)
BellSouth Telecommunications
7.00%, due 02/01/05.............. 1,000,000 1,067,500
MCI Communications Corporation
7.13%, due 01/20/00.............. 1,000,000 1,046,250
------------
Total Corporate Debt Securities
(cost: $ 14,284,307)............... 14,620,440
------------
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
65
<PAGE> 65
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- -------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (0.42%)
TOBACCO PRODUCTS (0.42%)
RJR Nabisco Holdings Corp. -
Series C........................ 80,000 $ 510,000
-------------
Total Convertible Preferred Stocks
(cost: $ 493,563)................. 510,000
-------------
COMMON STOCKS (47.58%)
APPAREL & TEXTILES (2.37%)
Liz Claiborne, Inc. .............. 30,000 832,500
Shaw Industries, Inc. ............ 30,000 442,500
VF Corporation.................... 30,000 1,582,500
AUTOMOTIVE (4.07%)
Chrysler Corporation.............. 37,000 2,048,875
Ford Motor Company................ 40,000 1,160,000
PACCAR, Inc....................... 24,000 1,011,000
TBC Corporation*.................. 80,000 690,000
BUILDING (1.28%)
Fleetwood Enterprises, Inc. ...... 60,000 1,545,000
CHEMICALS (3.70%)
Dow Chemical Company.............. 20,000 1,407,500
Eastman Chemical Company.......... 30,000 1,878,750
Praxair, Inc. .................... 35,000 1,176,875
COMPUTER TECHNOLOGY (2.20%)
EMC Corporation*.................. 80,000 1,230,000
Seagate Technology, Inc.*......... 30,000 1,425,000
ELECTRONICS (2.23%)
American Power Conversion
Corporation*.................... 50,000 475,000
Intel Corporation................. 10,000 567,500
Teleflex, Inc. ................... 40,000 1,640,000
FINANCE (3.43%)
Federal Home Loan Mortgage
Corporation..................... 20,000 1,670,000
Federal National Mortgage
Association..................... 13,000 1,613,625
Lehman Brothers Holdings, Inc. ... 40,000 850,000
FOOD & FOOD SERVICE (1.65%)
Darden Restaurants, Inc. ......... 30,000 356,250
Philip Morris Companies, Inc. .... 18,000 1,629,000
FOREST PRODUCTS & PAPER (3.90%)
International Paper Company....... 60,000 2,272,500
Louisiana-Pacific Corporation..... 100,000 2,425,000
FURNITURE (0.19%)
O'Sullivan Industries
Holdings, Inc.* ................ 35,000 231,875
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
----------- -------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE (6.05%)
AFLAC, Inc. ...................... 41,000 1,778,375
AMBAC, Inc. ...................... 40,000 1,875,000
Integon Corporation............... 21,000 433,125
John Alden Financial
Corporation..................... 75,000 1,565,625
The PMI Group, Inc. .............. 36,000 1,629,000
MACHINERY (0.32%)
Lindsay Manufacturing Company* ... 10,000 385,000
MEDICAL (3.75%)
Humana, Inc.* .................... 80,000 2,190,000
US Healthcare, Inc. .............. 50,000 2,325,000
METALS (1.23%)
Birmingham Steel Corporation...... 100,000 1,487,500
OIL & GAS (1.78%)
Ashland, Inc. .................... 40,000 1,405,000
Valero Energy Corporation......... 30,000 735,000
RETAIL & DEPARTMENT STORES (4.26%)
Fingerhut Companies, Inc. ........ 40,000 555,000
May Department Stores Company..... 40,000 1,690,000
TJX Companies, Inc. .............. 80,000 1,510,000
Toys "R" Us, Inc.* ............... 40,000 870,000
Value City Department Stores*..... 75,000 506,250
TELECOMMUNICATIONS (2.31%)
Sprint Corporation................ 30,000 1,196,250
Telefonos de Mexico SA -
Class L - ADR................... 50,000 1,593,750
TOBACCO PRODUCTS (1.66%)
UST, Inc. ........................ 60,000 2,002,500
TRANSPORTATION (0.72%)
Arnold Industries, Inc. .......... 50,000 868,750
UTILITIES (0.48%)
Southwestern Energy Company....... 45,000 573,750
-------------
Total Common Stocks
(cost: $ 52,391,153).............. 57,336,125
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- -------------
<S> <C> <C>
COMMERCIAL PAPER (4.19%)
Allomon Funding Corporation
5.85%, due 01/04/96............. $ 1,000,000 $ 999,188
Anchor Funding Corporation
6.10%, due 01/08/96............. 500,000 499,237
Distribution Funding Corporation
5.93%, due 01/02/96............. 800,000 799,605
Dynamic Funding Corporation
6.10%, due 01/02/96............. 250,000 249,873
Enterprise Funding Corporation
5.78%, due 01/11/96............. 1,000,000 998,073
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
66
<PAGE> 66
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------- -------------
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
Fingerhut Companies, Inc.
5.85%, due 01/02/96............. $ 500,000 $ 499,756
Triple A One Funding Corporation
5.85%, due 01/05/96............. 1,000,000 999,025
-------------
Total Commercial Paper
(cost: $ 5,044,757)............... 5,044,757
-------------
SHORT-TERM OBLIGATION (0.60%)
Prudential-Bache Securities**
5.39% Repurchase Agreement
dated 12/29/95 to be repurchased
at 723,736
on 01/02/96..................... 723,303 723,303
-------------
Total Short-Term Obligation
(cost: $ 723,303)................. 723,303
-------------
Total Investment Securities
(cost: $ 113,367,741)........... $119,604,605
-------------
-------------
SUMMARY
Investments at value.............. 99.23% $ 119,604,605
Other Assets in
Excess of Liabilities........... 0.77% 926,362
------- -------------
Net Assets........................ 100.00% $ 120,530,967
------- -------------
------- -------------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $ 3,406,565 of Federal National Mortgage Association
9.00% due 09/01/22; market value and accrued interest aggregated $ 737,770
for this collateral at December 31, 1995.
ADR American Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
67
<PAGE> 67
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
PERIOD ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
<TABLE>
<S> <C>
U.S. Government Obligations 31.72%
Corporate Debt Securities 12.12%
Apparel & Textiles 2.37%
Automotive 4.07%
Chemicals 3.70%
Computer Technology 2.20%
Electronics 2.23%
Finance 3.43%
Forest Products & Paper 3.90%
Insurance 6.05%
Medical 3.75%
Retail & Department Stores 4.26%
Telecommunications 2.31%
Commercial Paper 4.19%
Other 13.70%
</TABLE>
The investment objective of the Tactical Asset Allocation Portfolio is
preservation of capital and competitive investment returns. Its strategy seeks
to enhance value during strong market periods and to preserve capital during
weak or volatile market periods.
The U.S. stock market was strong during 1995 with the Standard & Poor's Index of
500 Common Stocks providing a 37.58% total return. Fixed-income markets also
showed strong performance during this period as the Lehman Brothers
Government/Corporate Intermediate Bond Index gained 15.3% on a total return
basis. For the year ended December 31, 1995, the Tactical Asset Allocation
Portfolio provided a total return of 20.09%. While on an absolute basis, these
returns were satisfactory, our conservative posture during 1995 kept our
allocation in stocks below 50%, thus hurting the Portfolio's performance
relative to the S&P 500.
Stocks and bonds rose sharply in 1995 as corporate earnings exceeded most
expectations and the Federal Reserve appeared to have achieved a "soft landing"
in the economy. The improvement in the inflation outlook, mostly due to the
slowdown in the economy, provided fuel for the sharp decline in interest rates.
Robust flows into mutual funds and corporate share repurchase programs provided
important support to stock prices.
Throughout the period we maintained a well-diversified portfolio of stocks that
provided solid returns. Our value philosophy guides us toward stocks and
industries that are currently out-of-favor and where expectations are very low.
We have purchased stocks of companies with attractive valuations and strong
balance sheets. At all times we seek to emphasize quality in our value stock
selection process.
Our asset allocation discipline guides us to a relatively low equity exposure
when risks appear high, and a relatively high equity exposure when risks appear
low. Over a complete market cycle, we intend to have an average allocation to
equities slightly greater than 60%. Our fixed-income strategy seeks to enhance
income through purchases of U.S. Treasuries and corporate bonds, and mostly
plays a defensive role.
As 1995 came to a close, we were maintaining our conservative outlook toward the
U.S. stock market with about a 48% allocation in equities, 46% in U.S.
Treasuries and corporate bonds, and 6% in cash investments. While our outlook on
stocks is positive for the long-term, our forecasting models suggest a more
difficult equity market environment in the short-to-intermediate term. With the
Federal Reserve apparently on a path of easing monetary policy, monetary factors
appear mixed to positive. At the same time, technical factors have been steadily
deteriorating. Valuations in the market remain a concern, just as they have for
much of 1995; dividend yield on the S&P 500 is the lowest in history, while
price-to-book value is near record-high territory. Sentiment has also
deteriorated with very high levels of initial and secondary stock offerings. In
sum, while interest rate and monetary factors suggest the market is not
necessarily overvalued, sentiment, technical, and valuation factors suggest that
risks have developed to the point where, historically, stocks have entered a
cyclical correction.
Our discipline is to maintain a fairly diversified portfolio of stocks with no
large industry or individual stock bets, particularly when we view the risks in
the stock market to be relatively high. Presently, our largest single equity
position is about 2%, and the largest industry position is about 6%.
Over the last several years, the stock market has not experienced a broad-based
decline, but has gone through rotational corrections, where entire industry
groups have declined sharply within a generally upward trending stock market.
This environment has provided excellent opportunities to selectively purchase
quality companies at attractive prices. We think we are well-positioned to take
advantage of this rotational behavior and plan to increase equity exposure when
attractive investment opportunities are presented as the broader market enters a
consolidation/correction phase.
<TABLE>
<S> <C> <C>
/s/ Arvind Sachdeva
-------------------
[DEAN INVESTMENT ASSOCIATES LOGO] Arvind Sachdeva
Tactical Asset Allocation Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
68
<PAGE> 68
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 107,599,681)...................... $ 113,836,545
Short-term securities, at amortized cost.... 5,768,060
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 858,334
Dividends................................. 155,850
Other..................................... 0
-----------------
Total assets............................ 120,618,789
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 0
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 74,616
Dividends to shareholders................. 0
Other fees................................ 13,206
-----------------
Total liabilities....................... 87,822
-----------------
Total net assets...................... $ 120,530,967
===================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)... $ 104,880
Additional paid-in capital.................. 113,928,784
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 10,439
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 250,000
Net unrealized appreciation (depreciation)
on:
Investment securities..................... 6,236,864
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 120,530,967
===================
Shares outstanding at December 31, 1995..... 10,487,976
===================
Net asset value per share................... $ 11.49
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED
INVESTMENT INCOME: DECEMBER 31, 1995*
<S> <C>
Interest.................................. $ 1,888,887
Dividends (Net of foreign tax of $ 19).... 674,868
------------------
Total investment income............. 2,563,755
------------------
EXPENSES:
Investment advisory fees.................. 433,844
Printing and shareholder reports.......... 8,254
Custodian fees............................ 44,519
Legal fees................................ 367
Auditing and accounting fees.............. 6,500
Directors fees............................ 396
Other fees................................ 13,467
------------------
Total expenses........................ 507,347
Less:
Advisory fee waiver and expense
reimbursement......................... 0
Fees paid indirectly.................... 286
------------------
Net expenses........................ 507,061
------------------
Net investment income (loss).............. 2,056,694
------------------
Net realized gain (loss) on:
Investment securities................. 2,438,162
Change in unrealized appreciation
(depreciation) on:
Investment securities................. 6,236,864
------------------
Net gain (loss) on investments........ 8,675,026
------------------
Net increase (decrease) in net assets
resulting from operations............... $ 10,731,720
====================
</TABLE>
* The inception of this portfolio was January 3, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
69
<PAGE> 69
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
<S> <C>
OPERATIONS:
Net investment income (loss)............................................................................... $ 2,056,694
Net realized gain (loss) on investments.................................................................... 2,438,162
Change in unrealized appreciation (depreciation) on investments............................................ 6,236,864
------------------
Net increase (decrease) in net assets resulting from operations.......................................... 10,731,720
------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income...................................................................................... (2,046,255)
Net realized gains......................................................................................... (2,188,162)
------------------
Total distributions...................................................................................... (4,234,417)
------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares.......................................................................... 125,126,149
Dividends and distributions reinvested..................................................................... 4,234,417
Cost of shares repurchased................................................................................. (15,326,902)
------------------
Increase (decrease) in net assets from capital shares transactions....................................... 114,033,664
------------------
Net increase (decrease) in net assets.................................................................... 120,530,967
NET ASSETS:
Beginning of period........................................................................................ 0
------------------
End of period.............................................................................................. $ 120,530,967
====================
Undistributed net investment income...................................................................... $ 10,439
====================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................................... 0
------------------
Shares issued.............................................................................................. 11,463,783
Shares issued - reinvestment of dividends and distributions................................................ 370,908
Shares redeemed............................................................................................ (1,346,715)
------------------
Increase (decrease) in shares outstanding.................................................................. 10,487,976
------------------
Shares outstanding - end of period......................................................................... 10,487,976
====================
</TABLE>
* The inception of this portfolio was January 3, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
70
<PAGE> 70
WRL SERIES FUND, INC.
TACTICAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. TACTICAL ASSET ALLOCATION PORTFOLIO, THE STANDARD & POOR'S INDEX OF 500
COMMON STOCKS AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE INTERMEDIATE BOND
INDEX]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995+
-----------
<S> <C> <C>
Net asset value, beginning of period............... $ 10.00
Income from operations:
Net investment income (loss)................... .41
Net realized and unrealized
gain (loss) on investments................... 1.93
-----------
Total income (loss) from operations.......... 2.34
-----------
Distributions:
Dividends from net investment income........... (.41)
Distributions from net realized gains
on investments............................... (.44)
-----------
Total distributions.......................... (.85)
-----------
Net asset value, end of period..................... $ 11.49
=============
Total return....................................... 20.09%
Ratios and supplemental data:
Net assets at end of period
(in thousands).................................. $ 120,531
Ratio of expenses to average net assets.......... .93%
Ratio of net investment income (loss)
to average net assets.......................... 3.76%
Portfolio turnover rate.......................... 38.68%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 6.
+ The inception of this portfolio was January 3, 1995. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
71
<PAGE> 71
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The WRL Series Fund, Inc. (the "Fund") is a diversified, open-end,
investment management company registered under the Investment Company Act of
1940, as amended. The Fund was incorporated on August 21, 1985 as a Maryland
Corporation and commenced operations with three portfolios on October 2, 1986:
Money Market, Bond, and Growth (each with different investment objectives). From
inception of the Fund until June 30, 1992, shares were sold exclusively to the
WRL Series Life Account (the "Life Account") and the WRL Series Annuity Account
(the "Annuity Account"), collectively called the Separate Accounts of Western
Reserve Life Assurance Co. of Ohio ("WRL"), to fund benefits under variable
universal life insurance policies and variable annuity contracts issued by WRL.
Under an amendment dated September 19, 1994 to the Participation Agreement dated
July 1, 1992, the Fund's Board of Directors authorized sales of its shares of
all the Portfolios to the separate accounts of life insurers affiliated with
WRL.
Since our initial three portfolio offerings, additional portfolios have
been added.
<TABLE>
<CAPTION>
PORTFOLIO INCEPTION
- --------------------------------- -----------------
<S> <C>
Short-to-Intermediate Government December 3, 1992
Global December 3, 1992
Equity-Income March 1, 1993
Emerging Growth March 1, 1993
Aggressive Growth March 1, 1994
Balanced March 1, 1994
Utility March 1, 1994
Tactical Asset Allocation January 3, 1995
</TABLE>
On January 3, 1995, WRL supplied seed capital in the amount of $500,000 for
the Tactical Asset Allocation Portfolio. On April 20, 1995, WRL redeemed the
seed capital in the Tactical Asset Allocation Portfolio for $524,042.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. VALUATION OF INVESTMENTS
The Board of Directors has determined that the most appropriate method for
valuing the securities of the Money Market Portfolio is the amortized cost
method. Under this method, the net asset value of Money Market Portfolio
shares is expected to remain at a constant $1.00 per share.
Securities held by the remaining portfolios are valued at market value,
except for short-term debt securities. Short-term debt securities maturing
in 60 days or less are valued on the amortized cost basis, which
approximates market value. Stocks are valued at the latest sale price on the
last business day of the fiscal period as reported by the principal
securities exchange on which the issue is traded or, if no sale is reported
for a stock, the latest bid price is used. Bonds are valued using prices
quoted by a major dealer in bonds which offers a pricing service. Certain
pricing methodologies, such as matrix pricing of bonds, may involve the use
of estimates and actual sales prices may differ. Securities for which
quotations may not be readily available are valued as determined in good
faith in accordance with procedures established by and under the general
supervision of the Fund's Board of Directors.
The value of foreign securities are translated into U.S. dollars using spot
foreign exchange rates.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are recorded on the trade date. Security gains and
losses are calculated on the first-in first-out basis for both tax and
financial reporting purposes. Dividend income is recorded on the ex-dividend
date, and interest income, including amortization of bond premium and
accretion of discount, is accrued daily. Dividend income on foreign
securities is recorded net of foreign tax withholdings.
The accounting records of the Fund are maintained in U.S. dollars. For
transactions denominated in a currency other than the U.S. dollar, purchases
and sales of securities, income received, and expenses paid are translated
into U.S. dollars at the foreign exchange spot rate on the date the
transaction is recorded. Currency gain and loss is also calculated on
payables and receivables that are denominated in foreign currencies. The
payables and receivables are generally related to security transactions and
income.
- --------------------------------------------------------------------------------
72
<PAGE> 72
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1 (CONTINUED)
The unrealized gain or loss on forward foreign currency contracts is due to
the difference between the foreign exchange contract rate and the foreign
exchange forward rate applicable to that contract at the end of the period.
This gain or loss becomes realized when the contract is closed or settled.
Futures contracts and options are valued based upon daily settlement prices
with the fluctuations in value recorded as unrealized gains and losses.
These gains and losses become realized when the position is closed. The
risks associated with the use of options and futures contracts involve the
possibilities of an illiquid market and an imperfect correlation between the
value of the instrument and the underlying security.
C. FEDERAL INCOME TAXES
It is the Fund's policy to distribute substantially all of its taxable
income and capital gains to its shareholders and otherwise qualify as a
regulated investment company under the Internal Revenue Code. Pursuant to
Code Section 4982(f), regulated investment companies serving as funding
vehicles for life insurance company separate accounts are not subject to
excise tax distribution requirements. Accordingly, no provision for Federal
income taxes has been made.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for such items as wash sales, foreign currency
transactions, net operating losses and capital loss carryforwards.
Reclassifications between undistributed net investment income (UNII) and
undistributed realized capital gains (URCG) were made to appropriately
conform financial accounting and tax treatment of dividend distributions.
Net investment income, net realized gains and net assets were not effected
by this change. The Portfolios and the amounts of the reclassifications are
as follows:
<TABLE>
<CAPTION>
PORTFOLIO UNII URCG
---------------------- ----------- -----------
<S> <C> <C>
Global $(2,745,074) $ 2,745,074
Aggressive Growth 515,168 (515,168)
Balanced (143) 143
</TABLE>
In addition, reclassifications were made in the Growth and Global Portfolios
for $188,988 and $1,444,952, respectively, from undistributed realized gains
and losses to additional paid-in capital.
D. DIVIDENDS AND DISTRIBUTIONS
Dividends of the Fund's Money Market Portfolio are declared daily and
reinvested monthly. Dividends of the remaining portfolios are declared and
reinvested semi-annually, while capital gain distributions are declared and
reinvested annually. Dividends and distributions of the Fund are generally
paid to and reinvested by the Separate Accounts on the next business day
after declaration.
E. ORGANIZATION COSTS
All costs incurred in connection with the formation of the Fund and its
portfolios were paid by WRL.
NOTE 2 - INVESTMENT ADVISORY AND
TRANSACTIONS WITH AFFILIATES
A. INVESTMENT ADVISORY
The Fund has entered into annually renewable investment advisory agreements
for each portfolio with WRL as investment adviser. The Fund pays to WRL, and
charges to each respective portfolio, advisory fees each month at the
following annual rate expressed as a percentage of the average daily net
assets of the respective portfolio:
<TABLE>
<CAPTION>
PORTFOLIO PERCENT OF ASSETS
----------------------------- -----------------
<S> <C>
Money Market .50%
Bond .50%
Growth .80%
Short-to-Intermediate
Government .60%
Global .80%
Equity-Income .80%
Emerging Growth .80%
Aggressive Growth .80%
Balanced .80%
Utility .75%
Tactical Asset Allocation .80%
</TABLE>
- --------------------------------------------------------------------------------
73
<PAGE> 73
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2 (CONTINUED)
WRL currently voluntarily waives its advisory fees to the extent a
portfolio's normal operating expenses exceeds the percentage of net assets
of the portfolio as listed below:
<TABLE>
<CAPTION>
PORTFOLIO PERCENT OF ASSETS
----------------------------- -----------------
<S> <C>
Money Market .70%
Bond .70%
Growth 1.00%
Short-to-Intermediate
Government 1.00%
Global 1.00%
Equity-Income 1.00%
Emerging Growth 1.00%
Aggressive Growth 1.00%
Balanced 1.00%
Utility 1.00%
Tactical Asset Allocation 1.00%
</TABLE>
WRL has entered into a sub-advisory agreement with various management
companies. Pursuant to each agreement, fifty percent of the advisory fee
paid to WRL is due the respective management company, for the following
Portfolios:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT MANAGER
-------------------------------------------------
<S> <C>
Money Market Janus Capital Corporation
("JCC")
Bond JCC
Growth JCC
Global JCC
Equity-Income Luther King Capital
Management Corp.
Aggressive Growth Fred Alger Management, Inc.
</TABLE>
Pursuant to other agreements, fifty percent of the advisory fee paid to WRL
less fifty percent of any expense reimbursement is due the respective
management company:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT MANAGER
------------------------------------------------
<S> <C>
Short-to-Intermediate AEGON USA Investment
Government Management, Inc.
("AEGON Mgmt.")
Balanced AEGON Mgmt.
Emerging Growth Van Kampen American
Capital Asset
Management, Inc.
Tactical Asset Dean Investment
Allocation Associates
</TABLE>
Pursuant to the Utility Portfolio agreement, 0.50% of the first $30 million
of average daily net assets, 0.35% of the next $20 million of average daily
net assets and 0.25% of average daily net assets in excess of $50 million,
is payable to Federated Investment Counseling.
The Portfolios are charged for expenses that specifically relate to their
individual operations. All other operating expenses of the Fund that are not
attributable to a specific portfolio are allocated based upon the
proportionate number of policy and contract owners of the underlying
sub-accounts. WRL directly incurs and pays these operating expenses relating
to the Fund, which subsequently reimburses WRL. All normal operating
expenses that exceed the established expense limit set forth above will be
borne by WRL.
B. AFFILIATES
WRL and AEGON Mgmt. are indirect wholly-owned subsidiaries of AEGON USA,
Inc., which is an indirect wholly-owned subsidiary of AEGON nv, a
Netherlands corporation.
During the year ended December 31, 1995, the Aggressive Growth Portfolio
borrowed against a line of credit agreement with Bank Labouchere nv
Amsterdam, an affiliate of AEGON nv, resulting in the payment of interest
expense in the amount of $161,975 in the accompanying statement of
operations.
- --------------------------------------------------------------------------------
74
<PAGE> 74
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITY TRANSACTIONS
Securities transactions are summarized as follows:
<TABLE>
<CAPTION>
SHORT-TO-
INTERMEDIATE
MONEY MARKET BOND GROWTH GOVERNMENT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Purchases of securities:
Long-term excluding U.S. Government....... $ 0 $ 75,683,716 $1,055,695,142 $ 2,692,520
U.S. Government securities................ 549,916,827 164,384,279 1,694,937,824 30,390,892
Proceeds from maturities and sales of
securities:
Long-term excluding U.S. Government....... 0 46,796,607 1,127,131,393 841,936
U.S. Government securities................ 590,589,720 162,292,701 1,686,795,548 29,843,931
</TABLE>
<TABLE>
<CAPTION>
EQUITY- EMERGING AGGRESSIVE
GLOBAL INCOME GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Purchases of securities:
Long-term excluding U.S. Government....... $367,269,819 $124,020,948 $ 290,988,995 $205,223,005
U.S. Government securities................ 212,838,215 13,370,477 1,085,133,937 0
Proceeds from maturities and sales of
securities:
Long-term excluding U.S. Government....... 298,077,220 104,149,062 268,170,818 114,163,880
U.S. Government securities................ 321,200,747 2,447,135 1,071,039,261 0
</TABLE>
<TABLE>
<CAPTION>
TACTICAL
ASSET
BALANCED UTILITY ALLOCATION
PORTFOLIO PORTFOLIO PORTFOLIO*
------------ ----------- -----------
<S> <C> <C> <C>
For the year ended December 31, 1995:
Purchases of securities:
Long-term excluding U.S. Government........... $22,163,317 $23,505,083 $72,500,362
U.S. Government securities.................... 7,812,756 0 66,925,418
Proceeds from maturities and sales of securities:
Long-term excluding U.S. Government........... 19,236,337 12,844,412 14,052,023
U.S. Government securities.................... 2,931,139 0 19,474,955
</TABLE>
* The inception of this portfolio was January 3, 1995.
- --------------------------------------------------------------------------------
75
<PAGE> 75
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4 - FEDERAL INCOME TAX MATTERS
The income, expenses, gains and losses on securities transactions
attributed to each Portfolio for accounting purposes, are also attributed to
that Portfolio for Federal income tax purposes. Gains and losses on forward
currency contracts are treated as ordinary income for Federal income tax
purposes.
Net capital gains noted below are the excess of the long-term capital gains
over short-term capital losses. The net capital loss carryforwards are available
to offset future capital gains through the periods listed below. The Fund will
elect to treat the net capital losses incurred in the two month period ended
December 31, 1995, (Post-October Losses Deferred) as having been incurred in the
following fiscal year. The cost of investments for Federal income tax purposes
and the composition of unrealized appreciation and depreciation on investment
securities for Federal income tax purposes are as follows at December 31, 1995:
<TABLE>
<CAPTION>
PRIOR YEAR NET
POST-OCTOBER CAPITAL LOSS NET CAPITAL LOSS
NET CAPITAL LOSSES CARRYFORWARD NET CAPITAL LOSS CARRYFORWARD
PORTFOLIO GAINS DEFERRED UTILIZED CARRYFORWARD AVAILABLE THROUGH:
- ----------------------- ------------ ------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Money Market........... $ n/a $ n/a $ n/a $ n/a n/a
Bond................... 0 0 2,128,588 (7,509,065) December 31, 2002
Growth................. 113,958,394 233,731 43,473,423 0 n/a
Short-to-Intermediate $171,939 through
Government........... 0 9,904 0 (419,679) December 31, 2002
$247,740 through
December 31, 2003
Global................. 11,759,084 5,086 0 0 n/a
Equity-Income.......... 7,252,507 0 2,641,691 0 n/a
Emerging Growth........ 12,672,178 0 22,781,487 0 n/a
Aggressive Growth...... 8,312,504 4,016,717 236,359 0 n/a
Balanced............... 0 472,914 179,481 (241,575) December 31, 2002
Utility................ 199,418 0 75,763 0 n/a
Tactical Asset
Allocation........... 2,438,162 0 0 0 n/a
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO COST BASIS APPRECIATION DEPRECIATION (DEPRECIATION)
- ------------------------- ------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Money Market............. $ 80,487,232 $ n/a $ n/a $ n/a
Bond..................... 88,821,523 6,942,786 0 6,942,786
Growth................... 911,406,571 289,513,601 5,316,001 284,197,600
Short-to-Intermediate
Government............. 22,641,994 677,321 17,955 659,366
Global................... 248,384,731 49,395,227 4,450,155 44,945,072
Equity-Income............ 226,618,292 34,473,888 2,267,046 32,206,842
Emerging Growth.......... 228,076,306 71,947,386 3,579,566 68,367,820
Aggressive Growth........ 138,439,024 26,297,668 4,425,547 21,872,121
Balanced................. 27,763,353 3,210,247 68,852 3,141,395
Utility.................. 22,154,048 2,678,751 153,028 2,525,723
Tactical Asset
Allocation............. 113,367,741 7,252,401 1,015,537 6,236,864
</TABLE>
- --------------------------------------------------------------------------------
76
<PAGE> 76
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS
The Fund is authorized to enter into foreign exchange contracts for the
purpose of hedging against foreign exchange risk arising from the Fund's
investment in securities denominated in foreign currencies. All foreign exchange
contracts are marked-to-market daily at the applicable foreign exchange rates
and the resulting unrealized gains or losses recorded in the Fund's financial
statements. These gains and losses are realized when the contract is
extinguished either by entering into a closing transaction or by delivery of the
currency. The risks that may arise from these contracts are the potential
inability of the counterparties to meet the terms of their contracts, and from
unanticipated movements in the currency's value relative to the U.S. dollar.
The Growth and Global Portfolios entered into forward foreign currency
contracts, which obligate the Fund to deliver currencies at specified future
dates. The open contracts at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
12/31/95 NET UNREALIZED
VALUE IN APPRECIATION
CURRENCY BOUGHT (SOLD) SETTLEMENT DATE U.S. DOLLARS (DEPRECIATION)
- -------------------------------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Growth Portfolio
German Deutschemark................. (19,713,000) 02/22/96 $ 13,814,167 $ 284,674
German Deutschemark................. (22,000,000) 04/11/96 15,453,731 98,369
German Deutschemark................. (8,500,000) 04/25/96 5,974,938 172,233
------------ --------------
Total Growth Portfolio...... $ 35,242,836 $ 555,276
============= ==============
Global Portfolio
British Pound....................... (34,540) 01/02/96 $ 53,622 $ (455)
British Pound....................... (413,196) 01/04/96 641,435 2,449
British Pound....................... (292,229) 01/05/96 453,638 (1,706)
British Pound....................... 300,000 01/25/96 465,475 (6,605)
British Pound....................... (3,808,000) 01/25/96 5,908,428 114,686
British Pound....................... 500,000 01/25/96 775,791 7,192
British Pound....................... 608,000 01/25/96 943,362 7,042
British Pound....................... 820,000 01/25/96 1,272,298 (23,712)
British Pound....................... (68,711) 01/08/96 106,626 0
Finnish Markka...................... (245,630) 01/03/96 56,633 (222)
Finnish Markka...................... (272,068) 01/04/96 62,731 (563)
Finnish Markka...................... (16,900,000) 01/25/96 3,900,633 29,599
Finnish Markka...................... (12,264,000) 05/09/96 2,840,756 60,249
Finnish Markka...................... 3,000,000 05/09/96 694,901 3,362
French Franc........................ 73,163 01/31/96 14,982 90
French Franc........................ 184,805 01/31/96 37,844 78
French Franc........................ 4,000,000 03/14/96 819,599 5,930
French Franc........................ (12,200,000) 03/14/96 2,499,778 (61,875)
French Franc........................ (9,225,000) 03/14/96 1,890,201 (62,383)
French Franc........................ 73,163 01/31/96 14,941 0
German Deutschemark................. (5,404,000) 01/25/96 3,781,872 106,457
German Deutschemark................. 7,000,000 01/25/96 4,898,798 (122,362)
German Deutschemark................. (22,968,000) 01/25/96 16,073,657 473,894
Hong Kong Dollar.................... (477,548) 01/02/96 61,761 4
Japanese Yen........................ 17,319,134 01/04/96 168,104 (683)
Japanese Yen........................ 6,302,479 01/04/96 61,173 (248)
Japanese Yen........................ 13,630,128 01/04/96 132,297 (537)
Japanese Yen........................ 12,757,715 01/04/96 123,829 (503)
Japanese Yen........................ 905,382 01/04/96 8,788 (36)
</TABLE>
- --------------------------------------------------------------------------------
77
<PAGE> 77
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
12/31/95 NET UNREALIZED
VALUE IN APPRECIATION
CURRENCY BOUGHT (SOLD) SETTLEMENT DATE U.S. DOLLARS (DEPRECIATION)
- -------------------------------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Global Portfolio (continued)
Japanese Yen........................ 4,817,474 01/04/96 $ 46,760 $ (190)
Japanese Yen........................ 1,808,836 01/05/96 17,560 (65)
Japanese Yen........................ 6,313,667 01/05/96 61,291 (225)
Japanese Yen........................ 13,707,055 01/05/96 133,064 (489)
Japanese Yen........................ 25,576,558 01/05/96 248,290 (912)
Japanese Yen........................ (171,003,000) 01/25/96 1,665,078 48,551
Japanese Yen........................ (108,145,000) 01/25/96 1,053,022 239,342
Japanese Yen........................ (99,037,000) 02/08/96 966,234 183,754
Japanese Yen........................ (1,000,000,000) 02/08/96 9,756,297 716,003
Japanese Yen........................ (185,963,000) 02/08/96 1,814,310 337,044
Japanese Yen........................ (300,000,000) 02/08/96 2,926,890 333,449
Japanese Yen........................ (445,000,000) 02/22/96 4,349,930 83,445
Japanese Yen........................ (1,300,000,000) 03/14/96 12,745,348 255,172
Japanese Yen........................ (350,000,000) 03/14/96 3,431,440 132,896
Japanese Yen........................ (300,000,000) 03/14/96 2,941,234 60,567
Japanese Yen........................ 4,577,920 01/08/96 44,360 0
Japanese Yen........................ 5,473,088 01/08/96 53,034 0
Japanese Yen........................ 4,012,155 01/08/96 38,877 0
Swedish Krona....................... (99,000,000) 01/25/96 14,909,078 (1,541,537)
Swedish Krona....................... (47,140,000) 02/08/96 7,092,092 (50,596)
Swiss Franc......................... (5,854,000) 05/09/96 5,160,012 96,813
------------ --------------
Total Global Portfolio...... $118,218,154 $ 1,422,164
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
78
<PAGE> 78
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 6 - FINANCIAL HIGHLIGHTS
The Financial Highlights for each Portfolio (except the Money Market
Portfolio) contains a chart (the "comparison chart") setting forth Average
Annual Total Return ("total return") and a comparison of the change in value of
a $10,000 investment in that Portfolio to one or more broad based market
indices. In the comparison chart and the total return set forth in "Financial
Highlights", the total return and the change in value of the portfolio reflect
the advisory fee and all other portfolio expenses and include reinvestment of
dividends and capital gains; they do not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the applicable
Policies or Annuity Contracts. Where a Portfolio's period from inception is less
than one year, the total return shown is not annualized. The indices referred to
in the comparison charts are unmanaged and are used as a general measure of
market performance; with the exception of the Value Line (Arithmetic) Index,
they assume reinvestment of dividends and capital gains and all indices do not
include any management or investment expenses.
The ratio of expenses to average net assets in the financial highlights is
net of advisory fee waiver (see Note 2). Without the advisory fee waived by WRL
the ratio for each period presented would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
PORTFOLIO 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market.......................... * * * * * * 0.84% 1.16% 1.63% 6.33%
Bond.................................. * * * * 0.82% * 0.82% 1.07% 2.12% 6.37%
Growth................................ * * * * * * 1.13% 1.49% 1.90% 6.76%
Short-to-Intermediate
Government.......................... * * 1.02% 1.41% ** ** ** ** ** **
Global................................ * * * * ** ** ** ** ** **
Equity-Income......................... * * 1.12% ** ** ** ** ** ** **
Emerging Growth....................... * * 1.16% ** ** ** ** ** ** **
Aggressive Growth..................... * 1.18% ** ** ** ** ** ** ** **
Balanced.............................. * 1.34% ** ** ** ** ** ** ** **
Utility............................... 1.08% 1.90% ** ** ** ** ** ** ** **
Tactical Asset Allocation............. * ** ** ** ** ** ** ** ** **
</TABLE>
* No waiver - portfolio did not exceed expense limitations.
** Portfolio not in existence during this period.
- --------------------------------------------------------------------------------
79
<PAGE> 79
WRL SERIES FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of the WRL Series Fund, Inc.
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the C.A.S.E. Growth, C.A.S.E.
Growth & Income, and C.A.S.E. Quality Growth Portfolios (three of the portfolios
constituting the WRL Series Fund, Inc., hereafter referred to as the
"Portfolios") at December 31, 1995, and the results of each of their operations,
the changes in each of their net assets and the financial highlights for the
period May 1, 1995 (commencement of operations) through December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolios' management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1995 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1996
- --------------------------------------------------------------------------------
2
<PAGE> 80
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (95.07%)
AEROSPACE (2.13%)
Lockheed Martin Corporation.......... 280 $ 22,120
Rockwell International Corporation... 620 32,783
BANKING (10.28%)
Fifth Third Bancorp.................. 690 50,543
First Indiana Corporation ........... 1,280 32,960
Huntington Bancshares, Inc........... 2,100 50,400
Provident Bankshares Corporation..... 1,510 44,545
Union Bank........................... 660 35,805
U.S. Bancorp......................... 1,500 50,438
BEVERAGES (3.06%)
Adolph Coors Company -- Class B...... 3,570 78,987
BIO-TECHNOLOGY (1.62%)
Genzyme Corporation*................. 670 41,791
BUILDING (1.54%)
Vulcan Materials Company............. 690 39,761
CHEMICALS (4.56%)
Cabot Corporation.................... 515 27,745
Eastman Chemical Company............. 400 25,050
Lyondell Petrochemical Company....... 1,130 25,849
Norsk Hydro A.S. - ADR............... 930 38,944
COMMERCIAL SERVICES (2.23%)
Manpower, Inc........................ 450 12,656
Paychex, Inc......................... 900 44,887
COMPUTER TECHNOLOGY (7.68%)
Bay Networks*........................ 825 33,928
Cisco Systems, Inc.*................. 770 57,461
Seagate Technology, Inc.*............ 860 40,850
Sun Microsystems, Inc.*.............. 1,440 65,700
ELECTRIC UTILITIES (2.60%)
Unicom Corporation................... 2,050 67,137
ELECTRONICS (5.66%)
Applied Materials, Inc.*............. 1,270 50,006
Arrow Electronics, Inc.*............. 130 5,606
Micron Technology Incorporated....... 1,280 50,720
Stratacom, Inc.*..................... 540 39,690
FINANCE (6.00%)
American Express Company............. 550 22,756
Bear Stearns Companies, Inc.......... 3,210 63,798
John Nuveen & Company, Inc. -- Class
A.................................. 2,750 68,063
FOODS & FOOD SERVICE (3.75%)
Archer Daniels Midland Co............ 2,700 48,600
IBP, Inc............................. 950 47,975
FOREST PRODUCTS & PAPER (1.63%)
Consolidated Papers, Inc............. 590 33,114
Willamette Industries, Inc. ......... 160 9,000
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE (1.86%)
Selective Insurance Group............ 1,350 $ 47,925
MACHINERY (1.06%)
Lam Research Corporation*............ 600 27,450
MANUFACTURING (2.93%)
Teledyne, Inc........................ 2,950 75,593
MEDICAL (9.30%)
Biomet, Inc.*........................ 2,260 40,397
Coherent, Inc.*...................... 1,110 44,955
HealthCare COMPARE Corporation*...... 1,240 53,940
HEALTHSOUTH Corporation*............. 1,000 29,125
Sierra Health Services, Inc.*........ 2,250 71,438
METALS (3.20%)
Reynolds Metals Company.............. 690 39,071
Worthington Industries, Inc. ........ 2,085 43,394
OFFICE EQUIPMENT (1.47%)
American Business Products, Inc...... 1,330 37,905
OIL & GAS (5.46%)
Halliburton Company.................. 920 46,575
NorAm Energy Corporation............. 6,450 57,244
Sun Company, Inc..................... 1,350 36,956
PHARMACEUTICALS (2.85%)
Mylan Laboratories................... 1 12
Watson Pharmaceuticals, Inc.*........ 1,500 73,500
PHOTOGRAPHY (2.73%)
Eastman Kodak Company................ 1,050 70,350
RESTAURANTS (0.86%)
Outback Steakhouse, Inc.*............ 620 22,243
RETAIL & DEPARTMENT STORES (1.44%)
Staples, Inc.*....................... 1,520 37,050
TELECOMMUNICATIONS (6.09%)
Cincinnati Bell, Inc................. 1,270 44,133
Pacific Telesis Group................ 2,160 72,630
Picturetel Corporation*.............. 260 11,213
U.S. Robotics Corporation*........... 330 28,958
TRANSPORTATION (1.86%)
America West Airlines, Inc. -- Class
B*................................. 1,250 21,250
UAL Corporation*..................... 150 26,775
UTILITIES (1.22%)
California Energy Company, Inc.*..... 1,610 31,395
-----------
Total Common Stocks
(cost: $ 2,404,376)........................... 2,451,145
-----------
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
4
<PAGE> 81
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- -----------
<S> <C> <C>
SHORT-TERM OBLIGATION (20.64%)
Morgan Stanley**
5.65%, Repurchase Agreement
dated 12/29/95 to be repurchased
at $ 532,388 on 01/02/96........ $532,054 $ 532,054
-----------
Total Short-Term Obligation
(cost: $ 532,054)............... 532,054
-----------
Total Investment Securities
(cost: $ 2,936,430)............. $ 2,983,199
-----------
-----------
SUMMARY
Investments at value.............. 115.71 % $ 2,983,199
Other Liabilities in
Excess of Assets................ (15.71)% (404,957)
--------- -----------
Net Assets........................ 100.00 % $ 2,578,242
--------- -----------
--------- -----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $480,487 U.S. Treasury Notes, 7.25% due 08/15/04; market
value and accrued interest aggregated $545,830 for this collateral at
December 31, 1995.
ADR American Depository Receipt
GDR Global Depository Receipt
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
5
<PAGE> 82
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
PERIOD ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH] Banking 10.28%
Beverages 3.06%
Chemicals 4.56%
Computer Technology 7.68%
Electronics 5.66%
Finance 6.00%
Foods & Food Service 3.75%
Manufacturing 2.93%
Medical 9.30%
Metals 3.20%
Oil & Gas 5.46%
Pharmaceuticals 2.85%
Telecommunications 6.09%
Short-Term Obligation 20.64%
Other 8.54%
The C.A.S.E. Growth Portfolio was funded May 1, 1995, with the investment
objective of capital growth through investments in common stocks of
small-to-medium-sized companies. The C.A.S.E. Growth Portfolio, during this
startup period, returned 20.65% from its inception through December 31, 1995.
The Standard & Poor's Index of 500 Common Stocks gained 21.86% for the same
period.
Generally, our strategy is to invest in companies with above market growth
characteristics in sales, earnings, rates of return and institutional buying.
The portfolio will also invest in securities that appear to be undervalued but
demonstrate the characteristics necessary for future growth.
Although it is the policy of the Portfolio to purchase and hold securities for
long term capital growth, changes in the Portfolio will generally be made
whenever the Sub-Advisor believes they are advisable, typically either as a
result of securities having reached price objective or by reasons of
developments not foreseen at the time of investment.
The stock market continues to be dominated by earnings as it reaches new highs.
In fact, of the two dozen fundamental methodologies used professionally to
evaluate investments, the four leading factors governing price movement are all
earnings related -- changes in analyst projections, quarterly earnings surprise
factors, 5-year growth rates, and return on equity. In "earnings" terms, the
market appears reasonably priced at 16 times current year projections. In the
past, market tops have occurred at between 19 and 21 times current year
projections.
With 1700 funds reporting, less than ten percent have beaten the 37.58% leap in
the S&P 500 this year. Our approach assumes a softer, slower paced market. In
place of a broad-based movement, certain areas of the economic structure appear
better situated than others. For example, the financial sector continues to be
attractive wherever a stock's fundamentals have kept pace with its price. Other
areas of interest include utilities and consumer stable demand industries like
healthcare.
Stocks which exhibit fundamentals of exceptional strength will ordinarily do
better than the market in good, as well as bad, times. The broad reach and
economic scope of our study disciplines lend themselves to investing in
selective economic periods, when volatility and uncertainty are present.
Therefore, our approach seems well-suited to the period ahead.
<TABLE>
<C> <S>
[LOGO] /s/ William E. Lange
-------------------------------------
William E. Lange
C.A.S.E. Growth Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE> 83
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 2,404,376)........................ $ 2,451,145
Short-term securities, at amortized cost.... 532,054
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 84
Dividends................................. 3,757
Other..................................... 0
-----------------
Total assets............................ 2,987,040
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 407,032
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 1,412
Dividends to shareholders................. 0
Other fees................................ 354
-----------------
Total liabilities....................... 408,798
-----------------
Total net assets...................... $ 2,578,242
===================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)... $ 2,212
Additional paid-in capital.................. 2,523,922
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 338
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 5,001
Net unrealized appreciation (depreciation) on:
Investment securities..................... 46,769
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 2,578,242
===================
Shares outstanding at December 31, 1995..... 221,168
===================
Net asset value per share................... $ 11.66
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED
INVESTMENT INCOME: DECEMBER 31, 1995*
<S> <C>
Interest.................................. $ 9,296
Dividends................................. 8,931
------------------
Total investment income............. 18,227
------------------
EXPENSES:
Investment advisory fees.................. 5,519
Printing and shareholder reports.......... 28
Custodian fees............................ 17,921
Legal fees................................ 5
Auditing and accounting fees.............. 5,000
Directors fees............................ 3
Other fees................................ 2,301
------------------
Total expenses...................... 30,777
Less:
Advisory fee waiver and expense
reimbursement......................... 23,832
Fees paid indirectly.................... 46
------------------
Net expenses........................ 6,899
------------------
Net investment income (loss).............. 11,328
------------------
Net realized gain (loss) on:
Investment securities................... 81,032
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 46,769
------------------
Net gain (loss) on investments............ 127,801
------------------
Net increase (decrease) in net assets
resulting from operations............... $ 139,129
====================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
7
<PAGE> 84
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
<S> <C>
OPERATIONS:
Net investment income (loss)............................................................................... $ 11,328
Net realized gain (loss) on investments.................................................................... 81,032
Change in unrealized appreciation (depreciation) on investments............................................ 46,769
------------------
Net increase (decrease) in net assets resulting from operations.......................................... 139,129
------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income...................................................................................... (10,990)
Net realized gains......................................................................................... (76,031)
------------------
Total distributions...................................................................................... (87,021)
------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares.......................................................................... 2,442,347
Dividends and distributions reinvested..................................................................... 87,021
Cost of shares repurchased................................................................................. (3,234)
------------------
Increase (decrease) in net assets from capital shares transactions....................................... 2,526,134
------------------
Net increase (decrease) in net assets.................................................................... 2,578,242
NET ASSETS:
Beginning of period........................................................................................ 0
------------------
End of period.............................................................................................. $ 2,578,242
====================
Undistributed net investment income...................................................................... $ 338
====================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................................... 0
------------------
Shares issued.............................................................................................. 213,996
Shares issued - reinvestment of dividends and distributions................................................ 7,465
Shares redeemed............................................................................................ (293)
------------------
Increase (decrease) in shares outstanding.................................................................. 221,168
------------------
Shares outstanding - end of period......................................................................... 221,168
====================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
8
<PAGE> 85
WRL SERIES FUND, INC.
C.A.S.E. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. C.A.S.E. GROWTH PORTFOLIO AND THE WILSHIRE 5000 INDEX]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995+
-----------
<S> <C>
Net asset value, beginning of period.............. $ 10.00
Income from operations:
Net investment income (loss).................. .12
Net realized and unrealized
gain (loss) on investments.................. 2.49
-----------
Total income (loss) from operations......... 2.61
-----------
Distributions:
Dividends from net investment income.......... (.12)
Distributions from net realized gains
on investments.............................. (.83)
-----------
Total distributions......................... (.95)
-----------
Net asset value, end of period.................... $ 11.66
=============
Total return...................................... 20.65%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................. $ 2,578
Ratio of expenses to average net assets......... 1.00%
Ratio of net investment income (loss)
to average net assets......................... 1.02%
Portfolio turnover rate......................... 121.62%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 5.
+ The inception date of this portfolio was May 1, 1995. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current
prospectus.
- --------------------------------------------------------------------------------
9
<PAGE> 86
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- ---------
<S> <C> <C>
COMMON STOCKS (98.70%)
AEROSPACE (1.81%)
Rockwell International Corporation...... 370 $ 19,564
BANKING (10.90%)
BankAmerica Corporation................. 245 15,864
Barnett Banks, Inc...................... 245 14,455
First Chicago NBD Corporation........... 805 31,814
Fleet Financial Group, Inc.............. 420 17,115
MBNA Corporation........................ 600 22,125
NationsBank Corporation................. 240 16,710
CHEMICALS (4.12%)
Dow Chemical Company.................... 325 22,872
Union Carbide Corporation............... 580 21,750
COMPUTER TECHNOLOGY (5.22%)
Hewlett-Packard Company................. 330 27,638
International Business Machines
Corporation........................... 315 28,901
ELECTRIC UTILITIES (7.22%)
Allegheny Power System, Inc............. 490 14,026
Duke Power Company...................... 250 11,844
Northeast Utilities..................... 520 12,675
Unicom Corporation...................... 790 25,872
Wisconsin Energy Corporation............ 450 13,781
ELECTRONICS (6.06%)
General Electric Company................ 495 35,640
Harris Corporation...................... 550 30,044
ENVIRONMENTAL SERVICES (2.38%)
Browning-Ferris Industries, Inc......... 875 25,813
FINANCE (3.56%)
Bank of New York Company, Inc........... 310 15,113
Federal National Mortgage Association... 135 16,757
John Nuveen & Company, Inc.
-- Class A............................ 270 6,683
FOODS & FOOD SERVICE (2.67%)
Philip Morris Companies, Inc............ 320 28,960
INSURANCE (6.74%)
Aetna Life and Casualty Company......... 285 19,736
Allstate Corporation.................... 500 20,563
Travelers Group, Inc.................... 520 32,694
MACHINERY (4.99%)
Black & Decker Corporation.............. 600 21,150
Caterpillar, Inc........................ 560 32,900
MANUFACTURING (2.96%)
Teledyne, Inc........................... 1,250 32,031
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- ---------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL (4.94%)
Medtronic, Inc.......................... 400 $ 22,350
US Healthcare, Inc...................... 670 31,155
OFFICE EQUIPMENT (1.89%)
American Business Products, Inc......... 720 20,520
OIL & GAS (9.87%)
Amoco Corporation....................... 300 21,563
Atlantic Richfield Company.............. 270 29,903
Chevron Corporation..................... 600 31,500
Exxon Corporation....................... 300 24,038
PHARMACEUTICALS (8.59%)
Bristol-Myers Squibb Company............ 360 30,915
Johnson & Johnson....................... 330 28,256
Merck & Company, Inc.................... 515 33,861
PHOTOGRAPHY (2.69%)
Eastman Kodak Company................... 435 29,144
RAILROADS (1.64%)
Union Pacific Corporation............... 270 17,820
RETAIL & DEPARTMENT STORES (2.99%)
Sears Roebuck and Company............... 830 32,370
TELECOMMUNICATIONS (7.46%)
Ameritech Corporation................... 445 26,255
Pacific Telesis Group................... 820 27,573
SBC Communications, Inc................. 470 27,025
---------
Total Common Stocks
(cost: $ 993,391)....................... 1,069,338
---------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- -----------
<S> <C> <C>
SHORT-TERM OBLIGATION (14.71%)
Morgan Stanley**
5.65%, due 01/02/96 dated
12/29/95 to be repurchased at
$159,527 on 01/02/96............. $ 159,428 $ 159,428
-----------
Total Short-Term Obligation
(cost: $ 159,428).................. 159,428
-----------
Total Investment Securities
(cost: $ 1,152,819).............. $ 1,228,766
===========
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
10
<PAGE> 87
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
SUMMARY
Investments at value................ 113.41 % $ 1,228,766
Liabilities in Excess
of Other Assets................... (13.41)% (145,304)
-------- -----------
Net Assets.......................... 100.00 % $ 1,083,462
-------- -----------
-------- -----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
** Collateralized by $143,976 U.S. Treasury Notes 7.25% due 08/15/04; market
value and accrued interest aggregated $163,556 for this collateral at
December 31, 1995.
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
11
<PAGE> 88
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
PERIOD ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH] Banking 10.90%
Chemicals 4.12%
Computer Technology 5.22%
Electric Utilities 7.22%
Electronics 6.06%
Insurance 6.74%
Machinery 4.99%
Medical 4.94%
Oil & Gas 9.87%
Pharmaceuticals 8.59%
Telecommunications 7.46%
Short-Term Obligation 14.71%
Other 9.18%
The C.A.S.E. Growth & Income Portfolio was funded May 1, 1995, with an objective
of high current income and moderate growth through investments in well-priced,
well-managed, large, stable and growing companies. The Portfolio invests in
stocks of companies that make a policy of paying above market dividends, have
positive internal growth rates, and have demonstrated capital appreciation over
time that exceeds the rate of inflation during the period measured. From its
inception through December 31, 1995, the Portfolio gained 14.80%. The Standard &
Poor's Index of 500 Common Stocks advanced 21.86% for the same period.
The stock market ordinarily serves as a barometer that anticipates economic
events occurring twelve to eighteen months into the future. Right now, though,
the market seems to have shortened its focus, becoming concerned over near-term
fluctuations in economic data, the inability of the President and Congress to
reach a federal budget agreement, and the upcoming presidential election. If
indeed the economy slips into a recession, lower taxes could lift it back from
its doldrums.
Our research disciplines for the Growth & Income Portfolio look for companies
with strong balance sheets, dependable cash flows, high profitability, favorable
valuations, and a strong, upward trend in earnings and dividend growth. If the
economy slows we should see a slower pace of growth for 1996. If that occurs,
the variety of rate-sensitive equities the Portfolio seeks should advance at a
pace greater than the overall market.
By design, the Growth & Income Portfolio invests in companies with
price/earnings ratios which are nearly 25% less than the market's, on both a
12-month leading and a 12-month lagging basis. These same companies exhibit
year-over-year earnings advancements above 10%. On a conservative value basis,
their 10-year comparatives are only 75% of the S&P 500. With its stocks
displaying strong fundamental underpinnings, an average dividend yield nearly
50% greater than the general market's, and earnings growth rates double the
market's, the Growth & Income Portfolio appears well-suited for the current
investment climate and its stated objectives.
<TABLE>
<C> <S>
/s/ William E. Lange
----------------------------------------------
William E. Lange
[LOGO] C.A.S.E. Growth & Income Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 89
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 993,391).......................... $ 1,069,338
Short-term securities, at amortized cost.... 159,428
Cash........................................ 0
Receivables:
Fund shares sold.......................... 0
Securities sold........................... 0
Interest.................................. 25
Dividends................................. 3,321
Other..................................... 0
-----------------
Total assets............................ 1,232,112
-----------------
LIABILITIES:
Fund shares purchased....................... 0
Securities purchased........................ 147,869
Accounts payable and accrued liabilities:
Custody fees.............................. 0
Investment advisory fees.................. 624
Dividends to shareholders................. 0
Other fees................................ 157
-----------------
Total liabilities....................... 148,650
-----------------
Total net assets...................... $ 1,083,462
===================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)... $ 961
Additional paid-in capital.................. 1,006,129
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)........................... 25
Accumulated undistributed net realized
gain (loss) on:
Investment transactions................. 400
Net unrealized appreciation (depreciation) on:
Investment securities..................... 75,947
-----------------
Net assets applicable to outstanding
shares of capital......................... $ 1,083,462
===================
Shares outstanding at December 31, 1995..... 96,056
===================
Net asset value per share................... $ 11.28
===================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED
INVESTMENT INCOME: DECEMBER 31, 1995*
<S> <C>
Interest.................................. $ 5,746
Dividends................................. 11,497
----------
Total investment income............. 17,243
----------
EXPENSES:
Investment advisory fees.................. 3,453
Printing and shareholder reports.......... 6
Custodian fees............................ 16,782
Legal fees................................ 2
Auditing and accounting fees.............. 5,000
Directors fees............................ 1
Other fees................................ 2,262
----------
Total expenses...................... 27,506
Less:
Advisory fee waiver and expense
reimbursement......................... 23,049
Fees paid indirectly.................... 141
----------
Net expenses........................ 4,316
----------
Net investment income (loss).............. 12,927
----------
Net realized gain (loss) on:
Investment securities................... 6,401
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 75,947
----------
Net gain (loss) on investments............ 82,348
----------
Net increase (decrease) in net assets
resulting from operations............... $ 95,275
====================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
13
<PAGE> 90
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
<S> <C>
OPERATIONS:
Net investment income (loss)............................................................................... $ 12,927
Net realized gain (loss) on investments.................................................................... 6,401
Change in unrealized appreciation (depreciation) on investments............................................ 75,947
------------------
Net increase (decrease) in net assets resulting from operations........................................... 95,275
------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income...................................................................................... (12,902)
Net realized gains......................................................................................... (6,001)
------------------
Total distributions....................................................................................... (18,903)
------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares.......................................................................... 991,742
Dividends and distributions reinvested..................................................................... 18,903
Cost of shares repurchased................................................................................. (3,555)
------------------
Increase (decrease) in net assets from capital shares transactions........................................ 1,007,090
------------------
Net increase (decrease) in net assets..................................................................... 1,083,462
NET ASSETS:
Beginning of period........................................................................................ 0
------------------
End of period.............................................................................................. $ 1,083,462
====================
Undistributed net investment income....................................................................... $ 25
====================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................................... 0
------------------
Shares issued.............................................................................................. 94,718
Shares issued -- reinvestment of dividends and distributions............................................... 1,676
Shares redeemed............................................................................................ (338)
------------------
Increase (decrease) in shares outstanding.................................................................. 96,056
------------------
Shares outstanding - end of period......................................................................... 96,056
====================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
14
<PAGE> 91
WRL SERIES FUND, INC.
C.A.S.E. GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
[COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. C.A.S.E. GROWTH AND INCOME PORTFOLIO AND THE STANDARD & POOR'S INDEX
OF 500 COMMON STOCKS]
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995+
-----------
<S> <C>
Net asset value, beginning of period.............. $ 10.00
Income from operations:
Net investment income (loss).................. .21
Net realized and unrealized
gain (loss) on investments.................. 1.38
-----------
Total income (loss) from operations......... 1.59
-----------
Distributions:
Dividends from net investment income.......... (.21)
Distributions from net realized gains
on investments.............................. (.10)
-----------
Total distributions......................... (.31)
-----------
Net asset value, end of period.................... $ 11.28
=============
Total return...................................... 14.80%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................ $ 1,083
Ratio of expenses to average net assets......... 1.00%
Ratio of net investment income (loss)
to average net assets......................... 1.94%
Portfolio turnover rate......................... 72.73%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 5.
+ The inception of this portfolio was May 1, 1995. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
15
<PAGE> 92
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -----------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (***)
MANUFACTURING (***)
Teledyne, Inc. -- Series E.......... 3 $ 45
-----------
Total Convertible Preferred Stocks
(cost: $43)......................... 45
-----------
COMMON STOCKS (98.99%)
AEROSPACE (2.57%)
Rockwell International
Corporation....................... 560 29,610
APPAREL & TEXTILES (1.30%)
Springs Industries, Inc. -- Class
A................................. 360 14,895
BANKING (10.84%)
Barnett Banks, Inc.................. 330 19,470
Fifth Third Bancorp................. 270 19,777
First Bank System, Inc.............. 370 18,361
First Chicago NBD Corporation....... 489 19,304
Fleet Financial Group, Inc.......... 520 21,190
Huntington Bancshares, Inc.......... 1,100 26,400
BUILDING (0.16%)
Castle & Cooke, Inc.*............... 110 1,843
CHEMICALS (3.20%)
Morton International, Inc........... 1,025 36,772
COMPUTER TECHNOLOGY (10.96%)
Bay Networks, Inc.*................. 405 16,656
Ceridian Corporation*............... 100 4,125
Cisco Systems, Inc.*................ 230 17,164
Digital Equipment Corporation*...... 490 31,421
Seagate Technology, Inc.*........... 510 24,225
Sun Microsystems, Inc.*............. 710 32,394
ELECTRIC UTILITIES (5.25%)
FPL Group, Inc...................... 340 15,767
Illinova Corporation................ 570 17,100
Unicom Corporation.................. 840 27,510
ELECTRONICS (5.16%)
Applied Materials, Inc.*............ 510 20,081
Arrow Electronics, Inc.*............ 80 3,450
Intel Corporation................... 270 15,323
Micron Technology Incorporated...... 50 1,981
Teradyne, Inc.*..................... 390 9,750
Texas Instruments, Inc.............. 170 8,798
ENVIRONMENTAL SERVICES (2.82%)
Browning-Ferris Industries, Inc..... 1,100 32,450
FINANCE (5.47%)
American Express Company............ 240 9,930
Bank of New York Company, Inc....... 320 15,600
Bear Stearns Companies, Inc......... 910 18,086
John Nuveen & Company, Inc. -- Class
A................................. 780 19,305
FOODS & FOOD SERVICE (5.85%)
Archer Daniels Midland Co........... 1,775 31,950
Dole Food Company................... 330 11,550
IBP, Inc............................ 470 23,735
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
---------- -----------
<S> <C> <C>
COMMON STOCK -- (CONTINUED)
FOREST PRODUCTS & PAPER (3.97%)
Champion International
Corporation....................... 190 $ 7,980
Consolidated Papers, Inc............ 340 19,083
Willamette Industries, Inc.......... 330 18,563
INSURANCE (3.16%)
Aetna Life and Casualty Company..... 300 20,775
Equitable Companies, Inc............ 650 15,600
MANUFACTURING (3.45%)
Teledyne, Inc....................... 1,550 39,719
MEDICAL (7.38%)
Foundation Health Corporation*...... 300 12,900
Humana, Inc.*....................... 805 22,037
Sierra Health Services, Inc.*....... 850 26,988
United Healthcare Corporation....... 350 22,925
METALS (2.95%)
Reynolds Metals Company............. 600 33,975
OFFICE EQUIPMENT (2.43%)
American Business Products, Inc..... 650 18,525
Pitney-Bowes, Inc................... 200 9,400
OIL & GAS (9.50%)
Amoco Corporation................... 370 26,594
Chevron Corporation................. 500 26,250
Halliburton Company................. 580 29,362
NorAm Energy Corporation............ 3,050 27,068
PHOTOGRAPHY (1.89%)
Eastman Kodak Company............... 325 21,775
RAILROADS (0.95%)
Burlington Northern Santa Fe........ 140 10,920
RETAIL & DEPARTMENT STORES (1.67%)
Staples, Inc.*...................... 790 19,256
TELECOMMUNICATIONS (6.90%)
AT & T Corporation.................. 170 11,007
Ameritech Corporation............... 330 19,470
Pacific Telesis Group............... 890 29,926
SBC Communications, Inc............. 330 18,975
TRANSPORTATION (1.16%)
Delta Air Lines, Inc................ 180 13,297
-----------
Total Common Stocks
(cost: $ 1,112,616)................. 1,138,343
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- -----------
<S> <C> <C>
SHORT-TERM OBLIGATION (11.21%)
Morgan Stanley**
5.65%, Repurchase Agreement dated
12/29/95 to be repurchased at
$128,941 on 01/02/96................. $ 128,860 $ 128,860
-----------
Total Short-Term Obligation..........
(cost: $128,860)..................... 128,860
-----------
Total Investment Securities
(cost: $1,241,519)................. $ 1,267,248
===========
</TABLE>
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
16
<PAGE> 93
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
SUMMARY
Investments at value................. 110.20 % $ 1,267,248
Liabilities in Excess
of Other Assets.................... (10.20)% (117,277)
-------- -----------
Net Assets........................... 100.00 % $ 1,149,971
-------- -----------
-------- -----------
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
* No income dividends were paid during the preceding twelve months.
** Collateralized by $116,371 U.S. Treasury Notes, 7.25% due 08/15/04; market
value and accrued interest aggregated $132,197 for this collateral at
December 31, 1995.
*** Percentage is less than .01%.
See notes to schedule of investments.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
17
<PAGE> 94
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
PERIOD ENDED DECEMBER 31, 1995
INVESTMENTS BY INDUSTRY
AT DECEMBER 31, 1995
Amount of investments in each category is indicated as a percentage of total
Portfolio net assets
[GRAPH]
Banking 10.84%
Chemicals 3.20%
Computer Technology 10.96%
Electric Utilities 5.25%
Electronics 5.16%
Finance 5.47%
Foods & Food Service 5.85%
Forest Products & Paper 3.97%
Manufacturing 3.45%
Medical 7.38%
Oil & Gas 9.50%
Telecommunications 6.90%
Short-Term Obligation 11.21%
Other 10.86%
The C.A.S.E. Quality Growth Portfolio was funded May 1, 1995, with the objective
of preservation and growth of capital. The Portfolio invests primarily in common
stocks of large, well-managed, well-priced companies with defined markets and
financial strategies. In the short period from its inception through December
31, 1995, the Portfolio gained 13.61%. The Standard & Poor's Index of 500 Common
Stocks advanced 21.86% for the same period.
In terms of current investment circumstances, the overall bullish tone of the
market is well supported by its current determinants -- earnings and interest
rates. Presently, fine-quality S&P 500 stocks carry a price/earnings ratio of 16
times current year projections. In terms of their historical range (13-21
times), quality stocks are mid-priced and below their 19-plus speculative
ratings of past bull markets.
Equities in general have rallied to a point where any bad news, especially
disappointing earnings, would be difficult to ignore. The current economic
slowdown should lead to some lowering of earnings expectations and a lessening
of corporate momentum.
As opposed to a broad-based movement, certain areas of the economic structure
appear more favorable than others. Interest-sensitive issues provide the
market's current leadership. In the interest-sensitive areas, we continue to be
impressed by the finance sector and utilities, as long as they are supported by
corresponding growth in their underlying fundamentals. The recent lowering of
interest rates may be giving new life to the cyclicals, including capital goods
and basic industries. As a matter of policy, we resist any temptation to time
markets. Our sector and industry weightings reflect our best judgment of the
near and long-term direction of our economy as a whole and the stock market in
particular.
In terms of the strategic alignments of the C.A.S.E. Quality Growth Portfolio,
our price/earnings ratio, on both a 12-month leading and 12-month lagging basis,
is more conservative than that of the average of the Standard & Poor's 500. Our
average stock is also revising its earnings estimates upward and the
year-over-year growth of sales and earnings average is above 15%. Stocks which
exhibit such "above the market" fundamentals ordinarily perform better than the
general market.
The companies which were selected are broadly diversified, well-managed, and
reflect balance sheets which provide a basis for future confidence. We monitor
two dozen of the industry's most advanced and reliable study disciplines. We
believe that if we hold fast to our discipline for uncovering companies with
above-average characteristics, we will achieve above-average returns in both
good and bad market environments.
<TABLE>
<C> <S>
/s/ William E. Lange
---------------------------------------------
William E. Lange
[LOGO] C.A.S.E. Quality Growth Portfolio Manager
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE> 95
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1995
<S> <C>
Investments in securities, at market value
(cost $ 1,112,659)...................... $ 1,138,388
Short-term securities, at amortized
cost.................................... 128,860
Cash...................................... 0
Receivables:
Fund shares sold........................ 0
Securities sold......................... 0
Interest................................ 20
Dividends............................... 2,497
Other................................... 0
-----------------
Total assets.......................... 1,269,765
-----------------
LIABILITIES:
Fund shares purchased..................... 0
Securities purchased...................... 118,921
Accounts payable and accrued liabilities:
Custody fees............................ 0
Investment advisory fees................ 699
Dividends to shareholders............... 0
Other fees.............................. 174
-----------------
Total liabilities..................... 119,794
-----------------
Total net assets.................... $ 1,149,971
=====================
NET ASSETS:
Capital stock
($ .01 par value 75,000,000
authorized)............................. $ 1,061
Additional paid-in capital................ 1,120,160
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)......................... 21
Accumulated undistributed net realized
gain (loss) on:
Investment transactions............... 3,000
Net unrealized appreciation (depreciation) on:
Investment securities................... 25,729
-----------------
Net assets applicable to outstanding
shares of capital....................... $ 1,149,971
=====================
Shares outstanding at December 31, 1995... 106,076
=====================
Net asset value per share................. $ 10.84
=====================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED
INVESTMENT INCOME: DECEMBER 31, 1995*
<S> <C>
Interest................................ $ 5,195
Dividends............................... 8,836
------------------
Total investment income........... 14,031
------------------
EXPENSES:
Investment advisory fees................ 3,871
Printing and shareholder reports........ 16
Custodian fees.......................... 17,717
Legal fees.............................. 2
Auditing and accounting fees............ 5,000
Directors fees.......................... 1
Other fees.............................. 2,135
------------------
Total expenses.................... 28,742
Less:
Advisory fee waiver and expense
reimbursement....................... 23,966
Fees paid indirectly.................. 40
------------------
Net expenses...................... 4,736
------------------
Net investment income (loss)............ 9,295
------------------
Net realized gain (loss) on:
Investment securities................. 46,323
Change in unrealized appreciation
(depreciation) on:
Investment securities................. 25,729
------------------
Net gain (loss) on investments.......... 72,052
------------------
Net increase (decrease) in net assets
resulting from operations............. $ 81,347
======================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
19
<PAGE> 96
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995*
<S> <C>
OPERATIONS:
Net investment income (loss)............................................................................... $ 9,295
Net realized gain (loss) on investments.................................................................... 46,323
Change in unrealized appreciation (depreciation) on investments............................................ 25,729
------------------
Net increase (decrease) in net assets resulting from operations.......................................... 81,347
------------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income...................................................................................... (9,274)
Net realized gains......................................................................................... (43,323)
------------------
Total distributions...................................................................................... (52,597)
------------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares.......................................................................... 1,072,213
Dividends and distributions reinvested..................................................................... 52,597
Cost of shares repurchased................................................................................. (3,589)
------------------
Increase (decrease) in net assets from capital shares transactions....................................... 1,121,221
------------------
Net increase (decrease) in net assets.................................................................... 1,149,971
NET ASSETS:
Beginning of period........................................................................................ 0
------------------
End of period.............................................................................................. $ 1,149,971
====================
Undistributed net investment income...................................................................... $ 21
====================
SHARE ACTIVITY:
Shares outstanding - beginning of period................................................................... 0
------------------
Shares issued.............................................................................................. 101,557
Shares issued - reinvestment of dividends and distributions................................................ 4,852
Shares redeemed............................................................................................ (333)
------------------
Increase (decrease) in shares outstanding.................................................................. 106,076
------------------
Shares outstanding - end of period......................................................................... 106,076
====================
</TABLE>
* The inception of this portfolio was May 1, 1995.
The notes to the financial statements are an integral part of this report.
- --------------------------------------------------------------------------------
20
<PAGE> 97
WRL SERIES FUND, INC.
C.A.S.E. QUALITY GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE WRL SERIES FUND,
INC. C.A.S.E. QUALITY GROWTH PORTFOLIO AND THE STANDARD & POOR'S INDEX
OF 500 COMMON STOCKS
[GRAPH]
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1995+
-----------
<S> <C>
Net asset value, beginning of period.............. $ 10.00
Income from operations:
Net investment income (loss).................. .14
Net realized and unrealized
gain (loss) on investments.................. 1.50
-----------
Total income (loss) from operations......... 1.64
-----------
Distributions:
Dividends from net investment income.......... (.14)
Distributions from net realized gains
on investments.............................. (.66)
-----------
Total distributions......................... (.80)
-----------
Net asset value, end of period.................... $ 10.84
=============
Total return...................................... 13.61%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................ $ 1,150
Ratio of expenses to average net assets......... 1.00%
Ratio of net investment income (loss)
to average net assets......................... 1.28%
Portfolio turnover rate......................... 119.63%
</TABLE>
* The above table illustrates the change for a share outstanding computed using
average shares outstanding throughout each period. See Note 5.
+ The inception of this portfolio was May 1, 1995. The total return is not
annualized.
The notes to the financial statements are an integral part of this report.
This material must be preceded or accompanied by the Fund's current prospectus.
- --------------------------------------------------------------------------------
21
<PAGE> 98
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The WRL Series Fund, Inc. (the "Fund") is a diversified, open-end,
investment management company registered under the Investment Company Act of
1940, as amended. The Fund was incorporated on August 21, 1985 as a Maryland
Corporation and commenced operations on October 2, 1986.
The Fund consists of a series of investment portfolios, including the
C.A.S.E. Growth Portfolio, the C.A.S.E. Growth & Income Portfolio, and the
C.A.S.E. Quality Growth Portfolio (the "Portfolios"). Shares of the Portfolios
are sold to the WRL Series Annuity Account (the "Annuity Account") of Western
Reserve Life Assurance Co. of Ohio ("WRL"), to fund benefits under the C.A.S.E.
Reserve Variable Annuity Contracts. The Separate Account contains three
investment options referred to as sub-accounts, each of which upon instructions
received from contract owners of C.A.S.E. Reserve Variable Annuity Contracts,
invests in a corresponding C.A.S.E. Portfolio.
On May 1, 1995, WRL made an initial contribution of $500,000 to each of the
Portfolios.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
A. VALUATION OF INVESTMENTS
Securities held by the Portfolios are valued at market value, except for
short-term debt securities. Short-term debt securities maturing in 60 days
or less are valued on the amortized cost basis, which approximates market
value. Stocks are valued at the latest sale price on the last business day
of the fiscal period as reported by the principal securities exchange on
which the issue is traded or, if no sale is reported for a stock, the latest
bid price is used. Bonds are valued using prices quoted by a major dealer in
bonds which offers a pricing service. Certain pricing methodologies, such as
matrix pricing of bonds, may involve the use of estimates and actual sales
prices may differ. Securities for which quotations may not be readily
available are valued as determined in good faith in accordance with
procedures established by and under the general supervision of the Fund's
Board of Directors.
The value of foreign securities are translated into U.S. dollars using spot
foreign exchange rates.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are recorded on the trade date. Security gains and
losses are calculated on the first-in, first-out basis for both tax and
financial reporting purposes. Dividend income is recorded on the ex-dividend
date, and interest income, including amortization of bond premium and
accretion of discount, is accrued daily. Dividend income on foreign
securities is recorded net of foreign tax withholdings.
The accounting records of the Fund are maintained in U.S. dollars. For
transactions denominated in a currency other than the U.S. dollar, purchases
and sales of securities, income received, and expenses paid are translated
into U.S. dollars at the foreign exchange spot rate on the date the
transaction is recorded. Currency gain and loss is also calculated on
payables and receivables that are denominated in foreign currencies. The
payables and receivables are generally related to security transactions and
income.
The unrealized gain or loss on forward foreign currency contracts is due to
the difference between the foreign exchange contract rate and the foreign
exchange forward rate applicable to that contract at the end of the period.
This gain or loss becomes realized when the contract is closed or settled.
Futures contracts and options are valued based upon daily settlement prices
with the fluctuations in value recorded as unrealized gains and losses.
These gains and losses become realized when the position is closed. The
risks associated with the use of options and futures contracts involve the
possibilities of an illiquid market and an imperfect correlation between the
value of the instrument and the underlying security.
C. FEDERAL INCOME TAXES
It is the Fund's policy to distribute substantially all of its taxable
income and capital gains to its shareholders and otherwise qualify as a
regulated investment company under the Internal Revenue Code. Pursuant to
Code Section 4982(f), regulated investment
- --------------------------------------------------------------------------------
22
<PAGE> 99
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
companies serving as funding vehicles for life insurance company
separate accounts are not subject to excise tax distribution
requirements. Accordingly, no provision for Federal income taxes has
been made.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for such items as wash sales, foreign currency
transactions, net operating losses and capital loss carryforwards.
D. DIVIDENDS AND DISTRIBUTIONS
Dividends of the Portfolios are declared and reinvested semi-annually, while
capital gain distributions are declared and reinvested annually. Dividends
and distributions of the Fund are generally paid to and reinvested by the
Separate Account on the next business day after declaration.
E. ORGANIZATION COSTS
All costs incurred in connection with the formation of the Fund and its
portfolios were paid by WRL.
NOTE 2 - INVESTMENT ADVISORY AND
TRANSACTIONS WITH AFFILIATES
A. INVESTMENT ADVISORY
The Fund has entered into an annually renewable investment advisory
agreement for the Portfolios with WRL as investment adviser. The Fund pays
to WRL, and charges to each respective Portfolio, advisory fees each month
at the following annual rate expressed as a percentage of the average daily
net assets of the respective Portfolio:
<TABLE>
<CAPTION>
PORTFOLIO PERCENT OF ASSETS
----------------------------- -----------------
<S> <C>
C.A.S.E. Growth .80%
C.A.S.E. Growth & Income .80%
C.A.S.E. Quality Growth .80%
</TABLE>
WRL currently voluntarily waives its advisory fees to the extent a
portfolio's normal operating expenses exceed the percentage of net assets of
the portfolio as listed below:
<TABLE>
<CAPTION>
PORTFOLIO PERCENT OF ASSETS
----------------------------- -----------------
<S> <C>
C.A.S.E. Growth 1.00%
C.A.S.E. Growth & Income 1.00%
C.A.S.E. Quality Growth 1.00%
</TABLE>
WRL has entered into a sub-advisory agreement with C.A.S.E. Management, Inc.
Pursuant to the agreement, fifty percent of the advisory fee paid to WRL is
due to C.A.S.E. Management, Inc.
The Portfolios are charged for expenses that specifically relate to their
individual operations. All other operating expenses of the Fund that are not
attributable to a specific portfolio are allocated based upon the
proportionate number of policy and contract owners of the underlying
sub-accounts. WRL directly incurs and pays these operating expenses relating
to the Fund, which subsequently reimburses WRL. All normal operating
expenses that exceed the established expense limit set forth above will be
borne by WRL.
B. AFFILIATES
WRL is an indirect wholly-owned subsidiary of AEGON USA, Inc., which is an
indirect wholly-owned subsidiary of AEGON nv, a Netherlands corporation.
- --------------------------------------------------------------------------------
23
<PAGE> 100
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITY TRANSACTIONS
Securities transactions are summarized as follows:
<TABLE>
<CAPTION>
C.A.S.E. GROWTH C.A.S.E. QUALITY
C.A.S.E. GROWTH & INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- ----------------
<S> <C> <C> <C>
For the period ended December 31, 1995:
Purchases of securities:
Long-term excluding U.S. Government............ $ 3,451,300 $ 1,420,331 $ 1,836,732
U.S. Government securities..................... 0 0 0
Proceeds from maturities and sales of securities:
Long-term excluding U.S. Government............ 1,127,956 433,342 770,397
U.S. Government securities..................... 0 0 0
</TABLE>
NOTE 4 - FEDERAL INCOME TAX MATTERS
The income, expenses, gains and losses on securities transactions
attributed to each Portfolio for accounting purposes, are also attributed to
that Portfolio for Federal income tax purposes. Gains and losses on forward
currency contracts are treated as ordinary income for Federal income tax
purposes.
Net capital gains noted below are the excess of the long-term capital gains
over short-term capital losses. The net capital loss carryforwards are available
to offset future capital gains through the periods listed below. The Fund will
elect to treat the net capital losses incurred in the two month period ended
December 31, 1995 (Post-October Losses Deferred) as having been incurred in the
following fiscal year. The cost of investments for Federal income tax purposes
and the composition of unrealized appreciation and depreciation on investment
securities for Federal income tax purposes are as follows at December 31, 1995:
<TABLE>
<CAPTION>
C.A.S.E. GROWTH C.A.S.E. QUALITY
C.A.S.E. GROWTH & INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- ----------------
<S> <C> <C> <C>
Net Capital Gains................................... $ 81,031 $ 6,401 $ 49,556
Post-October Losses Deferred........................ 0 0 3,081
Prior Year Net Capital Loss Carryforward Utilized... 0 0 0
Net Capital Loss Carryforward....................... 0 0 0
Available Through................................. N/A N/A N/A
Federal Tax Cost Basis.............................. 2,936,430 1,152,819 1,241,671
Unrealized Appreciation............................. 115,326 84,794 59,585
Unrealized Depreciation............................. 68,557 8,847 34,008
Net Unrealized Appreciation (Depreciation).......... 46,769 75,947 25,577
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 101
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 5 - FINANCIAL HIGHLIGHTS
The Financial Highlights for each Portfolio contains a chart (the
"comparison chart") setting forth Average Annual Total Return ("total return")
and a comparison of the change in value of a $10,000 investment in that
Portfolio to one or more broad based market indices. In the comparison chart and
the total return set forth in "Financial Highlights", the total return and the
change in value of the Portfolio reflect the advisory fee and all other
Portfolio expenses and include reinvestment of dividends and capital gains; they
do not reflect the charges against the corresponding sub-accounts or the charges
and deductions under the applicable annuity contracts. Where a portfolio's
period from inception is less than one year, the total return shown is not
annualized. The indices referred to in the comparison charts are unmanaged and
are used as a general measure of market performance; with the exception of the
Wilshire 5000 Index, they assume reinvestment of dividends and capital gains and
all indices do not include any management or investment expenses.
The ratio of expenses to average net assets in the financial highlights is
net of advisory fee waiver (see Note 2). The December 31, 1995 ratio is
annualized, along with the ratio of net investment income to average net assets.
Without the advisory fee waived by WRL, the ratio would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
PORTFOLIO 1995
--------------------------------------------------------------------------------------- ------------
<S> <C>
C.A.S.E. Growth........................................................................ 4.15%
C.A.S.E. Growth & Income............................................................... 6.17%
C.A.S.E. Quality Growth................................................................ 5.91%
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
1. The audited Financial Statements of the Fund in the 1995
Annual Report are incorporated by reference into the
Statements of Additional Information for the Growth, Bond,
Money Market and Global Portfolios, the
Short-to-Intermediate Government and Balanced Portfolios,
the Emerging Growth Portfolio, the Equity-Income Portfolio,
the Utility Portfolio, Aggressive Growth Portfolio, the
Tactical Asset Allocation Portfolio, the C.A.S.E. Quality
Growth Portfolio, the C.A.S.E. Growth & Income Portfolio,
and the C.A.S.E. Growth Portfolio. (Part B)
The Financial Statements of the Leisure Portfolio, the
Janus Balanced Portfolio, the International Equity
Portfolio, the Meridian/INVESCO Global Sector Portfolio, the
Meridian/INVESCO US Sector Portfolio, the Meridian/INVESCO
Foreign Sector Portfolio and the Value Equity Portfolio will
be included in a future Amendment.
2. Audited Per Share Income and Capital Changes are included
in the Prospectuses for the Growth, Bond, Money Market,
Global, Short-to-Intermediate Government, Balanced, Emerging
Growth, Equity-Income, the Utility, the Aggressive Growth,
the Tactical Asset Allocation, C.A.S.E. Growth, C.A.S.E.
Quality Growth and C.A.S.E. Growth & Income Portfolios (Part
A).
Per Share Income and Capital Changes for the Leisure, the
Janus Balanced, the International Equity, the
Meridian/INVESCO Global Sector Portfolio, the
Meridian/INVESCO US Sector Portfolio, the Meridian/INVESCO
Foreign Sector Portfolio and the Value Equity Portfolio will
be included in a future Amendment.
(b) Exhibits
1. (A) Articles of Incorporation of WRL Series Fund, Inc. (1)
(B) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (9)
(C) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (11)
(D) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (13)
(E) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (14)
(F) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (14)
(G) Articles Supplementary to Articles of Incorporation of
WRL Series Fund, Inc. (16)
2. Bylaws of WRL Series Fund, Inc. (3)
3. Not applicable.
4. Not applicable.
5. (i) Investment Advisory Agreement dated 2/26/91 on behalf
of the Growth and Bond Portfolios of the Fund. (4)
(ii) Investment Advisory Agreement dated 7/13/92 on behalf
of the Global Portfolio of the Fund. (7)
(iii) Investment Advisory Agreement dated 4/30/96 on behalf
of the Money Market Portfolio of the Fund.
(iv) Investment Advisory Agreement dated 7/13/92 on behalf
of the Short-to-Intermediate Government Portfolio of
the Fund.(7)
(v) Investment Advisory Agreement dated 11/19/92 on
behalf of the Emerging Growth Portfolio of the
Fund. (8)
C-1
<PAGE>
(vi) Investment Advisory Agreement dated 11/19/92 on
behalf of the Equity-Income Portfolio of the Fund. (8)
(vii) Investment Advisory Agreement dated 12/7/93 on
behalf of the Balanced Portfolio of the Fund. (11)
(viii) Investment Advisory Agreement dated 12/7/93 on behalf
of the Utility Portfolio of the Fund. (11)
(ix) Investment Advisory Agreement dated 12/7/93 on behalf
of the Aggressive Growth Portfolio of the Fund. (11)
(x) Investment Advisory Agreement dated 8/18/94 on behalf
of the Tactical Asset Allocation Portfolio of the Fund.
(12)
(xi) Investment Advisory Agreement dated 2/6/95 on behalf
of the C.A.S.E. Quality Growth Portfolio, the C.A.S.E.
Growth & Income Portfolio and the C.A.S.E. Growth
Portfolio of the Fund. (13)
(xii) Investment Advisory Agreement dated 3/15/95 on behalf
of the Janus Balanced Portfolio of the Fund. (15)
(xiii) Investment Advisory Agreement dated 3/15/95 on
behalf of the International Equity Portfolio of the
Fund. (15)
(xiv) Investment Advisory Agreement dated 6/19/95 on behalf
of the Leisure Portfolio of the Fund. (15)
(xv) Investment Advisory Agreement dated 4/30/96 on behalf
of the Meridian/INVESCO Global Sector, Meridian/INVESCO
US Sector and Meridian/INVESCO Foreign Sector
Portfolios of the Fund.
(xvi) Investment Advisory Agreement dated 4/30/96 on behalf
of the Value Equity Portfolio of the Fund.
(xvii) Sub-Advisory Agreement dated 2/26/91 on behalf of the
Growth and Bond Portfolios of the Fund.(4)
(xviii)Sub-Advisory Agreement dated 4/30/96 on behalf of the
Money Market Portfolio of the Fund.
(xix) Sub-Advisory Agreement dated 7/13/92 on behalf of the
Global Portfolio of the Fund. (7)
(xx) Sub-Advisory Agreement dated 7/13/92 on behalf of the
Short-to-Intermediate Government Portfolio of the Fund.
(7)
(xxi) Sub-Advisory Agreement dated 12/20/94 on behalf of the
Emerging Growth Portfolio of the Fund. (13)
(xxii) Sub-Advisory Agreement dated 11/19/92 on behalf of the
Equity-Income Portfolio of the Fund. (8)
(xxiii) Sub-Advisory Agreement dated 12/7/93 on behalf of
the Balanced Portfolio of the Fund. (11)
(xxiv) Sub-Advisory Agreement dated 12/7/93 on behalf of the
Utility Portfolio of the Fund. (11)
(xxv) Sub-Advisory Agreement dated 12/7/93 on behalf of the
Aggressive Growth Portfolio of the Fund. (11)
(xxvi) Sub-Advisory Agreement dated 8/18/94 on behalf of the
Tactical Asset Allocation Portfolio of the Fund. (12)
(xxvii) Sub-Advisory Agreement dated 2/6/95 on behalf of the
C.A.S.E. Quality Growth Portfolio, C.A.S.E. Growth &
Income Portfolio and C.A.S.E. Growth Portfolio of the
Fund. (15)
(xxviii)Sub-Advisory Agreement dated 3/15/95 on behalf of the
Janus Balanced Portfolio of the Fund. (15)
(xxix) Sub-Advisory Agreement dated 3/15/95 on behalf of the
International Equity Portfolio of the Fund. (15)
(xxx) Sub-Advisory Agreement dated 6/19/95 on behalf of the
Leisure Portfolio of the Fund. (15)
(xxxi) Co-Sub-Advisory Agreements dated 4/30/96 on behalf of
the Meridian/INVESCO Global Sector, Meridian/INVESCO US
Sector and Meridian/INVESCO Foreign Sector Portfolios
of the Fund.
C-2
<PAGE>
(xxxii)Sub-Advisory Agreement dated 4/30/96 on behalf of
the Value Equity Portfolio of the Fund.
(xxxiii) Form of Service Agreement between INVESCO Global
Asset Management Limitied and INVESCO Trust Company,
Inc.
(xxxiv) Form of Service Agreement between INVESCO Global
Asset Management Limited and INVESCO Asset Management
Limited.
6. Not applicable.
7. Directors' Deferred Compensation Plan
8. Custodian Agreement. (14)
9. Not applicable.
10. Opinion and consent of Thomas E. Pierpan, Esq.
as to legality of the securities being registered. (14)
11. Consent of Price Waterhouse LLP.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Schedules for Computations of Performance
Quotations. (9)
17. Powers of Attorney. (13)
18. Not applicable.
- ---------------------
(1) Previously filed with Form N-1A dated September 27, 1985 and
incorporated herein by reference.
(2) Previously filed with Pre-Effective Amendment No. 1 to Form N-1A dated
July 8, 1986 and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 3 to Form N-1A dated
May 1, 1988 and incorporated herein by reference
(4) Previously filed with Post-Effective Amendment No. 6 to Form N-1A dated
March 1, 1991 and incorporated herein by reference.
(5) Previously filed with Post-Effective Amendment No. 7 to Form N-1A dated
May 1, 1991 and incorporated herein by reference.
(6) Previously filed with Post-Effective Amendment No. 8 to Form N-1A dated
May 1, 1992 and incorporated herein by reference.
(7) Previously filed with Post-Effective Amendment No. 9 to Form N-1A dated
September 1, 1992 and incorporated herein by reference.
(8) Previously filed with Post-Effective Amendment No. 10 to Form N-1A
dated December 23, 1992 and incorporated herein by reference.
(9) Previously filed with Post-Effective Amendment No. 11 to Form N-1A
dated February 26, 1993 and incorporated herein by reference.
(10) Previously filed with Post-Effective Amendment No. 14 to Form N-1A
dated December 10, 1993 and incorporated herein by reference.
(11) Previously filed with Post-Effective Amendment No. 15 to Form N-1A
dated April 25, 1994 and incorporated herein by reference.
(12) Previously filed with Post-Effective Amendment No. 17 to Form N-1A
dated August 30, 1994 and incorporated herein by reference.
C-3
<PAGE>
(13) Previously filed with Post-Effective Amendment No. 19 to Form N-1A
dated April 21, 1995 and incorporated herein by reference.
(14) Previously filed with Post-Effective Amendment No. 20 to Form N-1A
dated July 18, 1995 and incorporated herein by reference.
(15) Previously filed with Post-Effective Amendment No. 21 to Form N-1A
dated October 23, 1995 and incorporated herein by reference.
(16) Previously filed with Post-Effective Amendment No. 22 to Form N-1A
dated February 5, 1996 and incorporated herein by reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Shares of the Registrant are sold to and owned by the WRL Series Life
Account and WRL Series Annuity Account established by Western Reserve Life
Assurance Co. of Ohio ("Western Reserve") to fund benefits under certain
flexible premium variable life insurance policies and variable annuity contracts
issued by it. In addition, shares of the Growth Portfolio Common Stock of the
Registrant are also sold to the PFL Endeavor Variable Annuity Account
established by PFL Life Insurance Company and AUSA Endeavor Variable Annuity
Account established by AUSA Life Insurance Company, Inc., both affiliates of
Western Reserve. Shares of the Growth, Bond, Money Market, Global,
Equity-Income, Balanced, Aggressive Growth, Emerging Growth,
Short-to-Intermediate Governement, Utility and Tactical Asset Allocation
Portfolio Common Stock are sold to Pooled Account No. 27 established by AUSA
Life Insurance Company, Inc.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF APRIL 1, 1996
-------------- ----------------------------
<S> <C>
Growth Portfolio
Common Stock ($.01 par value) 4
Bond Portfolio
Common Stock ($.01 par value) 2
Money Market Portfolio
Common Stock ($.01 par value) 2
Global Portfolio
Common Stock ($.01 par value) 2
Short-to-Intermediate Government Portfolio
Common Stock ($.01 par value) 2
Emerging Growth Portfolio
Common Stock ($.01 par value) 2
Equity-Income Portfolio
Common Stock ($.01 par value) 2
Balanced Portfolio
Common Stock ($.01 par value) 2
Utility Portfolio
Common Stock ($.01 par value) 2
Aggressive Growth Portfolio
Common Stock ($.01 par value) 2
Tactical Asset Allocation Portfolio
Common Stock ($.01 par value) 2
C.A.S.E. Quality Growth Portfolio
Common Stock ($.01 par value) 1
C.A.S.E. Growth & Income Portfolio
Common Stock ($.01 par value) 1
C.A.S.E. Growth Portfolio
Common Stock ($.01 par value) 1
Janus Balanced Portfolio
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF APRIL 1, 1996
-------------- ----------------------------
<S> <C>
Common Stock ($.01 par value) 0
International Equity Portfolio
Common Stock ($.01 par value) 0
Leisure Portfolio
Common Stock ($.01 par value) 0
Meridian/INVESCO Global Sector Portfolio
Common Stock ($.01 par value) 0
Meridian/INVESCO US Sector Portfolio
Common Stock ($.01 par value) 0
Meridian/INVESCO Foreign Sector Portfolio
Common Stock ($.01 par value) 0
Value Equity Portfolio
Common Stock ($.01 par value) 0
</TABLE>
Item 27. INDEMNIFICATION.
Article VI of the By-Laws of WRL Series Fund, Inc. provides in its entirety
as follows:
Each director, officer, or employee (and his heirs, executors and
administrators) shall be indemnified by the Corporation against all
liability and expense incurred by reason of the fact that he is or was a
director, officer or employee of the corporation, to the full extent and
in any manner permitted by Maryland law, as in effect at any time,
provided that nothing herein shall be construed to protect any director,
officer or employee against any liability to the corporation or to its
security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office ("disabling
conduct"). No indemnification of a director, officer or employee shall
be made pursuant to the preceding sentence unless there has been (a) a
final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified ("indemnity")
was not liable by reason of disabling conduct or (b) in the absence of
such a decision, a reasonable determination, based upon a review of the
facts, that the indemnity was not liable by reason of disabling conduct
by (i) the vote of a majority of a quorum of directors who are neither
"interested persons" of the corporation, as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor parties to the proceeding
("non-interested, non-party directors"), or (ii) an independent legal
counsel in a written opinion. Reasonable expenses incurred by each such
director, officer or employee may be paid by the corporation in advance
of the final disposition of any proceeding to which such person is a
party, to the full extent and under the circumstances permitted by
Maryland law, provided that such person undertakes to repay the advance
unless it is ultimately determined that he is entitled to
indemnification and either (i) he provides security for his undertaking,
(ii) the corporation is insured against losses by reason of any lawful
advances or (iii) a majority of a quorum of the non-interested,
non-party directors, or an independent legal counsel in a written
opinion, determines, based on a review of readily available facts, and
there is reason to believe that such person ultimately will be found
entitled to indemnification. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer or
employee of the corporation against any liability asserted against and
incurred by such person in any such capacity or arising out of such
person's position, whether or not the corporation would have the power
to indemnify against such liability under the provisions of this Article
VI.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "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 Act and is,
C-5
<PAGE>
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 Act and will be governed by the final adjudication of
such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
A. WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") is
principally engaged in offering life insurance policies and
annuity contracts. Western Reserve is admitted to do business in
49 states and the District of Columbia. The only business,
professions, vocations or employments of a substantial nature of
Messrs. Franz, Hurley, Kenney, and Yaeger, and Ms. Ferrell,
officers and directors of Western Reserve, are described in the
section of each Statement of Additional Information entitled
"Management of the Fund." Additionally, the following describes
the principal occupations of other persons who serve as officers
and directors of Western Reserve: Allan J. Hamilton is a Vice
President and Controller of Western Reserve; William Geiger is
Senior Vice President & Secretary; Jack E. Zimmerman, Director of
Western Reserve; Patrick S. Baird, Director of Western Reserve;
and Lyman H. Treadway, Director of Western Reserve.
B. GROWTH, BOND, GLOBAL AND JANUS BALANCED PORTFOLIOS: SUB-ADVISER -
JANUS CAPITAL CORPORATION
Janus Capital Corporation, the Sub-Adviser to the Growth,
Bond, Global and Janus Balanced Portfolios, of the WRL
Series Fund, Inc. is majority-owned by Kansas City Southern
Industries, Inc.
Janus Capital Corporation also serves as sub-adviser to certain of
the mutual funds within the IDEX Group and as investment adviser
or sub-adviser to other mutual funds, and for private and
retirement accounts. Thomas H. Bailey, Trustee, Chairman and
President of Janus Investment Fund and Janus Aspen Series,
Chairman, Director and President of the Sub-Adviser and Chairman
and Director of IDEX Management, Inc., has no business,
profession, vocation or employment of a substantial nature other
than his positions with IDEX Management, Inc. and Janus Capital
Corporation. James P. Craig, Executive Vice President of Janus
Investment Fund and Janus Aspen Series, Director, Vice President
and Chief Investment Officer of Janus Capital Corporation, has no
substantial business, profession, vocation or employment other
than his positions with Janus Capital Corporation and/or IDEX
Management, Inc. David C. Tucker, Vice President, Secretary and
General Counsel of Janus Capital Corporation, Vice President,
General Counsel and Director of Janus Service Corporation and
Janus Distributors, Inc. and Vice President and General Counsel of
Janus Investment Fund and Janus Aspen Series. Michael N. Stolper,
a Director of Janus Capital Corporation, is President of Stolper &
Company, 525 "B" Street, Suite 1080, San Diego, CA 92101, an
investment performance consultant. Michael E. Herman, a Director
of Janus Capital Corporation, is Chairman of the Finance Committee
of Ewing Marion Kauffman Foundation, 9900 Oak, Kansas City, MO
64113. Thomas A. McDonnell, a Director of Janus Capital
Corporation, is President, Chief Executive Officer and Director of
DST Systems, Inc., 1055 Broadway, 9th Floor, Kansas City, MO
64105, a provider of data processing and recordkeeping services
for various mutual funds and Executive Vice President and Director
of Kansas City Southern Industries, Inc., 114 West 11th Street,
Kansas City, MO 64105, a publicly traded holding company whose
primary subsidiaries are engaged in transportation, information
processing and financial services. Landon H. Rowland, a Director
of Janus Capital, President and Chief Executive Officer of Kansas
City Southern Industries, Inc. Steven R. Goodbarn is Vice
President and Treasurer of Janus Investment Fund and Janus
C-6
<PAGE>
Aspen Series, Vice President of Finance, Treasurer and Chief
Financial officer of Janus Capital Corporation, Janus Service
Corporation and Janus Distributors, Inc. Helen Young Hayes, Scott
W. Schoelzel, and Ronald V. Speaker are each a Vice President of
Janus Capital Corporation and an Executive Vice President of Janus
Investment Fund and Janus Aspen Series.
C. MONEY MARKET PORTFOLIO: SUB-ADVISER - J.P. MORGAN INVESTMENT
MANAGEMENT INC.
J.P. Morgan Investment Management Inc., the Sub-Adviser to the
Money Market Portfolio, is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated. J.P. Morgan Investment Management Inc.
provides investment management and related services for corporate,
public and union employee benefit funds, foundations, endowments,
insurance companies and government agencies.
The directors and principal officers of J.P. Morgan Investment
Management Inc. are listed below. Unless otherwise indicated, each
director and officer has a principal business address of 522 Fifth
Avenue, New York, NY 10036: Kenneth W. Anderson, Director and
Managing Director (J.P. Morgan Investment Management Inc., 28 King
Street, London SW1Y 6XA, United Kingdom); Robert A. Anselmi,
Director, Managing Director, General Counsel and Secretary; George
E. Austin, Managing Director; Jean L.P. Brunel, Director; William
L. Cobb, Jr., Vice Chairman, Director and Managing Director; Louis
George Gardella, Managing Director; Michael R. Granito, Director
and Managing Director; Thomas M. Luddy, Director and Managing
Director; Michael E. Patterson, Director (J.P. Morgan & Co.
Incorporated, 60 Wall Street, New York, NY 10260-0060); C.
Nicholas Potter, Chairman of the Board and Director; Keith M.
Schappert, President, Director and Managing Director; M. Steven
Soltis, Director, Managing Director, and Chief Administrative and
Financial Officer; John R. Thomas, Director (J.P. Morgan Trust
Bank Ltd., Akasaka Park Building 2-20, Akasaka 5-chome, Minato-ku,
Tokyo, Japan).
D. SHORT-TO-INTERMEDIATE GOVERNMENT AND BALANCED PORTFOLIOS:
SUB-ADVISER - AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. is an Iowa Corporation which
was incorporated on April 12, 1989. AEGON USA Investment
Management, Inc. became a registered investment adviser on March
16, 1992 and will assume all of the investment advisory functions
of its wholly-owned subsidiary, MidAmerica Management Corporation.
AEGON USA Investment Management, Inc. is a wholly-owned subsidiary
of First AUSA Holding Company which is a wholly-owned subsidiary
of AEGON USA, Inc.
AEGON USA Investment Management, Inc., also serves as sub-adviser
to IDEX II Series Fund High Yield Portfolio and Tax-Exempt
Portfolio. Patrick E. Falconio is President and Director of AEGON
USA Investment Management, Inc., and AEGON USA Charitable
Foundation, Inc., Chairman of the Board and Director of AEGON USA
Managed Portfolios, Inc., AEGON USA Realty Advisors, Inc., Cedar
Income Fund, Ltd., Landauer Realty Advisors, Inc., Realty
Information Systems, Inc., and USP Real Estate Investment Trust,
Director, Chief Investment Officer and Senior Vice President of
Bankers United Life Assurance Company, First AUSA Life Insurance
Company, Life Investors Insurance Company of America, Monumental
General Casualty Company, Monumental Life Insurance Company, PFL
Life Insurance Company and Transunion Casualty Company, Director
and Senior Vice President of AUSA Holding Company, Director of
AEGON USA Securities, Inc., AMCORP, Inc., AUSA Financial Markets,
Inc., AUSA Institutional Marketing Group, Inc., Cadet Holding
Corp., Creditor Resources, Inc., Executive Management & Consultant
Services, Inc., Investors Warranty of America, Inc., Landauer
Associates, Inc., Money Services, Inc., Monumental General
Administrators, Inc., Monumental General Insurance Group, Inc.,
Monumental General Mass Marketing, Inc., Supplemental Insurance
Division, Inc., The Whitestone Corporation, United Financial
Services, Inc. and Zahorik Company, Inc., Chief Investment Officer
and Executive Vice President of AEGON USA, Inc. and Chief
C-7
<PAGE>
Investment Officer and Senior Vice President of AUSA Life
Insurance Company, Inc. and Western Reserve Life Assurance Co. of
Ohio and Senior Vice President and Chief Financial Officer of
Southwest Equity Life Insurance Company; Brenda K. Clancy,
Director of AEGON USA Investment Management, Inc., Director and
Vice President of First AUSA Life Insurance Company, Life
Investors Insurance Company of America, Monumental Life Insurance
Company and Transunion Casualty Company, Director and Treasurer of
Massachusetts Fidelity Trust Company, and AEGON USA Securities
Inc., Senior Vice President, Controller and Treasurer of Cadet
Holding Corp., Vice President and Controller of AEGON USA, Inc.,
Vice President of Bankers United Life Assurance Company, Investors
Warranty of America, Inc., Money Services, Inc., PFL Life
Insurance Company and Western Reserve Life Assurance Co. of Ohio
and Treasurer of Zahorik Company, Inc.; Craig D. Vermie, Director
and Secretary of AEGON USA Investment Management Inc., AEGON USA
Charitable Foundation, Inc., AMCORP, Inc., AUSA Financial Markets,
Inc., AUSA Institutional Marketing Group, Inc., CADET Holding
Corp., First AUSA Life Insurance Company, Massachusetts Fidelity
Trust Company, and Transunion Casualty Company, Director,
Secretary, Vice President and Corporate Counsel of Bankers United
Life Assurance Company, Life Investors Insurance Company of
America, and PFL Life Insurance Company, Director, Secretary and
Vice President of Investors Warranty of America, Inc., Director,
Vice President, Corporate Counsel and Assistant Secretary of
Monumental Life Insurance Company, Director, Vice President and
Assistant Secretary of Monumental General Casualty Company and
Zahorik Company, Inc., Director and Assistant Secretary of
Creditor Resources, Inc. and Monumental General Insurance Group,
Inc., Vice President and Assistant Secretary of Money Services,
Inc. and Western Reserve Life Assurance Co. of Ohio, Vice
President and Corporate Counsel of AEGON USA, Inc., Director and
Vice President of The Whitestone Corporation, Director of Corpa
Reinsurance Company, Monumental General Administrators Inc., Short
Hills Management Company and United Financial Services Inc.,
Secretary of AUSA Holding Company, AUSA Life Insurance Company,
Inc., International Life Investors Insurance Company, Tele-Quote
Corporation and Universal Benefits Corporation, Assistant
Secretary of AEGON USA Realty Advisors Inc., Bankers Financial
Life Insurance Company, Supplemental Insurance Division, Inc. and
ZCI, Inc., and Vice President of AEGON USA Realty Management Inc.
; Donald E. Flynn is an Executive Vice President of AEGON USA
Investment Management, Inc., and President of AEGON USA Managed
Portfolios, Inc. and Vice President of AUSA Life Insurance
Company, Inc., Bankers United Life Assurance Company, First AUSA
Life Insurance Company, International Life Investors Insurance
Company, Life Investors Insurance Company of America, Money
Services, Inc., Monumental General Casualty Company, Monumental
Life Insurance Company, PFL Life Insurance Company and Western
Reserve Life Assurance Co. of Ohio; Donald W. Chamberlain is an
Executive Vice President of AEGON USA Investment Management, Inc.
and Vice President of AUSA Life Insurance Company, Inc., Bankers
United Life Assurance Company, First AUSA Life Insurance Company,
Life Investors Insurance Company of America, Monumental General
Casualty Company, Monumental Life Insurance Company, PFL Life
Insurance Company and Western Reserve Life Assurance Co. of Ohio;
James D. Ross is Vice President of Life Investors Insurance
Company of America, Monumental Life Insurance Company, PFL Life
Insurance Company and Western Reserve Life Assurance Co. of Ohio;
Clifford A. Sheets is Senior Vice President of AEGON USA
Investment Management, Inc., and Vice President of Bankers United
Life Assurance Company, Life Investors Insurance Company of
America, Monumental Life Insurance Company and PFL Life Insurance
Company; Ralph M. O'Brien is a Senior Vice President of AEGON USA
Investment Management, Inc., Vice President of AEGON USA Managed
Portfolios, Inc., AUSA Life Insurance Company, Inc., Bankers
United Life Assurance Company, First AUSA Life Insurance Company,
Life Investors Insurance Company of America, Monumental General
Casualty Company, Monumental Life Insurance Company, PFL Life
Insurance Company, and Western Reserve Life Assurance Co. of Ohio,
and Trust Officer of Massachusetts Fidelity Trust Company; Michael
Van Meter is a Senior Vice President of AEGON USA Investment
Management, Inc.; David R. Halfpap is Assistant Secretary and Vice
President of AEGON USA Managed Portfolios, Inc., and Vice
President of AEGON USA Investment Management, Inc., AUSA Life
Insurance Company, Inc., Bankers United Life Assurance Company,
First AUSA Life Insurance Company, Life Investors Insurance
Company of
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America, Monumental General Casualty Company, Monumental Life
Insurance Company, PFL Life Insurance Company and Western Reserve
Life Assurance Co. of Ohio; Gregory W. Theobald is Secretary and
Vice President of AEGON USA Investment Management, Inc., Secretary
of AEGON USA Managed Portfolios, Inc., and Vice President and
Assistant Secretary of AUSA Life Insurance Company, Inc., Bankers
United Life Assurance Company, First AUSA Life Insurance Company,
International Life Investors Insurance Company, Life Investors
Insurance Company of America, Monumental General Casualty Company,
Monumental Life Insurance Company, PFL Life Insurance Company and
Western Reserve Life Assurance Co. of Ohio, and Vice President of
Money Services, Inc.; Lewis O. Funkhouser is a Vice President of
AEGON USA Investment Management, Inc.; Jon D. Kettering is Vice
President and Treasurer of AEGON USA Investment Management, Inc.
and Vice President of AUSA Life Insurance Company, Inc., Bankers
United Life Assurance Company, First AUSA Life Insurance Company,
International Life Investors Insurance Company, Life Investors
Insurance Company of America, Monumental General Casualty Company,
Monumental Life Insurance Company, PFL Life Insurance Company and
Western Reserve Life Assurance Co. of Ohio; Michael N. Meese is a
Vice President of AEGON USA Investment Management, Inc., and
Portfolio Manager of AUSA Life Insurance Company, Inc. and
International Life Investor Insurance Company; Robert L. Hansen is
Vice President of AEGON USA Investment Management, Inc., AUSA Life
Insurance Company, Inc., Bankers United Life Assurance Company,
First AUSA Life Insurance Company, Life Investors Insurance
Company of America, Monumental Life Insurance Company, PFL Life
Insurance Company, and Western Reserve Life Assurance Co. of Ohio;
Frederick A. Sabetta is Vice President of AEGON USA Investment
Management, Inc., Bankers United Life Assurance Company, First
AUSA Life Insurance Company, Life Investors Insurance Company of
America, Monumental General Casualty Company, Monumental Life
Insurance Company, PFL Life Insurance Company and Western Reserve
Life Assurance Co. of Ohio; Kenneth M. Certain, Rachel A. Dennis,
David M. Carney, Frederick A. Sabetta, Steven P. Opp and Drew E.
Washburn are also Vice Presidents of AEGON USA Investment
Management, Inc.; James E. Fine, Thomas E. Myers, Bradley J. Beman
and Mary T. Pech are each an Assistant Vice President of AEGON USA
Investment Management, Inc.
E. EMERGING GROWTH PORTFOLIO: SUB-ADVISER - VAN KAMPEN AMERICAN
CAPITAL ASSET MANAGEMENT, INC.
Van Kampen American Capital Asset Management, Inc., the
Sub-Adviser to the Emerging Growth Portfolio, is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("VKAC"), which is
a wholly-owned subsidiary of VK/AC Holding, Inc. ("VK/AC
Holding"). VK/AC Holding is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."),
a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York based private investment firm.
The General Partner of C&D L.P. is Clayton & Dubilier Associates
IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B.
Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel,
Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each
of who is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of VKAC own,
in the aggregate, not more than 7% of the common stock of VK/AC
Holding and have the right to acquire, upon the exercise of
options, approximately an additional 13% of the common stock of
VK/AC Holding.
Don G. Powell, Chairman, CEO and Director of the Sub-Adviser and
President, CEO and Director of Van Kampen American Capital, Inc.,
has no business, profession, vocation or employment of a
substantial nature other than his positions with the Sub-Adviser,
its subsidiaries and affiliates. Paul R. Wolkenberg, Executive
Vice President; Nori L. Gabert, Vice President, Associate General
Counsel and Assistant Secretary; Ronald A. Nyberg, Executive Vice
President and General Counsel; Gary M. Lewis, Senior Vice
President; Alan T. Sachtleben, Executive Vice President and
Director; William N. Brown, Executive Vice President; William R.
Ryback, Executive Vice President and Chief Financial Officer and
Director; and Rosemary Pretty, Senior Vice President. All of these
officers and/or directors
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have no substantial business, profession, vocation or employment
other than their positions with Van Kampen American Capital Asset
Management, Inc. and/or its subsidiaries and affiliates.
F. EQUITY-INCOME PORTFOLIO: SUB-ADVISER - LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation, the Sub-Adviser to the
Equity-Income Portfolio, is a registered investment adviser
providing investment management services.
Luther King Capital Management Corporation also provides
investment management services to individual and institutional
investors on a private basis. J. Luther King, Jr., President of
the Sub-Adviser, Paul W. Greenwell, Robert M. Holt, Jr., Scot C.
Hollmann, David L. Dowler, J. Patrick Clegg, Donald R. Andrews,
Joan M. Maynard, Scott M. Kleberg and Barbara S. Garcia, officers
of Luther King Capital Management Corporation, have no substantial
business, profession, vocation or employment other than their
positions with Luther King Capital Management Corporation, Inc.
G. UTILITY PORTFOLIO: SUB-ADVISER - FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling, the Sub-Adviser to the Utility
Portfolio, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary of Federated Investors.
The Sub-Adviser serves as investment adviser to a number of
investment companies and private accounts. Total assets under
management or administered by the Sub-Adviser and other
subsidiaries of Federated Investors is approximately $80 billion.
The Trustees of the Sub-Adviser, their position with the
Sub-Adviser, and, in parenthesis, their principal occupations are
as follows: John F. Donahue, Trustee (Chairman and Trustee,
Federated Investors, Federated Advisers, Federated Management, and
Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.); J. Christopher Donahue, Trustee (President and
Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director,
Federated Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd; Trustee, Federated Shareholder
Services Company and Federated Shareholder Services; Director,
Federated Services Company); Henry J. Gailliott, Chairman and
Trustee (Trustee, Federated Investors; Senior Vice
President-Economist, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., Federated Global
Research Corp. and Passport Research, Ltd.); Mark L. Mallon,
President and Trustee (Executive Vice President, Federated
Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport
Research, Ltd.); John W. McGonigle, Trustee (Executive Vice
President, Secretary and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder Services Company and
Federated Shareholder Services; Director, Federated Services
Company; and Director, Federated Securities Corp.); Mark D. Olson,
Trustee (Trustee, Federated Investors, Federated Advisers,
Federated Research, Federated Management, Federated Shareholder
Services, and Federated Shareholder Services Company; Partner,
Wilson, Halbrook & Bayard, 107 W. Market Street, Georgetown,
Delaware 19947). The business address of the Trustees, with the
exception of Mark D. Olson, is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779.
The remaining Officers of the Sub-Adviser are: Robert J. Ostrowski
and J. Alan Minteer, Senior Vice Presidents; G. Michael Cullen,
Michael P. Donnelly, Edward C. Gonzales, Stephen A. Keen, Robert
K. Kinsey, Charles A. Ritter, Christopher J. Smith, and Edward T.
Tiedge, Vice Presidents; Stephen A. Keen, Secretary; and Thomas R.
Donahue, Treasurer.
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The business address of each of the Officers of the Sub-Adviser is
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
These individuals are also officers of some of the investments
advisers to other mutual funds.
H. AGGRESSIVE GROWTH PORTFOLIO: SUB-ADVISER - FRED ALGER
MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger Management") is a wholly-owned
subsidiary of Fred Alger & Company, Incorporated ("Alger, Inc.")
which in turn is a wholly-owned subsidiary of Alger Associates,
Inc., a financial services holding company. Alger Management is
generally engaged in rendering investment advisory services to
mutual funds, institutions and, to a lesser extent, individuals.
Fred M. Alger III, serves as Chairman of the Board, David D. Alger
serves as President and Director, Gregory S. Duch serves as
Treasurer and Mary Marsden-Cochran serves as Secretary of the
following companies: Alger Associates, Inc.; Alger Management;
Alger, Inc.; Alger Properties, Inc., Alger Shareholder Services,
Inc.; Alger Life Insurance Agency, Inc.; Castel Convertible Fund,
Inc. and Spectra Fund, Inc. Fred M. Alger also serves as Chairman
of the Board of Analysts Resources, Inc. ("ARI") and Chairman of
the Board and Trustee of The Alger Fund, The Alger American Fund
and The Alger Defined Contribution Trust. David D. Alger also
serves as Executive Vice President and Director of ARI and as
President and Trustee of The Alger Fund, The Alger American Fund
and The Alger Defined Contribution Trust. Gregory S. Duch also
serves as Treasurer of Fred Alger Asset Management ("FAAM"), ARI,
The Alger Fund, The Alger American Fund and The Alger Defined
Contribution Trust. Mary Marsden-Cochran also serves as Secretary
of ARI, The Alger Fund, The Alger American Fund and The Alger
Defined Contribution Trust. The principal business address of each
of the companies listed above, other than Alger, Inc., is 75
Maiden Lane, New York, NY 10038. The principal business address of
Alger, Inc. is 30 Montgomery Street, Jersey City, NJ 07302.
I. TACTICAL ASSET ALLOCATION PORTFOLIO: SUB-ADVISER - DEAN
INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean"), is a division of C.H. Dean
and Associates, Inc. Dean is the money management division of C.H.
Dean and Associates, Inc. Dean became a registered investment
adviser in October, 1972 and will assume all of the investment
advisory functions. C.H. Dean and Associates is an Ohio
corporation which was incorporated on March 28, 1975.
Chauncey H. Dean is the Chairman and Chief Executive Officer;
Dennis D. Dean is President; Frank H. Scott is Senior Vice
President; John C. Riazzi is Vice President and Director of
Consulting Services; Robert D. Dean is Vice President and Director
of Research; Richard M. Luthman is Senior Vice President; Darrell
N. Fulton is Vice President of Information Systems. The business
address of each of the Officers of the Sub-Adviser is 2480
Kettering Tower, Dayton, Ohio 45423-2480.
J. C.A.S.E. QUALITY GROWTH PORTFOLIO, C.A.S.E. GROWTH &
INCOME PORTFOLIO AND C.A.S.E. GROWTH PORTFOLIO: SUB-ADVISER -
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E.") is a registered investment
advisory firm and a wholly-owned subsidiary of C.A.S.E. Inc.
C.A.S.E. Inc. is indirectly controlled by William Edward Lange,
President and Chief Executive Officer of C.A.S.E. C.A.S.E.
provides investment management services to financial institutions,
high net worth individuals, and other professional money managers.
William E. Lange is the President, Chief Executive Officer and
Founder; Robert G. Errigo, Investment Committee Board Member; John
Gordon, Investment Committee Board Member; Bruce H. Jordan, Senior
Vice President and James M. LaBonte, Chief Operating Officer;
William Fagon, Senior Vice President Marketing; Richard Wells,
Senior Vice President Marketing; and Robert Hardy, Marketing
Director. The business address of each of the Officers of the
Sub-Adviser is 2255 Glades Road, Suite 221-A, Boca Raton, Florida
33431.
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K. INTERNATIONAL EQUITY PORTFOLIO: SUB-ADVISER - SCOTTISH
EQUITABLE INVESTMENT MANAGEMENT LIMITED
Scottish Equitable Investment Management Limited serves as
Sub-Adviser to the International Equity Portfolio of the WRL
Series Fund, Inc. See "Management of the Fund - The Sub-Adviser"
in the Prospectus and Statement of Additional Information for the
International Equity Portfolio for information regarding the
business of Scottish Equitable Investment Management Limited. The
directors and officers of Scottish Equitable Investment Management
Limited are listed below. Unless otherwise indicated, each
director and officer has a principal business address of Edinburgh
Park, Edinburgh EH12 9SE: David J. Kirkpatrick, Chairman of the
Board and Managing Director, Investment (also Director of Scottish
Equitable Life Assurance Society, Scottish Equitable plc, Scottish
Equitable Holdings Limited, Scottish Equitable (Managed Funds)
Limited, Peterwake Limited and Rashkirk Limited); Otto Thoresen,
Director, International Business (also Director of SEFM Ltd. and
SEISA); Niall A. M. Franklin, Finance Director (also Director of
Scottish Equitable Holdings Limited, Scottish Equitable plc,
Scottish Equitable Fund Managers Limited, College Green Associates
Limited and Royal Scottish Assurance plc); Russell Hogan, Director
and Investment Manager (also Director of Scottish Equitable Fund
Managers Limited); Roy Patrick, Director and Secretary (also
Director of Scottish Equitable Fund Managers Limited); William W.
Stewart, Executive Director, Strategy (also Director of Scottish
Equitable Life Assurance Society, Scottish Equitable plc, Scottish
Equitable Holdings Limited, Scottish Equitable Fund Managers
Limited, Scottish Equitable (Managed Funds) Limited, College Green
Associates Limited, Royal Scottish Assurance plc, Royal Scottish
Assurance Services Limited, AEGON Life Assurance Company (UK)
Limited, AEGON Financial Services Group (UK) plc, AEGON Holdings
(UK) Limited, AEGON Unit Trusts Limited, AEGON Investment Services
Limited, AEGON Financial Services Limited, Western General
Hospital NHS Trust and National LVA Financial Services Limited);
Paul N. Ritchie, Director and Investment Administration Manager
(also Director of Scottish Equitable Fund Managers Limited); and
Otto Thoresen, Director, International Business, SEFM Ltd. and
SEISA.
L. LEISURE PORTFOLIO: SUB-ADVISER - INVESCO TRUST COMPANY
INVESCO Trust Company serves as Sub-Adviser to the Leisure
Portfolio. See "Management of the Fund - The Sub-Adviser@ in the
Prospectus and Statement of Additional Information for the Leisure
Portfolio for information regarding the business of INVESCO Trust
Company.
The directors and officers of INVESCO Trust Company are listed
below. Unless otherwise indicated, each director and officer has
held the positions listed for at least the past two years and has
a principal business address of 7800 East Union Avenue, Denver,
Colorado 80237: R. Dalton Sim, Chairman of the Board, President
and Chief Executive Officer (also Director of INVESCO Funds Group,
Inc.); Frank M. Bishop, Director (also President, Chief Operating
Officer and a Director of INVESCO, Inc. and Vice President,
Portfolio Manager and a Director of INVESCO Capital Management,
Inc., both of which are located at 1315 Peachtree Street, N.E.,
Atlanta, Georgia 30309; Director of other companies affiliated
with the Sub-Adviser); Samuel T. DeKinder, Director (also
Executive Vice President and a Director of INVESCO, Inc. and
Director of Marketing of INVESCO Capital Management, Inc., both of
which are located at 1315 Peachtree Street, N.E., Atlanta, Georgia
30309); Dan J. Hesser, Director (also Chairman, President and
Chief Executive Officer of INVESCO Funds Group, Inc.); Ronald L.
Grooms, Senior Vice President and Treasurer (Mr. Grooms also holds
similar positions with INVESCO Funds Group, Inc.); Glen A. Payne,
Senior Vice President, General Counsel and Secretary (formerly,
Vice President, General Counsel and Secretary from May 1989 to
April 1995; Mr. Payne also holds similar positions with INVESCO
Funds Group, Inc.); Roger D. Maurer, Senior Vice President, Senior
Trust Officer and Portfolio Manager; Daniel B. Leonard, Senior
Vice President and Portfolio Manager; Charles P. Mayer, Senior
Vice President and Portfolio Manager; Timothy J. Miller, Senior
Vice President (since April 1995) and Portfolio Manager (formerly,
Vice President from January 1993 to April 1995); Donovan
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J. Paul, Senior Vice President (formerly, President of Quixote
Investment Management, Inc., 5442 S. Dayton Court, Englewood,
Colorado 80111, from April 1993 to May 1994); E. E. Frye, Jr.,
Vice President; Gerald F. Hallaren, Vice President (since July
1995) and Portfolio Manager (since February 1996) (formerly,
research analyst); Richard R. Hinderlie, Vice President (since
February 1996) and Portfolio Manager (since May 1993); Patricia F.
Johnston, Vice President (since July 1995) and equity trader
(since June 1992); Frederick R. Meyer, Vice President (since
February 1996), formerly, Executive Vice President of Nelson,
Benson & Zellmer Inc. from February 1990 to February 1996; Douglas
N. Pratt, Vice President and Portfolio Manager; Paul J. Rasplicka,
Vice President; Brian F. Kelly, Vice President (since April 1994)
and Portfolio Manager; John R. Schroer, Vice President (since
January 1995) and Portfolio Manager; Kenneth R. Christoffersen,
Vice President and Assistant General Counsel (formerly, Assistant
Vice President and Assistant General Counsel from February 1993 to
April 1995; Mr. Christoffersen also holds similar positions with
INVESCO Funds Group, Inc.); Jeraldine E. Kraus, Assistant
Secretary (also Assistant Secretary and Director of Office
Services Administration of INVESCO Funds Group, Inc.); Frederick
W. Braley, Trust Officer (since February 1996; also Chief
Financial Officer and Treasurer of INVESCO Retirement Plan
Services, Inc., 1355 Peachtree Street, N.E., Atlanta, GA 30309,
since March 1995 (formerly, Controller of INVESCO Management &
Research, Inc. from September 1986 to February 1995); Paul C.
Corbeil, Trust Officer (since February 1996; also Director of
Operations of INVESCO Retirement Plan Services, Inc., 1355
Peachtree Street, N.E., Atlanta, GA 30309, since November 1994;
formerly, Director of Planning Operations, T. Rowe Price
Associates from October 1990 to October 1994; Mary Ann Dallenbach,
Trust Officer (since February 1996; also Senior Vice President of
INVESCO Retirement Plan Services, Inc., 1355 Peachtree Street,
N.E., Atlanta, GA 30309); Joseph B. Jennings, Trust Officer (since
February 1996; also Senior Vice President of INVESCO Retirement
Plan Services, Inc. since December 1995; formerly Senior Vice
President of Fleet Investment Services from August 1992 to
December 1995); Jay M. Sommer, Trust Officer (also Director,
Retirement Operations, INVESCO Funds Group, Inc.); Judy P. Wiese,
Trust Officer (also Vice President of INVESCO Funds Group, Inc.);
Alan I. Watson, Trust Officer (also Vice President of INVESCO
Funds Group, Inc.); William J. Galvin, Jr., Trust Officer (also
Senior Vice President of INVESCO Funds Group, Inc. since July
1995; formerly Vice President of INVESCO Funds Group, Inc.); and
Theresa K. Philip, Trust Officer (also Director, Client Services
and Operations Administration with INVESCO Funds Group, Inc.)
M. MERIDIAN/INVESCO GLOBAL SECTOR, MERIDIAN/INVESCO US SECTOR
AND MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIOS ("MERIDIAN/
INVESCO PORTFOLIOS"): CO-SUB-ADVISERS - MERIDIAN INVESTMENT
MANAGEMENT CORPORATION & INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Meridian Investment Management Corporation and INVESCO Global
Asset Management Limited serve as the Co-Sub-Advisers for the
Meridian/INVESCO Portfolios. Meridian Investment Management
Corporation ("Meridian") is a wholly-owned subsidiary of Meridian
Management & Research Corporation and provides investment
management and related services to other mutual fund portfolios
and individual, corporate, charitable and retirement accounts.
INVESCO Global Asset Management Limited is a wholly-owned
subsidiary of INVESCO PLC.
The directors and officers of Meridian are listed below. Unless
otherwise indicated, each director and officer has held the
position listed for at least the past two years and has a
principal business address of 12835 East Arapahoe Road, Tower II,
7th Floor, Englewood, CO 80112: Michael J. Hart, President &
Director, President of Meridian Management & Research Corporation
and President of Meridian Clearing Corporation; and Dr. Craig T.
Callahan, Secretary, Treasurer & Director, Chief Investment
Advisor of Meridian Management & Research Corporation and Vice
President of Meridian Clearing Corporation.
The directors and officers of INVESCO Global Asset Management
Limited are listed below. Unless otherwise indicated, each
director and officer has a principal business address of
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Rosebank, 12 Bermudiana Road, Hamilton, Bermuda HM11: John D.
Campbell, Director and senior partner at the law firm Appleby,
Spurling & Kempe, Hamilton, Bermuda; Stephen A. Dana, Director,
also serves as Vice President of INVESCO Capital Management, Inc.
in Atlanta, GA; David A. Hartley, Assistant Secretary & Treasurer
and also serves as Secretary & Treasurer of INVESCO Group
Services, Inc., Atlanta, GA; Everard T. Richards, Deputy Chairman
and Director and also serves as Chief Executive Officer of Bermuda
Asset Management Ltd.; John D. Rogers, Director and also serves as
President of INVESCO Asset Management (Japan) Limited in Tokyo,
Japan; Wendell M. Starke, Chairman & Director and also serves as
Chairman & Director of INVESCO Capital Management, Inc. in
Atlanta, GA, Chairman and Director of INVESCO, Inc. in Atlanta, GA
and Director of INVESCO plc in London, England; Michael A. Wood,
Secretary; and Luis A. Aguilar, General Counsel and also serves as
General Counsel of INVESCO, Inc. in Atlanta, GA.
INVESCO Global Asset Management Limited has entered into
agreements with their affiliates, INVESCO Asset Management
Limited, 11 Devonshire Square, London, EC2M 4YR England, and
INVESCO Trust Company, 7800 East Union Avenue, Denver, Colorado
80237, for assistance in managing the Portfolios' investments.
(See "Management of the Fund - The Co-Sub-Advisers" in the
Prospectus and Statement of Additional Information for the
Meridian/INVESCO Global Sector, Meridian/INVESCO US Sector and
Meridian/INVESCO Foreign Sector Portfolios for information
regarding INVESCO Asset Management Limited and INVESCO Trust
Company.) See Item 28.L. for information regarding the directors
and officers of INVESCO Trust Company. The directors and officers
of INVESCO Asset Management Limited ("IAM") are listed below.
Unless otherwise indicated, each director and officer has held the
positions for at least the past two years and has a principal
business address of 11 Devonshire Square, London EC2M 4YR England:
Norman M. Riddell, who is Chairman of the company. In addition to
Mr. Riddell, the directors of IAM, and their positions with the
company, are as follows: Jeffrey C. Artfield, Chief Executive;
Sarah C. Bates, Managing Director--Investment Trust Division;
Francesco Bertoni, Investment Director--Global Equities; Anthony
Broccardo, Portfolio Manager--Asset Allocation; Ian A. Carstairs,
Investment Director--U.K. Equities; Adam D. Cooke,
Director--Institutional Business Group; Peter S. Dawson,
Investment Director--Treasury/Dealing; David C. Gillian,
Director--Institutional Business Group; Peter J. Glynne-Percy,
Director, Investment Management; Tristan P. Hillgarth, Executive
Director--Investment Management; David C. Hypher,
Director--Institutional Business Group; Jeremy C. Lambourne,
Director--Finance; Rory S. Powe, Investment Director--European
Equities; Jennifer M. Prince, Project Director--Central
Management; Riccardo Ricciardi, Investment Director--Investment
Management; and Alan C. Wren, Executive Director--Management.
N. VALUE EQUITY PORTFOLIO: SUB-ADVISER - NWQ INVESTMENT MANAGEMENT
COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ") serves as
Sub-Adviser for the Value Equity Portfolio. NWQ is a Massachusetts
corporation and is a wholly-owned subsidiary of United Asset
Management Corporation. NWQ provides investment advice to
individuals, pension funds, profit sharing funds, charitable
institutions, educational institutions, trust accounts,
corporations, insurance companies, municipalities and governmental
agencies.
The directors and officers of NWQ are listed below. Unless
otherwise indicated, each director and officer has held the
positions listed for at least the past two years and is located at
NWQ's principal business address of 655 South Hope Street, 11th
Floor, Los Angeles, CA 90017: David A. Polak, President, Director
& Chief Investment Officer; Edward C. Friedel, Jr., Director &
Managing Director; James H. Galbreath (Denver), Director &
Managing Director; Mary-Gene Slaven, Secretary/Treasurer &
Managing Director; James P. Owen, Managing Director; Michael C.
Mendez (Scottsdale, AZ), Managing Director; Phyllis M. Thomas,
Managing Director; Louis T. Chambers, Vice President, Justin T.
Clifford, Vice President; Jeffrey M. Cohen, Vice President; Paul
R. Guastamacchio, Vice President; Ronald R. Halverson
(Minneapolis, MN), Vice President; Thomas J. Laird, Vice
President; Karen S. McCue, Vice President; Martin Pollack, Vice
President; and Ronald R. Sternal (Minneapolis, MN), Vice
President.
Item 29. PRINCIPAL UNDERWRITERS.
Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained
by Registrant pursuant to Section 31(a) of the Investment Company
Act of 1940, as amended, and rules promulgated thereunder are in
the possession of Western Reserve Life Assurance Co. of
C-14
<PAGE>
Ohio at its offices at 201 Highland Avenue, Largo, Florida 34640,
or at the offices of the Fund's custodian, Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.
Item 31. MANAGEMENT SERVICES.
Not applicable
Item 32. UNDERTAKINGS.
The Registrant undertakes to file a post-effective amendment
including the financial statements of the Leisure Portfolio, the
International Equity Portfolio, the Janus Balanced Portfolio and
the Meridian/INVESCO Global Sector Portfolio, Meridian/INVESCO US
Sector Portfolio, the Meridian/INVESCO Foreign Sector Portfolio
and the Value Equity Portfolio of WRL Series Fund, Inc., which
need not be certified, within four to six months after the
effective date of this Post-Effective Amendment to the
Registration Statement.
The Registrant undertakes to furnish to each person to whom a
prospectus is (cont.) delivered with a copy of the Registrant's
latest Annual Report to shareholders, Policyowners or Contract
Owners upon request and without charge.
C-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant, WRL Series Fund,
Inc., certifies that it meets all the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 23 to its Registration
Statement to be signed on its behalf by the undersigned, thereunder duly
authorized, in the City of Largo, State of Florida, on this 15th day of April,
1996.
WRL SERIES FUND, INC.
(Registrant)
By: /S/ JOHN R. KENNEY
-----------------------------------
John R. Kenney
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 23 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
- ------------------- ----
<S> <C>
/S/ JOHN R. KENNEY April 15, 1996
- -------------------------------------
Chairman of the Board and
President
John R. Kenney
/S/ G. JOHN HURLEY April 15, 1996
- ---------------------------------------
Executive Vice President and Director
G. John Hurley
/S/ PETER R. BROWN April 15, 1996
- ---------------------------------------
Director - Peter R. Brown *
/S/ CHARLES C. HARRIS April 15, 1996
- ---------------------------------------
Director - Charles C. Harris*
/S/ RUSSELL A. KIMBALL, JR. April 15, 1996
- ---------------------------------------
Director - Russell A. Kimball, Jr. *
/S/ RICHARD B. FRANZ, II April 15, 1996
- --------------------------------------
Treasurer and Principal Financial
Officer - Richard B. Franz, II
<PAGE>
/S/ KENNETH P. BEIL April 15, 1996
- ---------------------------------------
Assistant Vice President and Principal
Accounting Officer
Kenneth P. Beil
/S/ALAN M. YAEGER April 15, 1996
- ---------------------------------------
Executive Vice President
Alan M. Yaeger
/S/ THOMAS E. PIERPAN April 15, 1996
- -----------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 23 TO
REGISTRATION STATEMENT
ON FORM N-1A
WRL SERIES FUND, INC.
REGISTRATION NO. 33-507
<PAGE>
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
5(iii). Investment Advisory Agreement dated 4/30/96 on behalf of the
Money Market Portfolio of the Fund.
5(xv). Investment Advisory Agreement dated 4/30/96 on behalf of the
Meridian/INVESCO Global Sector, the
Meridian/INVESCO US Sector and Meridian/INVESCO
Foreign Sector Portfolios of the Fund.
5(xvi). Investment Advisory Agreement dated 4/30/96 on behalf of the Value
Equity Portfolio of the Fund.
5(xviii). Sub-Advisory Agreement dated 4/30/96 on behalf of the Money
Market Portfolio of the Fund.
5(xxxi). Co-Sub-Advisory Agreements dated 4/30/96 on behalf of the
Meridian/INVESCO Global Sector, Meridian/INVESCO
US Sector and Meridian/INVESCO Foreign Sector
Portfolios of the Fund.
5(xxxii). Sub-Advisory Agreement dated 4/30/96 on behalf of the Value
Equity Portfolio of the Fund.
5(xxxiii). Form of Service Agreement between INVESCO Global Asset Management
Limited and INVESCO Trust Company.
5(xxxiv). Form of Service Agreement between INVESCO Global Asset Managment
Limited and INVESCO Asset Management Limited.
7. Directors' Deferred Compensation Plan.
11. Consent of Price Waterhouse LLP.
EXHIBIT 5(III)
INVESTMENT ADVISORY AGREEMENT ON BEHALF
OF THE MONEY MARKET PORTFOLIO OF THE FUND
<PAGE>
WRL SERIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT FOR
THE MONEY MARKET PORTFOLIO OF THE WRL SERIES FUND, INC.
This Agreement, entered into as of April 30, 1996, is between WRL Series
Fund, Inc., a Maryland corporation (referred to herein as the "Fund"), and
Western Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to
herein as "WRL"), to provide certain investment advisory services with respect
to a certain series of shares of common stock of the Fund, allocated to the
Money Market Portfolio (the "Portfolio").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended, (the "1940 Act") and consists of
more than one series of shares, including the Portfolio. In managing its
Portfolio, as well as in the conduct of certain of its affairs, the Fund wishes
to have the benefit of the investment advisory services of WRL and its
assistance in performing certain management, administrative and promotional
functions. WRL desires to furnish such services for the Portfolio and to perform
the functions assigned to it under this Agreement for the considerations
provided. Accordingly, the parties have agreed as follows:
1. INVESTMENT ADVISORY SERVICES. In its capacity as investment
adviser to the Portfolio, WRL shall have the following responsibilities:
(a) to furnish continuous advice and recommendations to the Fund
as to the acquisition, holding or disposition of any or all of the securities or
other assets which the Portfolio may own or contemplate acquiring from time to
time;
(b) to cause its officers to attend meetings and furnish oral or
written reports, as the Fund may reasonably require, in order to keep the Board
of Directors and appropriate officers of the Fund fully informed as to the
conditions of the investment portfolio of the Portfolio, the investment
recommendations of WRL, and the investment considerations which have given rise
to those recommendations; and
(c) to supervise the purchase and sale of securities
of the Portfolio as directed by the appropriate officers of the Fund.
It is understood and agreed that WRL may, and intends to, enter into a
Sub-Advisory Agreement with a duly registered investment adviser (the
"Sub-Adviser"), under which the Sub-Adviser will furnish investment information
and advice to assist WRL in carrying out its responsibilities under this Section
1. The compensation to be paid to the Sub-Adviser for such services and the
other terms and conditions under which the services shall be rendered by the
Sub-Adviser shall be set forth in the Sub-Advisory Agreement; provided, however,
that such Agreement shall be approved by the Board of Directors and by the
holders of the outstanding voting securities of the Portfolio in accordance with
the requirements of Section 15 of the 1940 Act), and shall otherwise be subject
to, and contain such provisions as shall be required by, the 1940 Act.
2. MANAGEMENT AND ADMINISTRATIVE SERVICES. WRL shall furnish or make
available to the Portfolio the services of executive and management personnel to
supervise the performance of all administrative, recordkeeping, shareholder
relations, regulatory reporting and compliance, and all other functions of the
Portfolio (other than the investment advisory services provided for in Section
1), including supervising and coordinating the services of the Portfolio's
custodian and transfer agent. WRL shall also assist the Portfolio in maintaining
communications and relations with shareholders of the Portfolio, answer
shareholder inquiries or supervise such activity by the Portfolio's transfer
agent, and assist in the preparation of reports to shareholders of the
Portfolio.
Page 1 of 5
<PAGE>
3. WRL EXPENSES. In addition to the expenses which WRL may incur in the
performance of its services pursuant to Sections 1 and 2 above, WRL shall incur
and pay the following expenses relating to the Portfolio's organization and
operations:
(a) All costs and expenses, including legal and accounting fees,
incurred in connection with the formation and organization of the Portfolio,
including the preparation (and filing, when necessary) of the Portfolio
contracts, plans and documents; conducting meetings of organizers, directors and
shareholders, and all other matters relating to the formation and organization
of the Portfolio and the preparation for offering its shares. The organization
of the Portfolio for all of the foregoing purposes will be considered completed
upon effectiveness of the post-effective amendment to the Fund's registration
statement to register the Portfolio under the Securities Act of 1933;
(b) All costs and expenses, including legal and accounting fees,
filing fees and printing costs, in connection with the preparation and filing of
the post-effective amendment to the Fund's registration statement to register
the Portfolio under the Securities Act of 1933 and the 1940 Act (including all
amendments thereto prior to the effectiveness of the registration statement
under the Securities Act of 1933);
(c) All costs and expenses, including legal fees and filing fees,
in connection with registering or qualifying the Portfolio's shares for sale
under the securities laws, if applicable, of such states as the Fund shall
designate prior to the effectiveness of approval of such registration or
qualifications in each such state;
(d) Reasonable compensation, fees and related expenses of the
officers and Directors of the Fund, except for such Directors who are not
interested persons (as that term is defined in Section 2(a)(19) of the 1940 Act)
of WRL; and
(e) Rental of offices for the Portfolio.
4. OBLIGATIONS OF THE FUND. The Fund shall have the following
obligations under this Agreement:
(a) to keep WRL continuously and fully informed as to the
composition of the Portfolio's investment securities and the nature of all of
its assets and liabilities from time to time;
(b) to furnish WRL with a certified copy of any financial
statement or report prepared for the Portfolio by certified or independent
public accountants, and with copies of any financial statements or reports made
to its shareholders or to any governmental body or securities exchange;
(c) to furnish WRL with any further materials or information
which WRL may reasonably request to enable it to perform its functions under
this Agreement; and
(d) to compensate WRL for its services in accordance with
the provisions of Section 5 hereof.
5. COMPENSATION. For its services under this Agreement, WRL is entitled
to receive from the Portfolio a monthly fee, payable on the last day of each
month during which or part of which this Agreement is in effect, of 1/12 of
0.40% of the average daily net assets of the Portfolio for such month. For the
month during which this Agreement becomes effective and the month during which
it terminates, however, there shall be an appropriate pro-ration of the fee
payable for such month based on the number of calendar days of such month during
which this Agreement is effective.
6. EXPENSES PAID BY THE PORTFOLIO. Subject to the provisions of Section
7, below, and except as provided in this paragraph, nothing in this Agreement
shall be construed to impose upon WRL the obligation to incur, pay, or reimburse
the Portfolio for any expenses not specifically assumed by WRL under Sections 1,
2 and 3 above. The Portfolio shall pay all of its other expenses including, but
not limited to, investment adviser fees; any compensation, fees, or
reimbursements which the Fund pays to its Directors who are not interested
Page 2 of 5
<PAGE>
persons (as that phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL;
compensation of the Portfolio's custodian, registrar and dividend disbursing
agent; current legal, accounting and printing expenses; administrative,
clerical, recordkeeping and bookkeeping expenses; pricing costs including the
daily calculation of net asset value; auditing; certain insurance premiums;
investor services including allocable telephone and personnel expenses;
brokerage commissions and all other expenses in connection with execution of
portfolio transactions interest; all federal, state and local taxes (including
stamp, excise, income and franchise taxes) and the preparation and filing of all
returns and reports in connection therewith; costs of certificates and the
expenses of delivering such certificates to the purchasers thereof; expenses of
local representation in Maryland; expenses of shareholders' meetings and of
preparing, printing and distributing proxy statement; expenses of preparation
and distribution of notices and reports to shareholders; expenses of preparing
and filing reports with federal and state regulatory authorities; all costs and
expenses, including fees and disbursements of counsel and auditors, filing and
renewal fees and printing costs in connection with the preparation and filing of
any required amendments, supplements or renewals of registration statement,
qualifications or prospectuses under the Securities Act of 1933 and the
securities laws of any states or territories subsequent to the effectiveness of
the initial registration statement under the Securities Act of 1933; all costs
involved in preparing and printing prospectuses of the Portfolio; extraordinary
expenses; and all other expenses properly payable by the Fund or the Portfolio.
Nothing in this Section 6 shall prohibit the Fund from entering into other
agreements or adopting plans which provide for the allocation of expenses of the
Fund or the Portfolio to other entities, or the assumption of other expenses by
the Fund or the Portfolio.
7. LIMITATION ON EXPENSES OF THE PORTFOLIO. If the laws, regulations or
policies of any state in which shares of the Portfolio are qualified for sale
limit the operation and management expenses (collectively referred to as "Normal
Operating Expenses" and as described below), WRL will pay on behalf of the
Portfolio the amount by which such expenses exceed the lowest of such state
limitations (the "Expense Limitation"). Normal Operating Expenses include, but
are not limited to, the fees of the Portfolio's investment adviser, the
compensation of its custodian, registrar, auditors and legal counsel, printing
expenses, expenses incurred in complying with all laws applicable to the sale of
shares of the Portfolio and any compensation, fees, or reimbursement which the
Portfolio pays to Directors of the Fund who are not interested persons (as that
phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL, but excluding all
interest and all federal, state and local taxes (such as stamp, excise, income,
franchise and similar taxes). If Normal Operating Expenses exceed in any year
the Expense Limitation of the Fund, WRL shall pay for those excess expenses on
behalf of the Portfolio in the year in which they are incurred. Expenses of the
Portfolio shall be calculated and accrued monthly. If at the end of any month
the accrued expenses of the Portfolio exceed a pro rata portion of the
above-described Expense Limitation, based upon the average daily net asset value
of the Portfolio from the beginning of the fiscal year through the end of the
month for which calculation is made, the amount of such excess shall be paid by
WRL on behalf of the Portfolio and such excess amounts shall continue to be paid
until the end of a month when such accrued expenses are less than the pro rata
portion of such Expense Limitation. Any necessary final adjusting payments,
whether from WRL to the Portfolio or from the Portfolio to WRL, shall be made as
soon as reasonably practicable after the end of the fiscal year.
8. TREATMENT OF INVESTMENT ADVICE. With respect to the Portfolio, the
Fund shall treat the investment advice and recommendations of WRL as being
advisory only, and shall retain full control over its own investment policies.
However, the Directors of the Fund may delegate to the appropriate officers of
the Fund, or to a committee of Directors, the power to authorize purchases,
sales or other actions affecting the Portfolio in the interim between meetings
of the Directors, provided such action is consistent with the established
investment policy of the Directors and is reported to the Directors at their
next meeting.
9. BROKERAGE COMMISSIONS. For purposes of this Agreement, brokerage
commissions paid by the Portfolio upon the purchase or sale of its portfolio
securities shall be considered a cost of securities of the Portfolio and shall
be paid by the Portfolio. WRL is authorized and directed to place the
Portfolio's securities transactions, or to delegate to the Sub-Adviser the
authority and direction to place the Portfolio's securities
Page 3 of 5
<PAGE>
transactions, only with brokers and dealers who render satisfactory service in
the execution of orders at the most favorable prices and at reasonable
commission rates; provided, however, that WRL or the Sub-Adviser, may pay a
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if WRL or the Sub-Adviser determines in
good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer
viewed in terms of either that particular transaction or the overall
responsibilities of WRL or the Sub-Adviser. WRL and the Sub-Adviser are also
authorized to consider sales of the individual and group life insurance policies
issued by WRL by a broker-dealer as a factor in selecting broker-dealers to
execute the Portfolio's securities transactions, provided that in placing
portfolio business with such broker-dealers, WRL and the Sub-Adviser shall seek
the best execution of each transaction and all such brokerage placement shall be
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Notwithstanding the foregoing, the Fund shall retain
the right to direct the placement of all securities transactions of the
Portfolio, and the Directors may establish policies or guidelines to be followed
by WRL and the Sub-Adviser in placing securities transactions for the Portfolio
pursuant to the foregoing provisions. WRL shall report on the placement of
portfolio transactions each quarter to the Directors of the Fund.
10. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Directors of the Fund or by the shareholders of the Portfolio
acting by vote of at least a majority of its outstanding voting securities (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) provided in either
case that 60 days' written notice of termination be given to WRL at its
principal place of business. This Agreement may be terminated by WRL at any time
by giving 60 days' written notice of termination to the Fund, addressed to its
principal place of business.
11. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as the term is defined in Section 2(a)(4) of the
1940 Act) of this Agreement.
12. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998, and shall continue in effect from year to year thereafter provided such
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as that term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
13. AMENDMENTS. This Agreement may be amended only with the approval of
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of Directors of the Fund who are not
parties hereto or interested persons (as that phrase is defined in Section
2(a)(19) of the 1940 Act of 1940) of any such party, cast in person at a meeting
called for the purpose of voting on the approval of such amendment, unless
otherwise permitted in accordance with the 1940 Act.
Page 4 of 5
<PAGE>
14. PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties hereto and supersedes in its entirety any and all
previous agreements between the parties relative to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WRL SERIES FUND, INC.
ATTEST:
By: /S/ JOHN R. KENNEY
----------------------------------
/S/ PRISCILLA I. HECHLER Chairman of the Board
- ------------------------- and President
Assistant Secretary
WESTERN RESERVE LIFE
ASSURANCE CO. OF OHIO
ATTEST:
By: /S/ ALAN YAEGER
-----------------------------------
/S/ PRISCILLA I. HECHLER Executive Vice President
- --------------------------
Assistant Secretary
Page 5 of 5
EXHIBIT 5(XV)
INVESTMENT ADVISORY AGREEMENT ON BEHALF
OF THE MERIDIAN/INVESCO GLOBAL SECTOR, MERIDIAN/INVESCO US SECTOR AND
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIOS OF THE FUND
<PAGE>
WRL SERIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT
FOR THE MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO,
MERIDIAN/INVESCO US SECTOR PORTFOLIO AND
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
OF THE WRL SERIES FUND, INC.
This Agreement, entered into as of April 30, 1996, is between WRL Series
Fund, Inc., a Maryland corporation (referred to herein as the "Fund"), and
Western Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to
herein as "WRL"), to provide certain investment advisory services with respect
to certain series of shares of common stock of the Fund, allocated to the
Meridian/INVESCO Global Sector Portfolio, Meridian/INVESCO US Sector Portfolio
and Meridian/INVESCO Foreign Sector Portfolio (the "Portfolios").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended, (the "1940 Act") and consists of
more than one series of shares, including the Portfolios. In managing its
Portfolios, as well as in the conduct of certain of its affairs, the Fund wishes
to have the benefit of the investment advisory services of WRL and its
assistance in performing certain management, administrative and promotional
functions. WRL desires to furnish such services for the Portfolios and to
perform the functions assigned to it under this Agreement for the considerations
provided. Accordingly, the parties have agreed as follows:
1. INVESTMENT ADVISORY SERVICES. In its capacity as investment
adviser to the Portfolios, WRL shall have the following responsibilities:
(a) to furnish continuous advice and recommendations to the Fund
as to the acquisition, holding or disposition of any or all of the securities or
other assets which the Portfolios may own or contemplate acquiring from time to
time;
(b) to cause its officers to attend meetings and furnish oral or
written reports, as the Fund may reasonably require, in order to keep the Board
of Directors and appropriate officers of the Fund fully informed as to the
conditions of the investment portfolio of the Portfolios, the investment
recommendations of WRL, and the investment considerations which have given rise
to those recommendations; and
(c) to supervise the purchase and sale of securities
of the Portfolios as directed by the appropriate officers of the Fund.
It is understood and agreed that WRL may, and intends to, enter into a
Sub-Advisory Agreements with duly registered investment advisers (the
"Co-Sub-Advisers"), under which the Co-Sub-Advisers will furnish investment
information and advice to assist WRL in carrying out its responsibilities under
this Section 1. The compensation to be paid to the Co-Sub-Advisers for such
services and the other terms and conditions under which the services shall be
rendered by the Co-Sub-Advisers shall be set forth in the Sub-Advisory
Agreements; provided, however, that such Agreements shall be approved by the
Board of Directors and by the holders of the outstanding voting securities of
the Portfolios in accordance with the requirements of Section 15 of the 1940
Act), and shall otherwise be subject to, and contain such provisions as shall be
required by, the 1940 Act.
2. MANAGEMENT AND ADMINISTRATIVE SERVICES. WRL shall furnish or make
available to the Portfolios the services of executive and management personnel
to supervise the performance of all administrative, recordkeeping, shareholder
relations, regulatory reporting and compliance, and all other functions of the
Portfolios (other than the investment advisory services provided for in Section
1), including supervising and
Page 1 of 5
<PAGE>
coordinating the services of the Portfolios' custodian and transfer agent. WRL
shall also assist the Portfolios in maintaining communications and relations
with shareholders of the Portfolios, answer shareholder inquiries or supervise
such activity by the Portfolios' transfer agent, and assist in the preparation
of reports to shareholders of the Portfolios.
3. WRL EXPENSES. In addition to the expenses which WRL may incur in the
performance of its services pursuant to Sections 1 and 2 above, WRL shall incur
and pay the following expenses relating to each Portfolio's organization and
operations:
(a) All costs and expenses, including legal and accounting fees,
incurred in connection with the formation and organization of each Portfolio,
including the preparation (and filing, when necessary) of the Portfolio's
contracts, plans and documents; conducting meetings of organizers, directors and
shareholders, and all other matters relating to the formation and organization
of the Portfolios and the preparation for offering its shares. The organization
of the Portfolios for all of the foregoing purposes will be considered completed
upon effectiveness of the post-effective amendment to the Fund's registration
statement to register the Portfolios under the Securities Act of 1933.
(b) All costs and expenses, including legal and accounting fees,
filing fees and printing costs, in connection with the preparation and filing of
the post-effective amendment to the Fund's registration statement to register
the Portfolios under the Securities Act of 1933 and the 1940 Act (including all
amendments thereto prior to the effectiveness of the registration statement
under the Securities Act of 1933);
(c) All costs and expenses, including legal fees and filing fees,
in connection with registering or qualifying each Portfolio's shares for sale
under the securities laws, if applicable, of such states as the Fund shall
designate prior to the effectiveness of approval of such registration or
qualifications in each such state;
(d) Reasonable compensation, fees and related expenses of the
officers and Directors of the Fund, except for such Directors who are not
interested persons (as that term is defined in Section 2(a)(19) of the 1940 Act)
of WRL; and
(e) Rental of offices for the Portfolios.
4. OBLIGATIONS OF THE FUND. The Fund shall have the following
obligations under this Agreement:
(a) to keep WRL continuously and fully informed as to the
composition of each Portfolio's investment securities and the nature of all of
its assets and liabilities from time to time;
(b) to furnish WRL with a certified copy of any financial
statement or report prepared for each Portfolio by certified or independent
public accountants, and with copies of any financial statements or reports made
to its shareholders or to any governmental body or securities exchange;
(c) to furnish WRL with any further materials or information
which WRL may reasonably request to enable it to perform its functions under
this Agreement; and
(d) to compensate WRL for its services in accordance with
the provisions of Section 5 hereof.
5. COMPENSATION. For its services under this Agreement, WRL is entitled
to receive from each Portfolio a monthly fee, payable on the last day of each
month during which or part of which this Agreement is in effect, of 1/12 of
1.10% of the average daily net assets of each of the Portfolios for such month.
For the month during which this Agreement becomes effective and the month during
which it terminates, however, there shall be an appropriate pro-ration of the
fee payable for such month based on the number of calendar days of such month
during which this Agreement is effective.
Page 2 of 5
<PAGE>
6. EXPENSES PAID BY THE PORTFOLIOS. Subject to the provisions of Section
7, below, and except as provided in this paragraph, nothing in this Agreement
shall be construed to impose upon WRL the obligation to incur, pay, or reimburse
each Portfolio for any expenses not specifically assumed by WRL under Sections
1, 2 and 3 above. Each Portfolio shall pay all of its other expenses including,
but not limited to, investment adviser fees; any compensation, fees, or
reimbursements which the Fund pays to its Directors who are not interested
persons (as that phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL;
compensation of the Portfolios' custodian, registrar and dividend disbursing
agent; current legal, accounting and printing expenses; administrative,
clerical, recordkeeping and bookkeeping expenses; pricing costs including the
daily calculation of net asset value; auditing; certain insurance premiums;
investor services including allocable telephone and personnel expenses;
brokerage commissions and all other expenses in connection with execution of
portfolio transactions interest; all federal, state and local taxes (including
stamp, excise, income and franchise taxes) and the preparation and filing of all
returns and reports in connection therewith; costs of certificates and the
expenses of delivering such certificates to the purchasers thereof; expenses of
local representation in Maryland; expenses of shareholders' meetings and of
preparing, printing and distributing proxy statement; expenses of preparation
and distribution of notices and reports to shareholders; expenses of preparing
and filing reports with federal and state regulatory authorities; all costs and
expenses, including fees and disbursements of counsel and auditors, filing and
renewal fees and printing costs in connection with the preparation and filing of
any required amendments, supplements or renewals of registration statement,
qualifications or prospectuses under the Securities Act of 1933 and the
securities laws of any states or territories subsequent to the effectiveness of
the initial registration statement under the Securities Act of 1933; all costs
involved in preparing and printing prospectuses of the Portfolios; extraordinary
expenses; and all other expenses properly payable by the Fund or the Portfolios.
Nothing in this Section 6 shall prohibit the Fund from entering into other
agreements or adopting plans which provide for the allocation of expenses of the
Fund or the Portfolios to other entities, or the assumption of other expenses by
the Fund or the Portfolios.
7. LIMITATION ON EXPENSES OF THE PORTFOLIOS. If the laws, regulations or
policies of any state in which shares of the Portfolios are qualified for sale
limit the operation and management expenses (collectively referred to as "Normal
Operating Expenses" and as described below), WRL will pay on behalf of each
Portfolio the amount by which such expenses exceed the lowest of such state
limitations (the "Expense Limitation"). Normal Operating Expenses include, but
are not limited to, the fees of the Portfolios' investment adviser, the
compensation of its custodian, registrar, auditors and legal counsel, printing
expenses, expenses incurred in complying with all laws applicable to the sale of
shares of the Portfolios and any compensation, fees, or reimbursement which the
Portfolios pay to Directors of the Fund who are not interested persons (as that
phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL, but excluding all
interest and all federal, state and local taxes (such as stamp, excise, income,
franchise and similar taxes). If Normal Operating Expenses exceed in any year
the Expense Limitation of the Fund, WRL shall pay for those excess expenses on
behalf of the Portfolios in the year in which they are incurred. Expenses of the
Portfolios shall be calculated and accrued monthly. If at the end of any month
the accrued expenses of the Portfolios exceed a pro rata portion of the
above-described Expense Limitation, based upon the average daily net asset value
of the Portfolios from the beginning of the fiscal year through the end of the
month for which calculation is made, the amount of such excess shall be paid by
WRL on behalf of the Portfolios and such excess amounts shall continue to be
paid until the end of a month when such accrued expenses are less than the pro
rata portion of such Expense Limitation. Any necessary final adjusting payments,
whether from WRL to the Portfolios or from the Portfolios to WRL, shall be made
as soon as reasonably practicable after the end of the fiscal year.
8. TREATMENT OF INVESTMENT ADVICE. With respect to the Portfolios, the
Fund shall treat the investment advice and recommendations of WRL as being
advisory only, and shall retain full control over its own investment policies.
However, the Directors of the Fund may delegate to the appropriate officers of
the Fund, or to a committee of Directors, the power to authorize purchases,
sales or other actions affecting the Portfolios in the interim between meetings
of the Directors, provided such action is consistent with the established
investment policy of the Directors and is reported to the Directors at their
next meeting.
9. BROKERAGE COMMISSIONS. For purposes of this Agreement,
brokerage commissions paid by the Portfolios upon the purchase or sale
of its portfolio securities shall be considered a cost of securities of the
Page 3 of 5
<PAGE>
Portfolios and shall be paid by the Portfolios. WRL is authorized and directed
to place the Portfolios' securities transactions, or to delegate to the
Sub-Adviser the authority and direction to place the Portfolios' securities
transactions, only with brokers and dealers who render satisfactory service in
the execution of orders at the most favorable prices and at reasonable
commission rates; provided, however, that WRL or the Sub-Adviser, may pay a
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if WRL or the Sub-Adviser determines in
good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer
viewed in terms of either that particular transaction or the overall
responsibilities of WRL or the Sub-Adviser. WRL and the Sub-Adviser are also
authorized to consider sales of the individual and group life insurance policies
issued by WRL by a broker-dealer as a factor in selecting broker-dealers to
execute the Portfolios' securities transactions, provided that in placing
portfolio business with such broker-dealers, WRL and the Sub-Adviser shall seek
the best execution of each transaction and all such brokerage placement shall be
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Notwithstanding the foregoing, the Fund shall retain
the right to direct the placement of all securities transactions of the
Portfolios, and the Directors may establish policies or guidelines to be
followed by WRL and the Sub-Adviser in placing securities transactions for the
Portfolios pursuant to the foregoing provisions. WRL shall report on the
placement of portfolio transactions each quarter to the Directors of the Fund.
10. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Directors of the Fund or by the shareholders of the Portfolios
acting by vote of at least a majority of its outstanding voting securities (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) provided in either
case that 60 days' written notice of termination be given to WRL at its
principal place of business. This Agreement may be terminated by WRL at any time
by giving 60 days' written notice of termination to the Fund, addressed to its
principal place of business.
11. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as the term is defined in Section 2(a)(4) of
the 1940 Act) of this Agreement.
12. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998, and shall continue in effect from year to year thereafter provided such
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as that term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolios (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
13. AMENDMENTS. This Agreement may be amended only with the approval of
the affirmative vote of a majority of the outstanding voting securities of the
Portfolios (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of Directors of the Fund who are not
parties hereto or interested persons (as that phrase is defined in Section
2(a)(19) of the 1940 Act of 1940) of any such party, cast in person at a meeting
called for the purpose of voting on the approval of such amendment, unless
otherwise permitted in accordance with the 1940 Act.
Page 4 of 5
<PAGE>
14. PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties hereto and supersedes in its entirety any and all
previous agreements between the parties relative to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WRL SERIES FUND, INC.
ATTEST:
By: /S/ JOHN R. KENNEY
----------------------------------
/S/ PRISCILLA I. HECHLER Chairman of the Board
- -------------------------
Assistant Secretary
WESTERN RESERVE LIFE
ASSURANCE CO. OF OHIO
ATTEST:
By: /S/ ALAN YAEGER
-----------------------------------
/S/ PRISCILLA I. HECHLER Executive Vice President
- --------------------------
Assistant Secretary
EXHIBIT 5(XVI)
INVESTMENT ADVISORY AGREEMENT ON BEHALF OF THE
VALUE EQUITY PORTFOLIO OF THE FUND
<PAGE>
WRL SERIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT FOR THE
VALUE EQUITY PORTFOLIO OF THE WRL SERIES FUND, INC.
This Agreement, entered into as of April 30, 1996, is between WRL Series
Fund, Inc., a Maryland corporation (referred to herein as the "Fund"), and
Western Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to
herein as "WRL"), to provide certain investment advisory services with respect
to a certain series of shares of common stock of the Fund, allocated to the
Value Equity Portfolio (the "Portfolio").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended, (the "1940 Act") and consists of
more than one series of shares, including the Portfolio. In managing its
Portfolio, as well as in the conduct of certain of its affairs, the Fund wishes
to have the benefit of the investment advisory services of WRL and its
assistance in performing certain management, administrative and promotional
functions. WRL desires to furnish such services for the Portfolio and to perform
the functions assigned to it under this Agreement for the considerations
provided. Accordingly, the parties have agreed as follows:
1. INVESTMENT ADVISORY SERVICES. In its capacity as investment
adviser to the Portfolio, WRL shall have the following responsibilities:
(a) to furnish continuous advice and recommendations to the Fund
as to the acquisition, holding or disposition of any or all of the securities or
other assets which the Portfolio may own or contemplate acquiring from time to
time;
(b) to cause its officers to attend meetings and furnish oral or
written reports, as the Fund may reasonably require, in order to keep the Board
of Directors and appropriate officers of the Fund fully informed as to the
conditions of the investment portfolio of the Portfolio, the investment
recommendations of WRL, and the investment considerations which have given rise
to those recommendations; and
(c) to supervise the purchase and sale of securities
of the Portfolio as directed by the appropriate officers of the Fund.
It is understood and agreed that WRL may, and intends to, enter into a
Sub-Advisory Agreement with a duly registered investment adviser (the
"Sub-Adviser"), under which the Sub-Adviser will furnish investment information
and advice to assist WRL in carrying out its responsibilities under this Section
1. The compensation to be paid to the Sub-Adviser for such services and the
other terms and conditions under which the services shall be rendered by the
Sub-Adviser shall be set forth in the Sub-Advisory Agreement; provided, however,
that such Agreement shall be approved by the Board of Directors and by the
holders of the outstanding voting securities of the Portfolio in accordance with
the requirements of Section 15 of the 1940 Act), and shall otherwise be subject
to, and contain such provisions as shall be required by, the 1940 Act.
2. MANAGEMENT AND ADMINISTRATIVE SERVICES. WRL shall furnish or make
available to the Portfolio the services of executive and management personnel to
supervise the performance of all administrative, recordkeeping, shareholder
relations, regulatory reporting and compliance, and all other functions of the
Portfolio (other than the investment advisory services provided for in Section
1), including supervising and coordinating the services of the Portfolio's
custodian and transfer agent. WRL shall also assist the Portfolio in maintaining
communications and relations with shareholders of the Portfolio, answer
shareholder inquiries or supervise such activity by the Portfolio's transfer
agent, and assist in the preparation of reports to shareholders of the
Portfolio.
Page 1 of 5
<PAGE>
3. WRL EXPENSES. In addition to the expenses which WRL may incur in the
performance of its services pursuant to Sections 1 and 2 above, WRL shall incur
and pay the following expenses relating to the Portfolio's organization and
operations:
(a) All costs and expenses, including legal and accounting fees,
incurred in connection with the formation and organization of the Portfolio,
including the preparation (and filing, when necessary) of the Portfolio
contracts, plans and documents; conducting meetings of organizers, directors and
shareholders, and all other matters relating to the formation and organization
of the Portfolio and the preparation for offering its shares. The organization
of the Portfolio for all of the foregoing purposes will be considered completed
upon effectiveness of the post-effective amendment to the Fund's registration
statement to register the Portfolio under the Securities Act of 1933;
(b) All costs and expenses, including legal and accounting fees,
filing fees and printing costs, in connection with the preparation and filing of
the post-effective amendment to the Fund's registration statement to register
the Portfolio under the Securities Act of 1933 and the 1940 Act (including all
amendments thereto prior to the effectiveness of the registration statement
under the Securities Act of 1933);
(c) All costs and expenses, including legal fees and filing fees,
in connection with registering or qualifying the Portfolio's shares for sale
under the securities laws, if applicable, of such states as the Fund shall
designate prior to the effectiveness of approval of such registration or
qualifications in each such state;
(d) Reasonable compensation, fees and related expenses of the
officers and Directors of the Fund, except for such Directors who are not
interested persons (as that term is defined in Section 2(a)(19) of the 1940 Act)
of WRL; and
(e) Rental of offices for the Portfolio.
4. OBLIGATIONS OF THE FUND. The Fund shall have the following
obligations under this Agreement:
(a) to keep WRL continuously and fully informed as to the
composition of the Portfolio's investment securities and the nature of all of
its assets and liabilities from time to time;
(b) to furnish WRL with a certified copy of any financial
statement or report prepared for the Portfolio by certified or independent
public accountants, and with copies of any financial statements or reports made
to its shareholders or to any governmental body or securities exchange;
(c) to furnish WRL with any further materials or information
which WRL may reasonably request to enable it to perform its functions under
this Agreement; and
(d) to compensate WRL for its services in accordance with
the provisions of Section 5 hereof.
5. COMPENSATION. For its services under this Agreement, WRL is entitled
to receive from the Portfolio a monthly fee, payable on the last day of each
month during which or part of which this Agreement is in effect, of 1/12 of
0.80% of the average daily net assets of the Portfolio for such month. For the
month during which this Agreement becomes effective and the month during which
it terminates, however, there shall be an appropriate pro-ration of the fee
payable for such month based on the number of calendar days of such month during
which this Agreement is effective.
6. EXPENSES PAID BY THE PORTFOLIO. Subject to the provisions of Section
7, below, and except as provided in this paragraph, nothing in this Agreement
shall be construed to impose upon WRL the obligation to incur, pay, or reimburse
the Portfolio for any expenses not specifically assumed by WRL under Sections 1,
2 and 3 above. The Portfolio shall pay all of its other expenses including, but
not limited to, investment adviser fees; any compensation, fees, or
reimbursements which the Fund pays to its Directors who are not interested
Page 2 of 5
<PAGE>
persons (as that phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL;
compensation of the Portfolio's custodian, registrar and dividend disbursing
agent; current legal, accounting and printing expenses; administrative,
clerical, recordkeeping and bookkeeping expenses; pricing costs including the
daily calculation of net asset value; auditing; certain insurance premiums;
investor services including allocable telephone and personnel expenses;
brokerage commissions and all other expenses in connection with execution of
portfolio transactions interest; all federal, state and local taxes (including
stamp, excise, income and franchise taxes) and the preparation and filing of all
returns and reports in connection therewith; costs of certificates and the
expenses of delivering such certificates to the purchasers thereof; expenses of
local representation in Maryland; expenses of shareholders' meetings and of
preparing, printing and distributing proxy statement; expenses of preparation
and distribution of notices and reports to shareholders; expenses of preparing
and filing reports with federal and state regulatory authorities; all costs and
expenses, including fees and disbursements of counsel and auditors, filing and
renewal fees and printing costs in connection with the preparation and filing of
any required amendments, supplements or renewals of registration statement,
qualifications or prospectuses under the Securities Act of 1933 and the
securities laws of any states or territories subsequent to the effectiveness of
the initial registration statement under the Securities Act of 1933; all costs
involved in preparing and printing prospectuses of the Portfolio; extraordinary
expenses; and all other expenses properly payable by the Fund or the Portfolio.
Nothing in this Section 6 shall prohibit the Fund from entering into other
agreements or adopting plans which provide for the allocation of expenses of the
Fund or the Portfolio to other entities, or the assumption of other expenses by
the Fund or the Portfolio.
7. LIMITATION ON EXPENSES OF THE PORTFOLIO. If the laws, regulations or
policies of any state in which shares of the Portfolio are qualified for sale
limit the operation and management expenses (collectively referred to as "Normal
Operating Expenses" and as described below), WRL will pay on behalf of the
Portfolio the amount by which such expenses exceed the lowest of such state
limitations (the "Expense Limitation"). Normal Operating Expenses include, but
are not limited to, the fees of the Portfolio's investment adviser, the
compensation of its custodian, registrar, auditors and legal counsel, printing
expenses, expenses incurred in complying with all laws applicable to the sale of
shares of the Portfolio and any compensation, fees, or reimbursement which the
Portfolio pays to Directors of the Fund who are not interested persons (as that
phrase is defined in Section 2(a)(19) of the 1940 Act) of WRL, but excluding all
interest and all federal, state and local taxes (such as stamp, excise, income,
franchise and similar taxes). If Normal Operating Expenses exceed in any year
the Expense Limitation of the Fund, WRL shall pay for those excess expenses on
behalf of the Portfolio in the year in which they are incurred. Expenses of the
Portfolio shall be calculated and accrued monthly. If at the end of any month
the accrued expenses of the Portfolio exceed a pro rata portion of the
above-described Expense Limitation, based upon the average daily net asset value
of the Portfolio from the beginning of the fiscal year through the end of the
month for which calculation is made, the amount of such excess shall be paid by
WRL on behalf of the Portfolio and such excess amounts shall continue to be paid
until the end of a month when such accrued expenses are less than the pro rata
portion of such Expense Limitation. Any necessary final adjusting payments,
whether from WRL to the Portfolio or from the Portfolio to WRL, shall be made as
soon as reasonably practicable after the end of the fiscal year.
8. TREATMENT OF INVESTMENT ADVICE. With respect to the Portfolio, the
Fund shall treat the investment advice and recommendations of WRL as being
advisory only, and shall retain full control over its own investment policies.
However, the Directors of the Fund may delegate to the appropriate officers of
the Fund, or to a committee of Directors, the power to authorize purchases,
sales or other actions affecting the Portfolio in the interim between meetings
of the Directors, provided such action is consistent with the established
investment policy of the Directors and is reported to the Directors at their
next meeting.
9. BROKERAGE COMMISSIONS. For purposes of this Agreement, brokerage
commissions paid by the Portfolio upon the purchase or sale of its portfolio
securities shall be considered a cost of securities of the Portfolio and shall
be paid by the Portfolio. WRL is authorized and directed to place the
Portfolio's securities transactions, or to delegate to the Sub-Adviser the
authority and direction to place the Portfolio's securities transactions, only
with brokers and dealers who render satisfactory service in the execution of
orders at the most favorable prices and at reasonable commission rates;
provided, however, that WRL or the Sub-Adviser,
Page 3 of 5
<PAGE>
may pay a broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if WRL or the Sub-Adviser determines
in good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer
viewed in terms of either that particular transaction or the overall
responsibilities of WRL or the Sub-Adviser. WRL and the Sub-Adviser are also
authorized to consider sales of the individual and group life insurance policies
issued by WRL by a broker-dealer as a factor in selecting broker-dealers to
execute the Portfolio's securities transactions, provided that in placing
portfolio business with such broker-dealers, WRL and the Sub-Adviser shall seek
the best execution of each transaction and all such brokerage placement shall be
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Notwithstanding the foregoing, the Fund shall retain
the right to direct the placement of all securities transactions of the
Portfolio, and the Directors may establish policies or guidelines to be followed
by WRL and the Sub-Adviser in placing securities transactions for the Portfolio
pursuant to the foregoing provisions. WRL shall report on the placement of
portfolio transactions each quarter to the Directors of the Fund.
10. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Directors of the Fund or by the shareholders of the Portfolio
acting by vote of at least a majority of its outstanding voting securities (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) provided in either
case that 60 days' written notice of termination be given to WRL at its
principal place of business. This Agreement may be terminated by WRL at any time
by giving 60 days' written notice of termination to the Fund, addressed to its
principal place of business.
11. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as the term is defined in Section 2(a)(4) of
the 1940 Act) of this Agreement.
12. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998, and shall continue in effect from year to year thereafter provided such
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as that term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
13. AMENDMENTS. This Agreement may be amended only with the approval of
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of Directors of the Fund who are not
parties hereto or interested persons (as that phrase is defined in Section
2(a)(19) of the 1940 Act of 1940) of any such party, cast in person at a meeting
called for the purpose of voting on the approval of such amendment, unless
otherwise permitted in accordance with the 1940 Act.
Page 4 of 5
<PAGE>
14. PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties hereto and supersedes in its entirety any
and all previous agreements between the parties relative to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WRL SERIES FUND, INC.
ATTEST:
By: /S/ JOHN R. KENNEY
----------------------------------
/S/ PRISCILLA I. HECHLER Chairman of the Board
- ------------------------- and President
Assistant Secretary
WESTERN RESERVE LIFE
ASSURANCE CO. OF OHIO
ATTEST:
By: /S/ ALAN YAEGER
-----------------------------------
/S/ PRISCILLA I. HECHLER Executive Vice President
- --------------------------
Assistant Secretary
EXHIBIT 5(XVIII)
SUB-ADVISORY AGREEMENT ON BEHALF
OF THE MONEY MARKET PORTFOLIO OF THE FUND
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Dear Sirs:
Western Reserve Life Assurance Co. of Ohio (the
"Adviser") hereby agrees with J.P. Morgan Investment Management Inc., a
Delaware corporation (the "Sub-Adviser") as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT. The Adviser entered
into an Investment Advisory Agreement (referred to herein as the
"Advisory Agreement"), dated April 30, 1996, with WRL Series Fund,
Inc., a Maryland corporation (the "Fund"), under which the Adviser
agreed, among other things, to act as investment adviser to the Fund.
The Adviser desires to employ the capital of the Money Market Portfolio
("Portfolio") by investing and reinvesting in investments of the kind
and in accordance with the limitations specified in the Fund's Articles
of Incorporation, as amended to date (the "Charter Document"), and in
the prospectus (the "Prospectus") and the statement of additional
information (the "Statement") for the Portfolio filed with the
Securities and Exchange Commission as part of the Fund's Registration
Statement on Form N-1A, as amended or supplemented from time to time,
and in such manner and to such extent as from time to time may be
approved by the Fund's Board of Directors. Copies of the Prospectus,
the Statement and the Charter Document, each as currently in effect,
have been delivered to the Sub-Adviser. The Adviser agrees, on an
ongoing basis, to provide to the Sub-Adviser as promptly as practicable
copies of all amendments and supplements to the Prospectus and the
Statement and amendments to the Charter Document. The Advisory
Agreement provides that the Adviser may engage a Sub-Adviser to perform
the services contemplated hereunder. The Adviser desires to engage and
hereby appoints the Sub-Adviser to act as investment sub-adviser to the
Portfolio. The Sub-Adviser accepts the appointment and agrees to
furnish the services described herein for the compensation set forth
below.
2. SERVICES AS INVESTMENT SUB-ADVISER, GUIDELINES AND ADVICE.
Subject to the supervision of the Adviser and the Board of Directors of
the Fund, the Sub-Adviser will (a) manage the Portfolio's assets in
accordance with the Portfolio's investment objective(s) and policies
stated in the Prospectus, the Statement and the Charter Document, but
subject to the Guidelines (as such term is defined below); (b) make
investment decisions for the Portfolio; (c) place purchase and sale
orders for portfolio transactions for the Portfolio; and (d) employ
professional portfolio managers and securities analysts to provide
research services to the Portfolio; (e) furnish statistical and
analytical information and reports as may reasonably be required by the
Adviser from time to time, and, in providing these services, conduct a
continual program of investment, evaluation and, if appropriate, sale
and reinvestment of the Portfolio's assets; (f) cause
1
<PAGE>
its officers to attend meetings of the Fund's Board of Directors and
furnish oral or written reports, as the Adviser may reasonably require,
in order to keep the Adviser and its officers and the Directors of the
Fund and appropriate officers of the Fund fully informed as to the
condition of the investment securities of the Portfolio, the investment
recommendations of the Sub-Adviser, and the investment considerations
which have given rise to those recommendations.
The Adviser agrees on an on-going basis to provide or cause to
be provided to the Sub-Adviser guidelines, to be revised as provided
below (the "Guidelines"), setting forth limitations, by dollar amount
or percentage of net assets, on the types of securities in which the
Portfolio is permitted to invest or investment activities in which the
Portfolio is permitted to engage. Among other matters, the Guidelines
shall set forth clearly the limitations imposed upon the Portfolio as a
result of relevant diversification requirements under state and federal
law pertaining to insurance products, including, without limitation,
the provisions of Section 817(h) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Guidelines shall remain in effect until
12:00 p.m. on the third business day following actual receipt by the
Sub-Adviser of a written notice, denominated clearly as such, setting
forth revised Guidelines. The Adviser agrees to cause to be delivered
to a person designated in writing for such purpose by the Sub-Adviser
each day, by 1:00 p.m., New York time, a written report dated the date
of its delivery (the "Report") with respect to the Portfolio's
compliance for its current fiscal year with the short-three test set
forth in Section 851(b) (3) of the Code (the "short-three test"). The
Report shall include in chart form the Portfolio's gross income (within
the meaning of Section 851 of the Code) from the beginning of the
current fiscal year to the date of the Report and its cumulative income
and gains described in Section 851(b) (3) of the Code for such period.
If the Report is not timely delivered, the Sub-Adviser shall be
permitted to rely on the most recent Report delivered to it. The
Adviser agrees that the Sub-Adviser may rely on the Guidelines and the
Report without independent verification of their accuracy.
3. BROKERAGE. In selecting brokers or dealers to execute
transactions on behalf of the Fund, the Sub-Adviser will seek the best
overall terms available. In assessing the best overall terms available
for any transaction, the Sub-Adviser will consider factors it deems
relevant, including, without limitation, the breadth of the market in
the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of
the commission, if any, for the specific transaction and on a
continuing basis. In selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms
available, the Sub-Adviser is authorized to consider the brokerage and
research services (within the meaning of Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided to the Portfolio
and/or other accounts over which the Sub-Adviser or its affiliates
exercise investment discretion.
4. STANDARD OF CARE. The Sub-Adviser shall exercise its best
judgment in rendering the services described in paragraphs 2 and 3
above. The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection
with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or from reckless disregard by
it of its obligations and duties under this Agreement (each such act or
omission shall be referred to as "Disqualifying Conduct"). The
Sub-Adviser shall not be deemed to have engaged in Disqualifying
Conduct if it complies with the Guidelines and acts in reliance on the
Report, and the
2
<PAGE>
Sub-Adviser's failure to act in accordance therewith shall not
constitute evidence that it engaged in Disqualifying Conduct.
5. COMPENSATION. In consideration of the services rendered
pursuant to this Agreement, the Adviser will pay the Sub-Adviser on the
first business day of each month a fee for the previous month at the
annual rate of .15% of the Portfolio's average daily net assets. The
fee for the period from the [date the initial public sale of the Fund's
shares commences] to the end of the month during which such sale shall
have been commenced shall be prorated according to the proportion that
such period bears to the full monthly period. Upon any termination of
this Agreement before the end of a month, the fee for such part of that
month shall be prorated according to the proportion that such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to the Sub-Adviser, the value of the Portfolio's net assets
shall be computed at the times and in the manner specified in the
Prospectus and/or the Statement.
6. EXPENSES. The Sub-Adviser will bear all of its expenses in
connection with the performance of its services under this Agreement.
All other expenses to be incurred in the operation of the Portfolio
will be borne by the Fund or the Adviser, as appropriate, except to the
extent specifically assumed by the Sub-Adviser. The expenses to be
borne by the Fund or the Adviser, as appropriate, include, without
limitation, the following: organizational costs, taxes, interest,
brokerage fees and commissions, Director's fees, Securities and
Exchange Commission fees and state Blue Sky qualification fees, if any,
advisory fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees,
outside auditing and legal expenses, costs of independent pricing
services, costs of maintaining existence, costs attributable to
investor services (including, without limitation, telephone and
personnel expenses), costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing stockholders, costs of stockholders' reports
and meetings, and any extraordinary expenses.
7. SERVICES TO OTHER COMPANIES OR ACCOUNTS. The Adviser
understands that the Sub-Adviser now acts, will continue to act and may
act in the future as investment adviser to fiduciary and other managed
accounts and as investment adviser to other investment companies, and
the Adviser has no objection to the Sub-Adviser so acting, provided
that whenever the Portfolio and one or more other accounts or
investment companies advised by the Sub-Adviser have available funds
for investment, investments suitable and appropriate for each will be
allocated in accordance with a methodology believed to be equitable to
each entity. The Sub-Adviser agrees to allocate similarly opportunities
to sell securities. The Adviser recognizes that, in some cases, this
procedure may limit the size of the position that may be acquired or
sold for the Portfolio. In addition, the Adviser understands that the
persons employed by the Sub-Adviser to assist in the performance of the
Sub-Adviser's duties hereunder will not devote their full time to such
service and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Adviser of any affiliate of the
Sub-Adviser to engage in and devote time and attention to other
business or to render services of whatever kind or nature.
8. BOOKS AND RECORDS. In compliance with the requirements of
Rule 31a-3 under the Investment Company Act of 1940, as amended (the
"Act"), the Sub-Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further
agrees to surrender promptly to the Fund copies of any of such records
3
<PAGE>
upon the Fund's or the Adviser's request. The Sub-Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the
Act the records relating to its activities hereunder required to be
maintained by Rule 31a-1 under the Act and to preserve the records
relating to its activities hereunder required by Rule 204-2 under the
Investment Advisers Act of 1940, as amended, for the period specified
in said Rule.
9. TERM OF AGREEMENT. This Agreement shall become effective as
of April 30, 1996 and shall continue until April 22, 1998 and
thereafter shall continue annually, provided such continuance is
specifically approved at least annually by (i) the Fund's Board or (ii)
a vote of a "majority" (as defined in the Act) of the Portfolio's
outstanding voting securities, provided that in either event the
continuance also is approved by a majority of the Fund's Board who are
not "interested persons" (as defined in the Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Adviser, by the Fund's
Board, by vote of holders of a majority of the Portfolio's shares or by
the Sub-Adviser, and will terminate five business days after the
Sub-Adviser receives written notice of the termination of the advisory
agreement between the Fund and the Adviser. This Agreement also will
terminate automatically in the event of its assignment (as defined in
the Act).
10. INDEMNIFICATION. The Adviser agrees to indemnify and hold
harmless the Sub-Adviser and each person who controls or is associated
with the Sub-Adviser within the meaning of such terms under the federal
securities laws and any officer, trustee, director, employee or agent
of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal and
other expenses reasonably incurred in connection therewith) under any
statute or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities:
(1) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the variable annuity
contracts and variable life insurance policies (both contracts and
policies, collectively referred to as "Contracts") for which the
Portfolio serves as an underlying investment option, (ii) any untrue
statement or alleged untrue statement of any material fact contained in
the Prospectuses or Statements for the Contracts, (iii) any sales
literature for the Contracts, (or any amendment or supplement to any of
the foregoing), or (iv) the statement or omission to state or the
alleged statement or alleged omission to state in the Prospectuses or
Statements for the Contracts a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances in which they were made; provided, that this
provision shall not apply if such statement or omission or such alleged
statement or alleged omission was made in reliance upon and in
conformity with information furnished to the Adviser by the Sub-Adviser
for use in the Contracts, or the Prospectuses or the Statements for the
Contracts, or sales literature (or any amendment or supplement), or
otherwise for use in connection with the sales of the Contracts or
Portfolio shares; or
(2) arise out of or as a result of statements or representations by or
on behalf of the Sub-Adviser (other than statements or representations
contained in the Contracts, the Prospectuses or Statements, or sales
literature for the Contracts not supplied by the Sub-Adviser or persons
under its control) or wrongful conduct of the Adviser or persons under
its control with respect to the sales or distribution of the Contracts
or Portfolio shares; or
4
<PAGE>
(3) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Prospectus or
Statement for the Portfolio (or any amendment thereof or supplement
thereto), (ii) any sales literature for the Portfolio or (iii) the
omission or alleged omission to state in the Prospectus or Statement
for the Portfolio a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances in which they were made; provided, that this provision
shall not apply if such statement or omission or such alleged statement
or alleged omission was made in reliance upon and in conformity with
information furnished to the Adviser by the Sub-Adviser for use with
the Prospectus, Statement or sales literature for the Portfolio and the
Contracts; or
(4) arise out of any third-party claims or proceedings relating to the
performance by or obligations of the Sub-Adviser in the performance of
its duties hereunder, except to the extent any such claims arise out of
any material breach by the Sub-Adviser of this Agreement.
This indemnification will be in addition to any liability which the
Adviser may otherwise have, but does not supersede the standard of care
owed by the Sub-Adviser to the Adviser as described in Section 4 above.
11. DISCLOSURE. The Adviser represents and warrants that
neither the Fund nor the Adviser shall, without the prior written
consent of the Sub-Adviser, make representations regarding or reference
to the Sub-Adviser or any affiliates in any disclosure document,
advertisement, sales literature or other promotional materials.
12. MISCELLANEOUS. All notices provided for by this Agreement
shall be in writing and shall be deemed given when received, against
appropriate receipt, by Diane Minardi at 522 Fifth Avenue, New York NY
10036 in the case of the Sub-Adviser, General Counsel at P. O. Box 5068
Clearwater, Fl 34618 in the case of the Adviser, or such other person
as a party shall designate by notice to the other parties. No provision
of this Agreement may be changed, waived, discharged or terminated
orally, but only by an instrument of writing signed by the party
against which enforcement of the change, waiver, discharge or
termination is sought. This Agreement constitutes the entire agreement
among the parties hereto and supersedes any prior agreement among the
parties relating to the subject matter hereof. The paragraph headings
of this Agreement are for convenience of reference and do not
constitute a part hereof. This Agreement shall be governed in
accordance with the internal laws of the State of New York, without
giving effect to principles of conflict of laws.
5
<PAGE>
If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed
copy hereof.
Very truly yours,
By: /S/ JOHN R. KENNEY
---------------------------------
Title: CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
Accepted:
By: /S/ DIANE J. MINARDI
-----------------------------------
Title: VICE PRESIDENT
J.P. MORGAN INVESTMENT MANAGEMENT INC.
6
EXHIBIT 5(XXXI)
CO-SUB-ADVISORY AGREEMENTS ON BEHALF OF THE
MERIDIAN/INVESCO GLOBAL SECTOR, MERIDIAN/INVESCO US SECTOR AND
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIOS OF THE FUND
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUB-ADVISORY AGREEMENT FOR THE
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO, MERIDIAN/INVESCO US
SECTOR PORTFOLIO AND MERIDIAN/INVESCO FOREIGN
SECTOR PORTFOLIO OF THE WRL SERIES FUND, INC.
This Agreement is entered into as of April 30, 1996, between Western
Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to herein as
"WRL"), and Meridian Investment Management Corporation, a Colorado company
(referred to herein as "MERIDIAN"), to provide certain investment advisory
services with respect to certain series of shares of common stock of the WRL
Series Fund, Inc., allocated to the Meridian/INVESCO Global Sector Portfolio,
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio of the WRL Series Fund, Inc. (collectively, the "Portfolios").
WHEREAS, WRL has entered into an Investment Advisory Agreement (referred
to herein as the "Advisory Agreement"), dated April 30, 1996 with WRL Series
Fund, Inc. (the "Fund"), a Maryland corporation, under which WRL has agreed,
among other things, to act as investment adviser to the Portfolios; and
WHEREAS, the Advisory Agreement provides that WRL may engage a
sub-adviser (and WRL has engaged Meridian as a co-sub-adviser for these
Portfolios) to furnish investment information and advice to assist WRL in
carrying out its responsibilities under the Advisory Agreement as investment
adviser to the Portfolios; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Meridian to WRL with respect to the Portfolios and the terms and conditions
under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. SERVICES OF MERIDIAN. Meridian shall act as investment
counsel to WRL with respect to the Portfolios. In this capacity,
MERIDIAN shall have the following responsibilities:
(a) to furnish continuous investment information, portfolio
management advice and recommendations to WRL as to the asset allocation,
industry and country selections for any or all of the securities or other assets
which the Portfolios may own or contemplate acquiring from time to time;
(b) to cause its officers to attend meetings of WRL or the Fund
and furnish oral or written reports, as WRL may reasonably require, in order to
keep WRL and its officers and the Directors of the Fund and appropriate officers
of the Fund fully informed as to the condition of the investment securities of
the Portfolios, the investment recommendations of Meridian, and the investment
considerations which have given rise to those recommendations;
(c) to furnish such quantitative investment research, statistical
and analytical information and reports as may reasonably be required by WRL from
time to time; and
(d) to make decisions with regard to asset allocation, industry
and country selections for each Portfolio as directed by the appropriate
officers of the Fund or of WRL.
2. OBLIGATIONS OF WRL. WRL shall have the following obligations
under this Agreement:
(a) to keep Meridian continuously and fully informed as to the
composition of each Portfolio's investment securities and the nature of each
Portfolio's assets and liabilities from time to time;
Page 1 of 4
<PAGE>
(b) to furnish Meridian with a certified copy of any financial
statement or report prepared for the Fund with respect to each Portfolio by
certified or independent public accountants, and with copies of any financial
statements or reports made by the Fund to shareholders or to any governmental
body or securities exchange;
(c) to furnish Meridian with any further materials or information
which Meridian may reasonably request to enable it to perform its functions
under this Agreement; and
(d) to compensate Meridian for its services under this Agreement
by the payment of monthly fees equal, as a percentage of each Portfolio's
average daily net assets, to an annual rate of 0.30% of the first $100 million
of assets, and 0.35% of assets in excess of $100 million. In the event that this
Agreement shall be effective for only part of a period to which any such fee
received by WRL is attributable, then an appropriate pro-ration of the fee that
would have been payable hereunder if this Agreement had remained in effect until
the end of such period shall be made, based on the number of calendar days in
such period and the number of calendar days during the period in which this
Agreement was in effect. The fees payable to Meridian hereunder shall be payable
upon receipt by WRL from each Portfolio of advisory fees payable to WRL.
3. TREATMENT OF INVESTMENT ADVICE. WRL shall treat the investment
information, advice and recommendations of Meridian as being advisory only, and
shall determine the extent to which such advice and recommendations relating to
each Portfolio shall be passed on to the Fund or incorporated in investment
advice by WRL relating to each Portfolio. WRL may direct Meridian to furnish its
investment information, advice and recommendations directly to officers or
Directors of the Fund.
4. COMPLIANCE WITH LAWS. Meridian represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, Meridian will act in conformity with the
Fund's Articles of Incorporation, Bylaws, and current registration statement
applicable to the Portfolios, in each case in the form provided to Meridian, and
with the instructions and direction of WRL and the Fund's Directors, and will
conform to and comply with the Investment Company Act of 1940, as amended (the
"1940 Act") and all other applicable federal or state laws and regulations.
5. TERMINATION. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by WRL or by the Fund by giving 60 days' written notice
of such termination to Meridian at its principal place of business, provided
that such termination is approved by the Board of Directors of the Fund or by
vote of a majority of the outstanding voting securities (as that phrase is
defined in Section 2(a)(42) of the 1940 Act) of each Portfolio. This Agreement
may be terminated at any time by Meridian by giving 60 days' written notice of
such termination to the Fund and WRL at their respective principal places of
business.
6. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as that term is defined in Section
2(a)(4) of the 1940 Act) of this Agreement.
7. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998 and shall continue in effect from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
8. AMENDMENTS. This Agreement may be amended only with the
approval by the affirmative vote of a majority of the outstanding
voting securities of each Portfolio (as that phrase is defined in
Page 2 of 4
<PAGE>
Section 2(a)(42) of the 1940 Act) and the approval by the vote of a majority of
the Directors of the Fund who are not parties hereto or interested persons (as
that term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
such amendment, unless otherwise permitted in accordance with the 1940 Act.
9. PRIOR AGREEMENTS. This Agreement supersedes all prior
agreements between the parties relating to the subject matter hereof,
and all such prior agreements are deemed terminated upon the
effectiveness of this Agreement.
10. ACTIVITIES OF THE SUB-ADVISER. The services of Meridian to WRL and
the Fund under this Agreement shall not be deemed to be exclusive, and Meridian
and its affiliates shall be free to render similar services to others so long as
Meridian fulfills its rights and obligations under this Agreement.
11. LIABILITY OF THE SUB-ADVISER. Meridian shall have no liability
under this Agreement to WRL, the Fund, the Portfolios or to the Fund's
shareholders or creditors for any error of judgment, mistake of law, or for any
loss arising out of any investment, nor for any other act or omission in the
performance of its duties under this Agreement not involving willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties hereunder. WRL shall have no liability under this
Agreement to the Sub-Adviser for any error of judgment, mistake of law, or for
any loss arising out of any investment, nor for any other act of omission in the
performance of its duties under this Agreement or the Advisory Agreement not
involving willful misfeasance, bad faith, gross negligence or reckless disregard
of its obligations and duties hereunder.
12. DISCLOSURE DOCUMENTS. Meridian will cooperate with WRL and the Fund
in the preparation of disclosure relating to the Portfolios for the Fund's
Registration Statement, including the prospectuses and statements of additional
information contained therein, or any amendment or supplement thereto, any
preliminary prospectus, any other communications with investors or any other
submissions to governmental bodies or self-regulatory agencies filed or
distributed on or subsequent to the date of this Agreement.
13. NOTICES. Any notice under this Agreement shall be in writing and
shall be deemed given (a) upon personal delivery, or (b) on the first business
day after receipted delivery to a courier service that guarantees next business
day delivery, under circumstances in which such guaranty is applicable, or (c)
on the earlier of delivery or three business days after mailing by United States
certified mail, postage and fees prepaid, to the appropriate party at the
address set forth below, or to such other address as the party so notifies the
other in writing.
Page 3 of 4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MERIDIAN INVESTMENT MANAGEMENT
CORPORATION
ATTEST:
BY: /S/ MICHAEL J. HART
------------------------------------------
Michael J. Hart
/S/ CRAIG T. CALLAHAN Title: President
- -------------------------
Dr. Craig T. Callahan 12835 East Arapahoe Road
Secretary Tower II, 7th Floor
Englewood, CO 80112
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
ATTEST:
BY: /S/ JOHN R. KENNEY
---------------------------------
John R. Kenney
Title: Chairman of the Board, President
/S/ PRISCILLA I. HECHLER and Chief Executive Officer
- --------------------------
Priscilla I. Hechler Address: 201 Highland Avenue
Assistant Secretary Largo, FL 34640
Page 4 of 4
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUB-ADVISORY AGREEMENT FOR THE
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO, MERIDIAN/INVESCO US SECTOR
PORTFOLIO AND MERIDIAN/INVESCO FOREIGN
SECTOR PORTFOLIO OF THE
WRL SERIES FUND, INC.
This Agreement is entered into as of April 30, 1996, between Western
Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to herein as
"WRL"), and INVESCO Global Asset Management Limited, a Bermuda corporation
(referred to herein as "INVESCO Global"), to provide certain investment advisory
services with respect to certain series of shares of common stock of the WRL
Series Fund, Inc., allocated to the Meridian/INVESCO Global Sector Portfolio,
Meridian/INVESCO US Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio of the WRL Series Fund, Inc. (collectively, the "Portfolios").
WHEREAS, WRL has entered into an Investment Advisory Agreement (referred
to herein as the "Advisory Agreement"), dated April 30, 1996 with WRL Series
Fund, Inc. (the "Fund"), a Maryland corporation, under which WRL has agreed,
among other things, to act as investment adviser to the Portfolios; and
WHEREAS, the Advisory Agreement provides that WRL may engage a
sub-adviser (and WRL has engaged INVESCO Global as a co-sub-adviser for these
Portfolios) to furnish investment information and advice to assist WRL in
carrying out its responsibilities under the Advisory Agreement as investment
adviser to the Portfolios; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
INVESCO Global to WRL with respect to the Portfolios and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. SERVICES OF INVESCO GLOBAL. INVESCO Global shall act as
co-investment counsel to WRL with respect to the Portfolios. In this capacity,
INVESCO Global shall have the following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to WRL as to the selection, acquisition, holding or disposition
of any or all of the securities or other assets which the Portfolios may own or
contemplate acquiring from time to time; provided, however, that notwithstanding
any other provision of this Agreement to the contrary, INVESCO Global shall have
no responsibility with respect to the allocation of the Portfolios' assets among
industrial sectors or countries, it being understood that Meridian Investment
Management Corporation will provide such allocation services to WRL;
(b) to cause its officers to attend meetings of WRL or the Fund
and furnish oral or written reports, as WRL may reasonably require, in order to
keep WRL and its officers and the Directors of the Fund and appropriate officers
of the Fund fully informed as to the condition of the investment securities of
the Portfolios, the investment recommendations of INVESCO Global, and the
investment considerations which have given rise to those recommendations;
(c) to furnish such statistical and analytical information
and reports as may reasonably be required by WRL from time to time; and
(d) to supervise the selection, purchase and sale of securities
as directed by the appropriate officers of the Fund or of WRL.
(e) In connection with the rendering of the services required to
be provided by INVESCO Global under this Agreement, INVESCO Global may, to the
extent it deems appropriate and subject to
<PAGE>
the prior consent of WRL, enter into service agreements with one or more
companies affiliated with INVESCO Global ("INVESCO Affiliates"), pursuant to
which such INVESCO Affiliate(s) provide investment management information and
services/support to INVESCO Global with respect to one or more of the
Portfolios; provided, however, that INVESCO Global shall supervise and remain
fully responsible for all such services in accordance with and to the extent
provided by this Agreement; and further provided that each such service
agreement shall be subject to the requirements of the 1940 Act and regulations
thereunder.
2. OBLIGATIONS OF WRL. WRL shall have the following obligations
under this Agreement:
(a) to keep INVESCO Global continuously and fully informed as to
the composition of each Portfolio's investment securities and the nature of each
Portfolio's assets and liabilities from time to time;
(b) to furnish INVESCO Global with a certified copy of any
financial statement or report prepared for the Fund with respect to each
Portfolio by certified or independent public accountants, and with copies of any
financial statements or reports made by the Fund to shareholders or to any
governmental body or securities exchange;
(c) to furnish INVESCO Global with any further materials or
information which INVESCO Global may reasonably request to enable it to perform
its functions under this Agreement; and
(d) to compensate INVESCO Global for its services under this
Agreement by the payment of monthly fees equal, as a percentage of each
Portfolio's average daily net assets, to an annual rate of 0.40% of the first
$100 million of assets, and 0.35% of assets in excess of $100 million. In the
event that this Agreement shall be effective for only part of a period to which
any investment advisory fee received by WRL is attributable, then an appropriate
pro-ration of the fee that would have been payable hereunder if this Agreement
had remained in effect until the end of such period shall be made, based on the
number of calendar days in such period and the number of calendar days during
the period in which this Agreement was in effect. The fees payable to INVESCO
Global hereunder shall be payable upon receipt by WRL from each Portfolio of
advisory fees payable to WRL.
3. TREATMENT OF INVESTMENT ADVICE. WRL shall treat the investment
information, advice and recommendations of INVESCO Global as being advisory
only, and shall determine the extent to which such advice and recommendations
relating to each Portfolio shall be passed on to the Fund or incorporated in
investment advice by WRL relating to each Portfolio. WRL may direct INVESCO
Global to furnish its investment information, advice and recommendations
directly to officers or Directors of the Fund.
4. PORTFOLIO BROKERAGE. In accordance with Section 9 of the Advisory
Agreement, WRL delegates to the Sub-Adviser the authority and direction to place
each Portfolio's securities transactions only with brokers and dealers who
render satisfactory service in the execution of orders at the most favorable
prices and at reasonable commission rates; provided, however, that the
Sub-Adviser may pay a broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Sub-Adviser
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of either that particular transaction or the
overall responsibilities of the Sub-Adviser. The Sub-Adviser is also authorized
to consider sales of the individual and group life insurance policies issued by
WRL by a broker-dealer as a factor in selecting broker-dealers to execute each
Portfolio's securities transactions, provided that in placing portfolio business
with such broker-dealers, the Sub-Adviser shall seek the best execution of each
transaction and all such brokerage placement shall be consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
Notwithstanding the foregoing, the Fund shall retain the right to direct the
placement of all securities transactions of each Portfolio, and the Fund's
Directors may establish policies or guidelines to be followed by the Sub-Adviser
in placing securities transactions for each Portfolio pursuant to the foregoing
provisions.
<PAGE>
5. COMPLIANCE WITH LAWS. INVESCO Global represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, INVESCO Global will act in conformity with
the Fund's Articles of Incorporation, Bylaws, and current registration statement
applicable to the Portfolios, in each case in the form provided to INVESCO
Global, and with the instructions and direction of WRL and the Fund's Directors,
and will conform to and comply with the Investment Company Act of 1940, as
amended (the "1940 Act") and all other applicable federal or state laws and
regulations.
6. TERMINATION. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by WRL or by the Fund by giving 60 days' written notice
of such termination to INVESCO Global at its principal place of business,
provided that such termination is approved by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as that phrase is
defined in Section 2(a)(42) of the 1940 Act) of each Portfolio. This Agreement
may be terminated at any time by INVESCO Global by giving 60 days' written
notice of such termination to the Fund and WRL at their respective principal
places of business.
7. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as that term is defined in Section 2(a)(4)
of the 1940 Act) of this Agreement.
8. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998 and shall continue in effect from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
9. AMENDMENTS. This Agreement may be amended only with the approval by
the affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Directors of the Fund who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
10. PRIOR AGREEMENTS. This Agreement supersedes all prior
agreements between the parties relating to the subject matter hereof, and all
such prior agreements are deemed terminated upon the effectiveness of this
Agreement.
11. ACTIVITIES OF THE SUB-ADVISER. The services of INVESCO Global to
WRL and the Fund under this Agreement shall not be deemed to be exclusive, and
INVESCO Global and its affiliates shall be free to render similar services to
others so long as INVESCO Global fulfills its rights and obligations under this
Agreement. Securities held by each Portfolio may also be held by separate
accounts or other mutual funds for which INVESCO Global or its affiliates act as
an adviser. Because of different investment objectives or other factors, a
particular security may be bought by INVESCO Global or its affiliates for one or
more clients when one or more clients are selling the same security. If
purchases or sales of securities for each Portfolio or entities for which
INVESCO Global or its affiliates act as investment adviser arise for
consideration at or about the same time, INVESCO Global or its affiliates may
engage in transactions in such securities, insofar as feasible, for the
respective entities and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of INVESCO Global or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, it is recognized that
there may be an adverse effect on price. It is agreed that, on occasions which
INVESCO Global deems the purchase or sale of a security to be in the best
interests of each Portfolio as well as other accounts or companies, it may, to
the extent permitted by applicable laws and regulations, but will not be
obligated to, aggregate the securities to be so sold or purchased for other
accounts or companies in order to obtain favorable execution and low
<PAGE>
brokerage commissions. In that event, allocation of the securities purchased or
sold, as well as the expenses incurred in the transaction, will be made by
INVESCO Global in the manner it considers to be most equitable and consistent
with its fiduciary obligations to each Portfolio and to such other accounts or
companies.
12. LIABILITY OF THE SUB-ADVISER. INVESCO Global shall have no
liability under this Agreement to WRL, the Fund, the Portfolios or to the Fund's
shareholders or creditors for any error of judgment, mistake of law, or for any
loss arising out of any investment, nor for any other act or omission in the
performance of its duties under this Agreement not involving willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties hereunder. WRL shall have no liability under this
Agreement to the Sub-Adviser for any error of judgment, mistake of law, or for
any loss arising out of any investment, nor for any other act of omission in the
performance of its duties under this Agreement or the Advisory Agreement not
involving willful misfeasance, bad faith, gross negligence or reckless disregard
of its obligations and duties hereunder.
13. DISCLOSURE DOCUMENTS. INVESCO Global will cooperate with WRL and
the Fund in the preparation of disclosure relating to the Portfolios for the
Fund's Registration Statement, including the prospectuses and statements of
additional information contained therein, or any amendment or supplement
thereto, any preliminary prospectus, any other communications with investors or
any other submissions to governmental bodies or self-regulatory agencies filed
or distributed on or subsequent to the date of this Agreement.
14. NOTICES. Any notice under this Agreement shall be in writing and
shall be deemed given (a) upon personal delivery, or (b) on the first business
day after receipted delivery to a courier service that guarantees next business
day delivery, under circumstances in which such guaranty is applicable, or (c)
on the earlier of delivery or three business days after mailing by United States
certified mail, postage and fees prepaid, to the appropriate party at the
address set forth below, or to such other address as the party so notifies the
other in writing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
ATTEST:
BY: /S/ STEPHEN A. DANA
---------------------------------
/S/ DAVID A. HARTLEY Title: Director
- --------------------------
Assistant Secretary Address: Rosebank, 12 Bermudiana Road
Hamilton, Bermuda HM11
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
ATTEST:
BY: /S/ JOHN R. KENNEY
-------------------------------------
Title: Chairman of the Board, President
/S/ PRISCILLA I. HECHLER and Chief Executive Officer
- --------------------------
Assistant Secretary Address: 201 Highland Avenue
Largo, FL 34640
EXHIBIT 5(XXXII)
SUB-ADVISORY AGREEMENT ON BEHALF
OF THE VALUE EQUITY PORTFOLIO OF THE FUND
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUB-ADVISORY AGREEMENT FOR THE
VALUE EQUITY PORTFOLIO OF THE WRL SERIES FUND, INC.
This Agreement is entered into as of April 30, 1996, between Western
Reserve Life Assurance Co. of Ohio, an Ohio corporation (referred to herein as
"WRL"), and NWQ Investment Management Company, Inc., a Massachusetts corporation
(referred to herein as "NWQ"), to provide certain investment advisory services
with respect to a certain series of shares of common stock of the WRL Series
Fund, Inc., allocated to the Value Equity Portfolio (the "Portfolio").
WHEREAS, WRL has entered into an Investment Advisory Agreement (referred
to herein as the "Advisory Agreement"), dated April 30, 1996, with WRL Series
Fund, Inc. (the "Fund"), a Maryland corporation, under which WRL has agreed,
among other things, to act as investment adviser to the Portfolio; and
WHEREAS, the Advisory Agreement provides that WRL may engage NWQ to
furnish investment information and advice to assist WRL in carrying out its
responsibilities under the Advisory Agreement as investment adviser to the
Portfolio; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
NWQ to WRL with respect to the Portfolio and the terms and conditions under
which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. SERVICES OF NWQ. NWQ shall act as investment counsel to
WRL with respect to the Portfolio. In this capacity, NWQ shall have the
following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to WRL as to the acquisition, holding or disposition of any or
all of the securities or other assets which the Portfolio may own or contemplate
acquiring from time to time;
(b) to cause its officers to attend meetings of WRL or the Fund
and furnish oral or written reports, as WRL may reasonably require, in order to
keep WRL and its officers and the Directors of the Fund and appropriate officers
of the Fund fully informed as to the condition of the investment securities of
the Portfolio, the investment recommendations of NWQ, and the investment
considerations which have given rise to those recommendations;
(c) to furnish such statistical and analytical information
and reports as may reasonably be required by WRL from time to time; and
(d) to supervise the purchase and sale of securities as
directed by the appropriate officers of the Fund or of WRL.
2. OBLIGATIONS OF WRL. WRL shall have the following obligations
under this Agreement:
(a) to keep NWQ continuously and fully informed as to the
composition of the Portfolio's investment securities and the nature of the
Portfolio's assets and liabilities from time to time;
Page 1 of 3
<PAGE>
(b) to furnish NWQ with a certified copy of any financial
statement or report prepared for the Fund with respect to the Portfolio by
certified or independent public accountants, and with copies of any financial
statements or reports made by the Fund to shareholders or to any governmental
body or securities exchange;
(c) to furnish NWQ with any further materials or information
which NWQ may reasonably request to enable it to perform its functions under
this Agreement; and
(d) to compensate NWQ for its services under this Agreement by
the payment of fees equal to (i) 50% of the fees received by WRL for services
rendered under the Investment Advisory Agreement by WRL to the Portfolio during
the term of this Agreement, less (ii) 50% of the amount paid by WRL on behalf of
the Portfolio pursuant to any expense limitation or the amount of any other
reimbursement made by WRL to the Portfolio. In the event that this Agreement
shall be effective for only part of a period to which any such fee received by
WRL is attributable, then an appropriate pro-ration of the fee that would have
been payable hereunder if this Agreement had remained in effect until the end of
such period shall be made, based on the number of calendar days in such period
and the number of calendar days during the period in which this Agreement was in
effect. The fees payable to NWQ hereunder shall be payable upon receipt by WRL
from the Portfolio of advisory fees payable to WRL.
3. TREATMENT OF INVESTMENT ADVICE. WRL shall treat the investment
information, advice and recommendations of NWQ as being advisory only, and shall
determine the extent to which such advice and recommendations relating to the
Portfolio shall be passed on to the Fund or incorporated in investment advice by
WRL relating to the Portfolio. WRL may direct NWQ to furnish its investment
information, advice and recommendations directly to officers or Directors of the
Fund. Investment information, advice and recommendations provided by NWQ shall
be used by WRL or the Fund solely with respect to the management of the
Portfolio.
4. COMPLIANCE WITH LAWS. NWQ represents that it is, and will continue to
be throughout the term of this Agreement, an investment adviser registered under
all applicable federal and state laws. In all matters relating to the
performance of this Agreement, NWQ will act in conformity with the Fund's
Articles of Incorporation, Bylaws, and current registration statement applicable
to the Portfolio and with the instructions and direction of WRL and the Fund's
Directors, and will conform to and comply with the Investment Company Act of
1940, as amended (the "1940 Act") and all other applicable federal or state laws
and regulations.
5. TERMINATION. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by WRL or by the Fund by giving 60 days' written notice
of such termination to NWQ at its principal place of business, provided that
such termination is approved by the Board of Directors of the Fund or by vote of
a majority of the outstanding voting securities (as that phrase is defined in
Section 2(a)(42) of the 1940 Act) of the Portfolio. This Agreement may be
terminated at any time by NWQ by giving 60 days' written notice of such
termination to the Fund and WRL at their respective principal places of
business.
6. ASSIGNMENT. This Agreement shall terminate automatically
in the event of any assignment (as that term is defined in Section 2(a)(4) of
the 1940 Act) of this Agreement.
7. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending April 22,
1998 and shall continue in effect from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Directors of the Fund who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
Page 2 of 3
<PAGE>
8. AMENDMENTS. This Agreement may be amended only with the approval by
the affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Directors of the Fund who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
9. PRIOR AGREEMENTS. This Agreement supersedes all prior
agreements between the parties relating to the subject matter hereof, and all
such prior agreements are deemed terminated upon the effectiveness of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
ATTEST:
BY: /S/ DAVID A. POLAK
------------------------------------
Title: President
/S/ MARY-GENE SLAVEN
- --------------------------
Secretary
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
ATTEST:
BY: /S/ JOHN R. KENNEY
------------------------------
Title: Chairman of the Board, President
/S/ PRISCILLA I. HECHLER and Chief Executive Officer
- --------------------------------
Assistant Secretary
Page 3 of 3
EXHIBIT 5(XXXIII)
FORM OF SERVICE AGREEMENT BETWEEN INVESCO GLOBAL ASSET
MANAGEMENT LIMITED AND INVESCO TRUST COMPANY, INC.
<PAGE>
SERVICE AGREEMENT
AGREEMENT made as of the 30th day of April, 1996, by and between INVESCO
Global Asset Management Limited, a corporation organized under the laws of the
Islands of Bermuda ("IGAM"), and INVESCO Trust Company, Inc. a Colorado trust
company ("INVESCO").
WITNESSETH:
WHEREAS, IGAM has developed a proprietary system for global asset
allocation and desires to obtain from time to time information from INVESCO to
assist IGAM in making certain determinations regarding IGAM's global asset
allocation decisions; and
WHEREAS, IGAM will enter into a Sub-Advisory Agreement (the "IGAM
Agreement") with Western Reserve Life Assurance Co. of Ohio (the "Client"),
which has selected IGAM to act as investment sub-adviser with respect to one or
more of the Portfolios of the WRL Series Fund, Inc. ("Fund"), as indicated in
the IGAM Agreement and as set forth in Schedule A hereto (the "Portfolios"); and
WHEREAS, the IGAM Agreement provides that IGAM may, with prior notice to
Client, provide services to the Client that reflect information and
services/support provided by any or all of its affiliates worldwide; and
WHEREAS, IGAM wishes to avail itself of INVESCO's services for (I)
providing information related to IGAM's global asset allocation process and (ii)
assistance with IGAM's provision of investment advisory services to Client; and
WHEREAS, IGAM and INVESCO are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, INVESCO is willing to provide services to IGAM on the terms
and conditions hereinafter set forth; and
WHEREAS, it is understood by the parties that this Agreement is solely
between the parties, and that this Agreement is not intended to, and shall not,
impose any obligation on Client;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, IGAM and INVESCO hereby agree as follows:
ARTICLE I
DUTIES OF INVESCO
IGAM hereby employs INVESCO to furnish, or arrange for affiliates of
INVESCO to provide, such investment management information and services/support
to IGAM as may be instructed by IGAM from time to time, subject to the
supervision of IGAM and the terms of the IGAM Agreement. A copy of the IGAM
Agreement is attached hereto as Exhibit A.
<PAGE>
Page 2
RE: Service Agreement
INVESCO accepts such employment and agrees during such period, at its own
expense, to render such services and to assume the obligations herein set forth
for the compensation provided for herein. INVESCO shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent IGAM in any
way or otherwise be deemed an agent of IGAM.
ARTICLE II
COMPENSATION OF INVESCO
For the services rendered with respect to each Portfolio, the facilities
furnished and expenses assumed by INVESCO, IGAM shall pay to INVESCO
compensation as set forth on Schedule A hereto. INVESCO assumes and shall pay
for maintaining the staff and personnel necessary to perform its obligations
under this Agreement, and shall at its own expense, provide the office space,
equipment and facilities necessary to perform its obligations under this
Agreement.
ARTICLE III
LIMITATION OF LIABILITY OF INVESCO
INVESCO shall not be liable for any error of judgment, mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of the services rendered hereunder, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason or
reckless disregard of its obligations and duties hereunder. As used in this
Article III, INVESCO shall include directors, officers and employees of INVESCO.
ARTICLE IV
ACTIVITIES OF INVESCO
The services of INVESCO to IGAM are not to be deemed to be exclusive,
INVESCO and any person controlled by or under common control with INVESCO being
free to render services to others.
ARTICLE V
COMPLIANCE WITH THE LAWS
IGAM and INVESCO will comply with all applicable laws in acting hereunder
including, without limitation, the Securities Exchange Act of 1934, as amended,
the Advisers Act, the Employee Retirement Income Security Act of 1974, as
amended, the Investment Company Act of 1940, as amended ("1940 Act"), and all
applicable rules and regulations duly promulgated under the foregoing.
<PAGE>
Page 3
RE: Service Agreement
ARTICLE VI
TERM
This Agreement shall continue in effect, unless sooner terminated in
accordance with its terms, for an initial term ending April 22, 1998 and shall
continue in effect from year to year thereafter provided continuance is
specifically approved at least annually by the vote of a majority of the
Directors of the Fund who are not parties hereto or interested persons (as that
term is defined in Section 2(a)(19) of the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on the approval of the
terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act). This
Agreement shall automatically terminate in the event of its assignment (as that
term is defined in Section 2(a)(4) of the 1940 Act) or in the event of the
termination of the IGAM Agreement. This Agreement may be terminated at any time,
without penalty, by IGAM by giving 60 days' written notice of such termination
to INVESCO at its principal place of business, provided that such termination is
approved by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities (as that phrase is defined in Section 2(a)(42) of
the 1940 Act) of each Portfolio. This Agreement may be terminated at any time by
INVESCO by giving 60 days' written notice of such termination to IGAM at its
principal place of business.
ARTICLE VII
AMENDMENTS
This Agreement may be amended only with the approval by the affirmative
vote of a majority of the outstanding voting securities of each Portfolio (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) and the approval by
the vote of a majority of the Directors of the Fund who are not parties hereto
or interested persons (as that term is defined in Section 2(a)(19) of the 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on the approval of such amendment, unless otherwise permitted in
accordance with the 1940 Act.
ARTICLE VIII
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the Islands of
Bermuda and the applicable provisions of the 1940 Act and the Advisers Act. To
the extent that the applicable laws of the Islands of Bermuda, or any of the
provisions herein, conflict with applicable provisions of the 1940 Act and the
Advisers Act, the latter shall control.
<PAGE>
Page 4
RE: Service Agreement
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
INVESCO TRUST COMPANY
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
EXHIBIT 5(XXXIV)
FORM OF SERVICE AGREEMENT BETWEEN INVESCO GLOBAL ASSET MANAGEMENT LIMITED
AND INVESCO ASSET MANAGEMENT LIMITED
<PAGE>
SERVICE AGREEMENT
AGREEMENT made as of the 30th day of April, 1996, by and between INVESCO
Global Asset Management Limited, a corporation organized under the laws of the
Islands of Bermuda ("IGAM"), and INVESCO Asset Management Limited, a United
Kingdom corporation ("INVESCO Asset").
WITNESSETH:
WHEREAS, IGAM has developed a proprietary system for global asset
allocation and desires to obtain from time to time information from INVESCO
Asset to assist IGAM in making certain determinations regarding IGAM's global
asset allocation decisions; and
WHEREAS, IGAM will enter into a Sub-Advisory Agreement (the "IGAM
Agreement") with Western Reserve Life Assurance Co. of Ohio (the "Client"),
which has selected IGAM to act as investment sub-adviser with respect to one or
more of the Portfolios of the WRL Series Fund, Inc. ("Fund"), as indicated in
the IGAM Agreement and as set forth in Schedule A hereto (the "Portfolios"); and
WHEREAS, the IGAM Agreement provides that IGAM may, with prior notice to
Client, provide services to the Client that reflect information and
services/support provided by any or all of its affiliates worldwide; and
WHEREAS, IGAM wishes to avail itself of INVESCO Asset's services for (I)
providing information related to IGAM's global asset allocation process and (ii)
assistance with IGAM's provision of investment advisory services to Client; and
WHEREAS, IGAM and INVESCO Asset are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, INVESCO Asset is willing to provide services to IGAM on the
terms and conditions hereinafter set forth; and
WHEREAS, it is understood by the parties that this Agreement is solely
between the parties, and that this Agreement is not intended to, and shall not,
impose any obligation on Client;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, IGAM and INVESCO Asset hereby agree as follows:
ARTICLE I
DUTIES OF INVESCO ASSET
IGAM hereby employs INVESCO Asset to furnish, or arrange for affiliates of
INVESCO Asset to provide, such investment management information and
services/support to IGAM as may be instructed by IGAM from time to time, subject
to the supervision of IGAM and the terms of the IGAM Agreement. A copy of the
IGAM Agreement is attached hereto as Exhibit A.
<PAGE>
Page 2
RE: Service Agreement
INVESCO Asset accepts such employment and agrees during such period, at its
own expense, to render such services and to assume the obligations herein set
forth for the compensation provided for herein. INVESCO Asset shall for all
purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided or authorized, have no authority to act for or
represent IGAM in any way or otherwise be deemed an agent of IGAM.
ARTICLE II
COMPENSATION OF INVESCO ASSET
For the services rendered with respect to each Portfolio, the facilities
furnished and expenses assumed by INVESCO Asset, IGAM shall pay to INVESCO Asset
compensation as set forth on Schedule A hereto. INVESCO Asset assumes and shall
pay for maintaining the staff and personnel necessary to perform its obligations
under this Agreement, and shall at its own expense, provide the office space,
equipment and facilities necessary to perform its obligations under this
Agreement.
ARTICLE III
LIMITATION OF LIABILITY OF INVESCO ASSET
INVESCO Asset shall not be liable for any error of judgment, mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of the services rendered hereunder, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason or
reckless disregard of its obligations and duties hereunder. As used in this
Article III, INVESCO Asset shall include directors, officers and employees of
INVESCO Asset.
ARTICLE IV
ACTIVITIES OF INVESCO ASSET
The services of INVESCO Asset to IGAM are not to be deemed to be exclusive,
INVESCO Asset and any person controlled by or under common control with INVESCO
Asset being free to render services to others.
ARTICLE V
COMPLIANCE WITH THE LAWS
IGAM and INVESCO Asset will comply with all applicable laws in acting
hereunder including, without limitation, the Securities Exchange Act of 1934, as
amended, the Advisers Act, the Employee Retirement Income Security Act of 1974,
as amended, the Investment Company Act of 1940, as amended ("1940 Act"), and all
applicable rules and regulations duly promulgated under the foregoing.
<PAGE>
Page 3
RE: Service Agreement
ARTICLE VI
TERM
This Agreement shall continue in effect, unless sooner terminated in
accordance with its terms, for an initial term ending April 22, 1998 and shall
continue in effect from year to year thereafter provided continuance is
specifically approved at least annually by the vote of a majority of the
Directors of the Fund who are not parties hereto or interested persons (as that
term is defined in Section 2(a)(19) of the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on the approval of the
terms of such renewal, and by either the Directors of the Fund or the
affirmative vote of a majority of the outstanding voting securities of each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act). This
Agreement shall automatically terminate in the event of its assignment (as that
term is defined in Section 2(a)(4) of the 1940 Act) or in the event of the
termination of the IGAM Agreement. This Agreement may be terminated at any time,
without penalty, by IGAM by giving 60 days' written notice of such termination
to INVESCO Asset at its principal place of business, provided that such
termination is approved by the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities (as that phrase is defined in
Section 2(a)(42) of the 1940 Act) of each Portfolio. This Agreement may be
terminated at any time by INVESCO Asset by giving 60 days' written notice of
such termination to IGAM at its principal place of business.
ARTICLE VII
AMENDMENTS
This Agreement may be amended only with the approval by the affirmative
vote of a majority of the outstanding voting securities of each Portfolio (as
that phrase is defined in Section 2(a)(42) of the 1940 Act) and the approval by
the vote of a majority of the Directors of the Fund who are not parties hereto
or interested persons (as that term is defined in Section 2(a)(19) of the 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on the approval of such amendment, unless otherwise permitted in
accordance with the 1940 Act.
ARTICLE VIII
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the Islands of
Bermuda and the applicable provisions of the 1940 Act and the Advisers Act. To
the extent that the applicable laws of the Islands of Bermuda, or any of the
provisions herein, conflict with applicable provisions of the 1940 Act and the
Advisers Act, the latter shall control.
<PAGE>
Page 4
RE: Service Agreement
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
INVESCO ASSET MANAGEMENT LIMITED
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
EXHIBIT 7
DIRECTORS' DEFERRED COMPENSATION PLAN
<PAGE>
DEFERRED COMPENSATION PLAN
FOR
TRUSTEES OF IDEX FUND, IDEX II SERIES FUND AND IDEX FUND 3
AND FOR
DIRECTORS OF WRL SERIES FUND, INC.
ARTICLE I
PURPOSE & AUTHORITY
1.1 PURPOSE. The purpose of the Plan is to offer
Trustees and Directors the opportunity to defer receipt of a portion of their
fees from the Funds, under terms advantageous both to the Trustees and Directors
and to the Funds.
1.2 EFFECTIVE DATE. The Plan is effective as of
January 1, 1996.
1.3 AUTHORITY. Any decision made or action taken by
the Funds and any of its officers or employees involved in the administration of
this Plan, or any member of the Committee, arising out of or in connection with
the construction, administration, interpretation and effect of the Plan shall be
within the absolute discretion of all and each of them, as the case may be, and
will be conclusive and binding on all parties. No officer or employee of the
Funds shall be liable for any act or action hereunder, whether of omission or
commission, by any other member or employee or by any agent to whom duties in
connection with the administration of the Plan have been delegated or, except in
circumstances involving the member's or employee's bad faith, for anything done
or omitted to be done by himself or herself.
ARTICLE II
DEFINITIONS
2.1 "ACCOUNT" means, for any Participant, the
memorandum account established for the Participant under Section 4.1.
2.2 "ACCOUNT BALANCE" means, for any Participant
as of any date, the aggregate amount reflected in his or her Account.
2.3 "BENEFICIARY" means the person or persons
designated from time to time in writing by a Participant to receive payments
under the Plan after the death of such Participant or, in the absence of such
designation or in the event that such designated person or persons predeceases
the Participant, the Participant's estate.
2.4 "COMMITTEE" means the committee established by
the Boards of Trustees and the Board of Directors (as applicable) of the Funds
to administer the Plan.
<PAGE>
2.5 "DEFERRAL ELECTION" means an election by a
Trustee or Director to defer a portion of his or her fees from the Funds under
the Plan, as described in Section 3.1.
2.6 "DIRECTOR" means a member of the Board of
Directors of WRL Series Fund, Inc.
2.7 "FUND" means IDEX Fund, IDEX II Series Fund,
IDEX Fund 3, or WRL Series Fund, Inc.
2.8 "PARTICIPANT" means a Trustee or Director or a
former Trustee or Director who has made a Deferral Election and who has not
received a distribution of his or her entire Account Balance.
2.9 "PLAN" means the Deferred Compensation Plan for
Trustees of IDEX Fund, IDEX II Series Fund and IDEX Fund 3 and for Directors of
WRL Series Fund, Inc.
2.10 "REVISED ELECTION" means an election made by a
Participant, in accordance with Section 5.2, to change the date as of which
payment of his or her Account Balance is to commence and/or the form in which
such payment is to be made.
2.11 "TRUSTEE" means a member of the Board of Trustees
of IDEX Fund, IDEX II Series Fund or IDEX Fund 3, but not including any trustee
emeritus.
2.12 "VALUATION DATE" means each March 31, June 30,
September 30, December 31, and such other dates as may be determined by the
Committee.
<PAGE>
ARTICLE III
DEFERRAL OF COMPENSATION
3.1 DEFERRAL ELECTION.
(a) During any calendar year, each individual who is a Trustee
or Director for such calendar year may, by properly completing a Deferral
Election, elect to defer all or a portion of the fees that, absent deferral,
would be paid to him or her for services rendered during the next following
calendar year.
(b) To be effective, a Deferral Election must be made in
writing by the Trustee or Director on a form furnished by the Committee on or
before the September 30 preceding the calendar year during which the amounts to
be deferred, absent deferral, would be paid to the Trustee or Director;
provided, however, that an individual who becomes a Trustee or Director after
the effective date of the Plan (as set forth in Section 1.2) may make a Deferral
Election with respect to fees that, absent deferral, would be paid to him or her
during the remainder of the calendar year in which he or she becomes a Trustee
or Director by filing the required written election with the Committee on or
before the date that is 30 days after the date on which he or she becomes a
Trustee or Director.
(c) Notwithstanding any provision of the Plan to the contrary,
a Trustee or Director may make a Deferral Election with respect to fees that,
absent deferral, would be paid to him or her in 1996 by filing the required
written election with the Committee on or before January 30, 1996.
(d) Once made, a Deferral Election shall become effective upon
approval by the Committee and is thereafter irrevocable, except to the extent
otherwise provided in Section 5.2. A Deferral Election will be deemed to have
been approved by the Committee if it is not disapproved by the Committee within
ten days of the date on which it is received.
(e) A Deferral Election filed by a Trustee or a Director must
specify either a percentage or a certain dollar amount of his or her fees to be
deferred under the Plan. In addition, the Deferral Election must specify the
date on which payment of the Trustee's or the Director's Account Balance is to
commence and the manner in which such payment is to be made.
(1) The Trustee or Director must specify
the date as of which payment of his or her Account Balance is to commence and
may specify that such payment is to commence as of:
(A) the termination of his or her status
as a Trustee or Director; or
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(B) a specific date (which may be
determined by reference to the termination of his or her status as a Trustee or
Director) that is at least five years after the date on which the amounts to be
deferred, absent deferral, would be paid to the Trustee or Director.
(2) The Trustee or Director must specify the
manner in which payment of his or her Account Balance is to be made and may
specify that such payment is to be made either in a single sum or in a number of
quarterly installments (not to exceed 40).
(f) Deferrals of a Trustee's or a Director's fees shall be
credited to the Plan ratably throughout the year (or, where applicable, the
portion of the year) to which the Deferral Election applies.
(g) Unless the Deferral Election form specifically provides
otherwise, a Deferral Election shall expire as of the last day of the calendar
year that includes the first day on which any amount, absent deferral, would be
paid to the Trustee or Director.
ARTICLE IV
TREATMENT OF DEFERRED AMOUNTS
4.1 MEMORANDUM ACCOUNT. The Funds shall establish on
their books an Account for each Participant. Amounts deferred by a Participant
pursuant to a Deferral Election shall be credited to the Participant's Account
on the date on which the deferred amounts, absent deferral, would have been paid
to the Participant. In addition, as of each Valuation Date, incremental amounts
determined in accordance with Section 4.2 will be credited or debited to each
Participant's Account. Any payments made to or on behalf of the Participant and
for his or her Beneficiary shall be debited from the Account. No assets shall be
segregated or earmarked in respect to any Account and no Participant or
Beneficiary shall have any right to assign, transfer, pledge or hypothecate his
or her interest or any portion thereof in his or her Account. The Plan and the
crediting of Accounts hereunder shall not constitute a trust or a funded
arrangement of any sort and shall be merely for the purpose of recording an
unsecured contractual obligation of the Fund.
4.2 HYPOTHETICAL INVESTMENT DESIGNATION.
(a) Subject to the provisions of this Section 4.2, a
Participant's Account shall be credited or debited with amounts equal to the
amounts that would be earned or lost with respect to the Participant's Account
Balance if amounts equal to that Account Balance were actually invested in A
Shares of the IDEX II Series Fund in the manner specified by the Participant. In
determining the number
<PAGE>
of such shares by which a Participant's Account Balance will be determined as of
any date, no front-end sales charge will be applied.
(b) Each Participant shall elect, in 10 percent increments,
one or more of the portfolios available under the IDEX II Series Fund to be used
as a measure of the hypothetical investment performance of his or her Account.
Any such election shall continue in effect until modified by a subsequent
election. A Participant may modify his or her hypothetical investment
designations in accordance with rules prescribed by the Committee.
(c) Any investment designation made under this Section shall
be hypothetical only. No Fund shall be obligated to invest any amounts in the
portfolios selected by a Participant, but will merely maintain bookkeeping
entries to reflect the hypothetical earnings or losses that would have been
credited to or debited from the Participant's Account if in fact amounts had
been invested in the selected portfolios.
(d) Notwithstanding the foregoing, until such time as an
exemptive order is granted with respect to the Plan by the Division of
Investment Management of the Securities and Exchange Commission which has the
effect of permitting hypothetical investment performance to be measured by the
performance of a Fund or Funds, each Account shall be deemed to earn interest at
an annual rate, effective on each January 1, determined by the Committee;
provided, however, that if the Committee does not select a new interest rate on
or prior to any subsequent January 1, the rate in effect prior to such date
shall remain in effect until a new rate is determined by the Committee. The
initial interest rate shall be a rate equal to the yield on 90-day U.S. Treasury
Bills.
ARTICLE V
PAYMENT OF DEFERRED AMOUNTS
5.1 FORM AND TIME OF PAYMENT. The benefits to which a
Participant or a Beneficiary may be entitled under the Plan shall be paid in
accordance with this Section 5.1.
(a) All payments under the Plan shall be made in cash.
(b) Except as otherwise provided in Section 5.2 or Section
5.3, payment of a Participant's Account Balance shall commence as of the
Valuation Date next following the date or dates specified in the Participant's
Deferral Election or Elections or (where applicable) the Participant's Revised
Election or Elections; provided, however, that where the Participant's Deferral
Election or Elections or (where
<PAGE>
applicable) the Participant's Revised Election or Elections specify that
payments with respect to a Participant's Account Balance are to commence as of a
specified date or specified dates not determined by reference to the termination
of the Participant's status as a Trustee or Director and the Participant's
status as such terminates prior to such date or dates, payment of the portion of
the Participant's Account Balance that was deferred to such date or dates shall
commence as of the Valuation Date next following the termination of the
Participant's status as a Trustee or Director.
(c) All payments shall be made in the form or forms specified
in the Participant's Deferral Election or Elections or (where applicable) the
Participant's Revised Election or Elections.
(d) To the extent a Participant has not specified the form or
time of payment of his or her Account Balance, payment will be made in a single
sum as soon as administratively practicable, but in any event within 90 days,
after the first Valuation Date following the termination of the Participant's
status as a Trustee or a Director.
(e) Notwithstanding any election made by a Participant, any
portion of a Participant's Account Balance that has not been paid to the
Participant as of the date of his or her death shall be paid to the
Participant's Beneficiary in the form elected by the Participant. If the
Participant dies after payments of his or her Account Balance have begun,
payments will continue as if the Participant had not died. If the Participant
dies before payments have commenced, payments will commence as soon as
administratively practicable, after the Valuation Date following the date on
which the Committee receives notification of the Participant's death.
5.2 REVISED ELECTION.
(a) Pursuant to a Revised Election, a Participant may specify:
(1) a date for the commencement of the
payment of the Participant's Account Balance that is after the date specified in
the Participant's Deferral Election; and/or
(2) a form of payment that calls for a greater
number of installment payments than that specified in the Participant's Deferral
Election, or a number of annual installment payments where the Participant
specified a single sum payment in his or her Deferral Election.
(b) If a Participant has made a Revised Election with respect
to amounts the payment of which has been deferred to a certain date, the
Participant may not thereafter make another Revised
<PAGE>
Election with respect to amounts the payment of which, as of the date on which
such Revised Election is made and before giving effect to the Revised Election,
has been deferred to the same date.
(c) To be effective, a Revised Election must be:
(1) made in writing by the Participant on a
form furnished for such purpose by the Committee;
(2) submitted to the Committee on or before
the date that is one year and one day before the date on which the portion of
the Participant's Account Balance that is the subject of the Revised Election
would, absent the Revised Election, first become payable; and
(3) approved by the Committee. A Revised
Election will be deemed to have been approved by the Committee if it is not
disapproved by the Committee within ten days of the date on which it is
received.
5.3 PAYMENTS IN THE EVENT OF FINANCIAL HARDSHIP.
(a) Notwithstanding any other provision of the Plan to the
contrary, a Participant may receive payment of all or a portion of his or her
Account Balance as soon as administratively practicable following the approval
by the Committee of a written application for such payment which demonstrates
that the Participant has incurred a severe financial hardship as a result of an
unanticipated emergency beyond the control of the Participant. The amount of any
payment made pursuant to this Section 5.3 shall be limited to the amount
necessary to meet the financial hardship (including any taxes that Participant
will be required to pay as a result of the payment).
(b) Where a Participant receives a payment of less than his or
her entire Account Balance pursuant to Subsection 5.3(a), the portion of the
Participant's Account Balance to which each hypothetical investment Fund
designation is applied shall be reduced proportionately so that the investment
Fund designations apply to the Participant's Account Balance in the same
percentages immediately before and immediately after the payment.
5.4 ACCELERATION OF PAYMENT.
(a) Notwithstanding any provision of the Plan to the contrary,
in the event the Committee determines that any portion of a Participant's
Account Balance is the subject of a final determination by the Internal Revenue
Service that such portion is includible in the Participant's taxable income, the
Participant's Account Balance shall be distributed to the extent it is so
includible. All income taxes and
<PAGE>
related interest and penalties associated with credits to or distributions from
a Participant's Account shall be borne by the Participant.
(b) Notwithstanding any other provision of this Plan to the
contrary, the portion of any Account Balances attributable to fees earned from a
Fund shall be paid to all or any group of similarly situated Participants or
Beneficiaries, whether before or after the termination of the Participants'
status as Trustees or Directors, upon the dissolution, liquidation or winding up
of such Fund, whether voluntary or involuntary, or the disposition of all or
substantially all of the Fund's assets (unless the Fund's obligations under the
Plan have been assumed by a financially responsible party purchasing such
assets) or upon the merger or consolidation of the Fund (unless prior to the
merger or consolidation the Fund's Boards of Trustees determines that the
deferrals under the Plan shall survive the merger or consolidation).
ARTICLE VI
MISCELLANEOUS
6.1 AMENDMENT. The Committee may modify or amend, in
whole or in part, any of or all the provisions of the Plan, or suspend or
terminate it entirely; provided, however, that any such modification, amendment,
suspension or termination may not, without the Participant's consent, adversely
affect any deferred amount credited to him or her for any period prior to the
effective date of such modification, amendment, suspension or termination. The
Plan shall remain in effect until terminated pursuant to this provision.
6.2 ADMINISTRATION. The Committee shall have the sole
authority to interpret the Plan and in its discretion to establish and modify
administrative rules for the Plan. All expenses and costs in connection with the
operation of this Plan shall be borne by the Corporation. The Corporation shall
have the right to deduct from any payment to be made pursuant to this Plan any
federal, state or local taxes required by law to be withheld, and any associated
interest and/or penalties.
6.3 GOVERNING LAW. The Plan shall be construed
and its provisions enforced and administered in accordance with the laws of the
state of Florida, except as such laws may be superseded by the federal law.
EXHIBIT 11
CONSENT OF PRICE WATERHOUSE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statements of
Additional Information for the Aggressive Growth, Emerging Growth, Growth,
Global, Tactical Asset Allocation, Equity-Income, Utility, Balanced, Bond,
Short-to-Intermediate Government, and Money Market Portfolios constituting part
of this Post-Effective Amendment No. 23 to the registration statement on Form
N-1A (the "Registration Statement") of our report dated January 31, 1996,
relating to the financial statements and financial highlights appearing in the
December 31, 1995 Annual Report of the WRL Series Fund, Inc., which is also
incorporated by reference into the Registration Statement. We also consent to
the incorporation by reference in the Statements of Additional Information for
the C.A.S.E. Growth, C.A.S.E. Growth and Income, and C.A.S.E. Quality Growth
Portfolios constituting part of the Registration Statement of our report dated
January 31, 1996, relating to the financial statements and financial highlights
appearing in the December 31, 1995 Annual Report of the C.A.S.E. portfolios of
the WRL Series Fund, Inc., which is also incorporated by reference into the
Registration Statement. We also consent to the reference to us under the heading
"Independent Accountants" in each Prospectus constituting part of the
Registration Statement.
PRICE WATERHOUSE LLP
Kansas City, Missouri
April 18, 1996
