As filed with the Securities and Exchange Commission on December 26, 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. 26 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 27 [X]
(Check appropriate box or boxes.)
WRL SERIES FUND, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
201 HIGHLAND AVENUE, LARGO, FLORIDA 33770-2597
--------------------------------------------------
(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.
[ ] on , pursuant to paragraph (b) of Rule 485.
[X] 60 days after filing pursuant to paragraph (a) of Rule 485.
[ ] on DECEMBER 31, 1996, pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2) of Rule 485
[ ] on DATE , pursuant to paragraph (a) (2) of Rule 485
[ ]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Cross Reference Sheet
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 .......................Other Information - 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 ......................Other Information - The
Fund and Its Shares
Item 7. Purchase of Securities Being Offered ....................Other Information -
Purchase and
Redemption
of Shares; Valuation of
Shares
Item 8. Redemption or Repurchase ................................Other Information -
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>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- ------------
<S> <C>
Item 13. Investment Objectives 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 ......................Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................................Purchase and
Redemption of Shares
Item 20. Tax Status ..............................................Taxes
Item 21. Underwriter .............................................Management of the
Fund - The Investment
Adviser - Distribution
Agreement
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ........................................Performance Related
Information
Item 23. Financial Statements .....................................Financial Statements
(incorporated by
reference)
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
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
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
Item 12. General Information and History .........................Not Applicable
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
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)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER 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 ......................Capital Stock of the
Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................................Purchase and
Redemption of Shares
Item 20. Tax Status ..............................................Taxes
Item 21. Underwriter .............................................Management of the
Fund - Distribution Agreement
Item 22. Calculations of Yield Quotations of Calculation of
Performance Data ........................................Performance Related
Information
Item 23. Financial Statements ....................................Incorporated by Reference
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Global Sector Portfolio
US Sector Portfolio
Foreign Sector Portfolio
Cross Reference Sheet
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 .......................Global Sector Portfolio,
US Sector Portfolio and
Foreign 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
LOCATION IN STATEMENT
PART B. 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>
v
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
Global Sector Portfolio
US Sector Portfolio
Foreign Sector Portfolio
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER 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
Other Practices..........................................Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities ......................Capital Stock of the Fund
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................................Purchase and Redemption of
Shares
Item 20. Tax Status ..............................................Taxes
Item 21. Underwriter .............................................Management of the Fund -
Distribution Agreement
Item 22. Calculations of Yield Quotations of
Performance Data ........................................Calculation of Performance
Related Information
Item 23. Financial Statements ....................................Financial Statements
</TABLE>
vi
<PAGE>
PROSPECTUS
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone: (800) 851-9777
(813) 585-6565
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of twenty-two separate series or investment
portfolios. The Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). This Prospectus pertains to sixteen of the
Portfolios of the Fund: Aggressive Growth Portfolio, Emerging Growth
Portfolio, International Equity Portfolio, Global Sector Portfolio, Global
Portfolio, Growth Portfolio, C.A.S.E. Growth Portfolio, U.S. Equity
Portfolio, Value Equity Portfolio, Tactical Asset Allocation Portfolio,
Equity-Income Portfolio, Utility Portfolio, Balanced Portfolio, Bond
Portfolio, Short-to-Intermediate Government Portfolio and Money Market
Portfolio (the "Portfolios"). For a brief description of these Portfolios,
see "Portfolios At A Glance" on page 8.
Shares of the Fund's Portfolios are currently sold only to 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 flexible premium 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 (the "SEC"), 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. 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.
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 and the Portfolios has been filed with
the SEC and is available upon request without charge by calling or writing
the Fund. The Statement of Additional Information (the "SAI") 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 OR DISCLOSURE
DOCUMENT FOR THE APPLICABLE VARIABLE ANNUITY CONTRACT OR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY. ALL PROSPECTUSES SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE.
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.
Prospectus Dated January 1, 1997
<PAGE>
WRL SERIES FUND, INC.
201 Highland Avenue
Largo, Florida 33770-2597
Telephone (813) 585-6565
(800) 851-9777
FINANCIAL HIGHLIGHTS ..................................................... 1
PORTFOLIOS AT A GLANCE .................................................... 8
PERFORMANCE INFORMATION ................................................... 11
THE PORTFOLIOS IN DETAIL .................................................. 12
MANAGEMENT OF THE FUND .................................................... 36
OTHER INFORMATION ......................................................... 45
DISTRIBUTIONS AND TAXES ................................................... 47
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information in the tables below is taken from each Portfolio's audited
financial statements, which have been incorporated by reference into the SAI.
(The information for the period 1/1/96 - 6/30/96 is unaudited.) The tables
provide information for one share of capital stock outstanding during the
respective Portfolio's fiscal periods ended on December 31 of each year.
Expense and income ratios and portfolio turnover rates have been annualized
for periods of less than one year. Total returns for periods of less than one
year are not annualized. A Fund 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>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO -------------------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ---------- -------- -------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ....... $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME . .18 .26 .22 .28 .36 .27 .30 .19 .31
NET GAINS (LOSSES) ON
SECURITIES (BOTH
REALIZED
AND UNREALIZED) ........ 4.65 10.97 (2.41) .79 .52 10.75 (.33) 6.29 1.83
---------- ---------- ------- ------- ------- -------- -------- ------ -------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS . 4.83 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48 2.14
---------- ---------- -------- -------- ------- -------- -------- ------ -------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET
INVESTMENT INCOME) ...... (.06) (.24) (.22) (.28) (.36) (.27) (.30) (.19) (.31)
DISTRIBUTIONS (FROM
CAPITAL GAINS) .......... .00 (3.14) .00 (.37) (.95) (1.97) (.04) (1.41) .00
---------- ---------- -------- -------- -------- -------- -------- ------ -------
DISTRIBUTIONS IN EXCESS
OF CAPITAL GAINS ........ .00 .00 (.03) .00 .00 .00 .00 .00 .00
---------- ---------- -------- -------- -------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS ....... (.06) (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60) (.31)
---------- ---------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE,
END OF PERIOD ............ $ 36.43 $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97
========== ========== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN* .............. 15.25% 47.12% (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04% 18.62%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) ............ $1,436,248 $1,195,174 $814,383 $934,810 $711,422 $393,511 $129,057 $74,680 $28,497
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ..... .82% .86% .84% .87% .86% .90% 1.00% 1.00% 1.00%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS ............... 1.06% .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18% 2.50%
RATIO OF COMMISSION
PAID TO NUMBER
OF SHARES ................ 4.44% N/A N/A N/A N/A N/A N/A N/A N/A
PORTFOLIO TURNOVER RATE ... 19.58% 130.48% 107.33% 77.91% 77.70% 7.27% 157.01% 123.80% 76.27%
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------- -----------
<S> <C> <C>
NET ASSET VALUE, $ 10.14 $ 10.00
BEGINNING OF PERIOD ......
INCOME FROM
INVESTMENT OPERATIONS .21 .00
NET INVESTMENT INCOME
NET GAINS (LOSSES) ON
SECURITIES (BOTH
REALIZED 1.00 .14
AND UNREALIZED) ....... ------- ---------
TOTAL INCOME (LOSS) FROM 1.21 .14
INVESTMENT OPERATIONS ------- ---------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET (.21) .00
INVESTMENT INCOME) .....
DISTRIBUTIONS (FROM .00 .00
CAPITAL GAINS) ......... ------- ---------
DISTRIBUTIONS IN EXCESS .00 .00
OF CAPITAL GAINS ....... ------- ---------
(.21) .00
TOTAL DISTRIBUTIONS ...... ------- ---------
NET ASSET VALUE, $ 11.14 $ 10.14
END OF PERIOD ........... ======= =========
10.90% 5.84%
TOTAL RETURN* .............
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $15,815 $ 716
(000 OMITTED) ...........
RATIO OF EXPENSES TO 1.00% .19%
AVERAGE NET ASSETS** ....
RATIO OF NET INVESTMENT
INCOME TO AVERAGE 1.84% .03%
NET ASSETS ..............
RATIO OF COMMISSION
PAID TO NUMBER N/A N/A
OF SHARES ............... 222.13% 8.55%
PORTFOLIO TURNOVER RATE ..
</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; INCLUDING THESE
CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL PERIODS SHOWN.
** 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>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO ----------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $ 10.07 $ 9.29 $ 9.22
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME ... .33 .69 .63 .72 .75 .86 .79 .75 .90
NET GAINS (LOSSES) ON
SECURITIES (BOTH REALIZED
AND UNREALIZED) .......... (.82) 1.55 (1.44) .95 .32 1.30 (.16) .78 .07
------- ------- ------- ------- ------- ------- ------- ------ ------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS ... (.49) 2.24 (.81) 1.67 1.07 2.16 .63 1.53 .97
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS )
DIVIDENDS (FROM NET
INVESTMENT INCOME) ........ (.29) (.69) (.63) (.72) (.75) (.86) (.79) (.75) (.90
DISTRIBUTIONS (FROM
CAPITAL GAINS) ............ .00 .00 .00 (.89) (.32) (.03) .00 .00 .00)
------- ------- ------- ------- ------- ------- ------- ------ ------
TOTAL DISTRIBUTIONS ....... (.29) (.69) (.63) (1.61) (1.07) (.89) (.79) (.75) (.90
------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE,
END OF PERIOD .............. $ 10.57 $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18 $ 9.91 $10.07 $ 9.29%
======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN* ................ (4.18%) 22.99% (6.94%) 13.38% 6.79% 18.85% 6.21% 14.65% 7.73
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) .............. $91,650 $96,972 $71,064 $90,715 $56,820 $22,291 $10,143 $7,025 $3,372
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ....... .55% .61% .59% .64% .70% .70% .69% .70% .70%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 5.99% 6.45% 5.94% 5.94% 6.49% 8.02% 8.82% 8.60% 8.96%
RATIO OF COMMISSION PAID TO
NUMBER OF SHARES ........... N/A N/A N/A N/A N/A N/A N/A N/A N/A
PORTFOLIO TURNOVER RATE ..... 54.89% 120.54% 131.73% 149.02% 80.73% 33.47% 18.09% 23.26% 21.54%
</TABLE>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $ 10.28 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
NET INVESTMENT INCOME ... .25 .13
NET GAINS (LOSSES) ON
SECURITIES (BOTH REALIZED
AND UNREALIZED) .......... (.89) .15
------- -------
TOTAL INCOME (LOSS) FROM
INVESTMENT OPERATIONS ... (.64) .28
------- -------
LESS DISTRIBUTIONS
DIVIDENDS (FROM NET
INVESTMENT INCOME) ........ (.38) .00
DISTRIBUTIONS (FROM
CAPITAL GAINS) ............ .04 .00
------- -------
TOTAL DISTRIBUTIONS ....... (.42) .00
------- -------
NET ASSET VALUE,
END OF PERIOD .............. $ 9.22 $ 10.28
======= =======
TOTAL RETURN* ................ (5.66%) 11.49%
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) .............. $ 1,400 $ 127
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** ....... .86% .12%
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS 7.17% 1.51%
RATIO OF COMMISSION PAID TO
NUMBER OF SHARES ........... N/A N/A
PORTFOLIO TURNOVER RATE ..... 134.76% 123.68%
<TABLE>
<CAPTION>
GLOBAL PORTFOLIO
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ----------------------------------- 12/3/92 TO
6/30/96 1995 1994 1993 12/31/92
------------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 15.52 $ 13.12 $ 13.62 $ 10.16 $10.00
Income From Investment Operations
Net Investment Income (Loss) ....................... .09 .10 .10 .04 (.02)
Net Gains on Securities (both realized and unrealized) 3.05 2.91 .10 3.72 .18
--------- --------- --------- ------- -------
Total Income From Investment Operations .............. 3.14 3.01 .20 3.76 .16
--------- --------- --------- ------- -------
Less Distributions
Dividends (from net investment income) ................. (.02) .00 (.10) (.04) .00
Dividends in excess of net investment income .......... .00 .00 (.01) .00 .00
Distributions (from capital gains) ..................... .00 (.61) (.56) (.26) .00
Distributions in excess of capital gains ............... .00 (.00) (.03) .00 .00
--------- --------- --------- ------- -------
Total Distributions .................................. (.02) (.61) (.70) (.30) .00
--------- --------- --------- ------- -------
Net Asset Value, End of Period .......................... $ 18.64 $ 15.52 $ 13.12 $ 13.62 $ 10.16
========= ======== ========= ======= =======
Total Return*** ......................................... 20.28% 23.06% .25% 35.05% 1.62%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ................. $ 445,040 $ 289,506 $ 261,778 $99,094 $ 508
--------- --------- --------- ------- -------
Ratio of Expenses to Average Net Assets**** ............. .91% .99% 1.01% 1.09% 2.48%
Ratio of Net Investment Income to Average Net Assets ... 1.04% .75% .73% .30% (2.23%)
Ratio of Commission paid to number of shares ........... 1.86% N/A N/A N/A N/A
Portfolio Turnover Rate ................................. 45.45% 130.60% 192.06% 79.93% .00%
</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;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** 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.
*** 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.
2
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
1/1/96 TO -----------------------------------------------------------------------------
6/30/96 1995 1994 1993 1992 1991 1990 1989 1988
----------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <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 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .......... .02 .05 .04 .02 .03 .05 .07 .07 .05
Net Gains on
Securities (both realized
and unrealized) ................. .00 .00 .00 .00 .00 .00 .00 .00 .00
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Income From
Investment Operations .......... .02 .05 .04 .02 .03 .05 .07 .07 .05
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ............... (.02) (.05) (.04) (.02) (.03) (.05) (.07) (.07) (.05)
Distributions (from capital gains) .00 .00 .00 .00 .00 .00 .00 .00 .00
------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions ............. (.02) (.05) (.04) (.02) .(03) (.05) (.07) (.07) (.05)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net Asset Value,
End of Period ..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ====== ======
Total Return* ....................... 2.49% 5.40% 3.44% 2.45% 3.03% 5.25% 7.09% 8.09% 5.77%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ................... $97,959 $80,544 $93,081 $45,782 $45,600 $33,695 $24,931 $6,233 $5,114
Ratio of Expenses to
Average Net Assets** .............. .53% .56% .60% .66% .70% .70% .66% .70% .70%
Ratio of Net Investment
Income to Average Net Assets ...... 5.04% 5.30% 3.59% 2.41% 2.99% 5.07% 7.09% 7.82% 6.26%
Ratio of Commission paid
to number of shares ............... N/A N/A N/A N/A N/A N/A N/A N/A N/A
Portfolio Turnover Rate ............. N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
PERIOD FROM
10/2/86 TO
1987 12/31/86
------ -----------
Net Asset Value,
Beginning of Period ............... $1.00 $1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .......... .04 .01
Net Gains on
Securities (both realized
and unrealized) ................. .00 .00
Total Income From
Investment Operations ........ .04 .01
----- -----
LESS DISTRIBUTIONS
Dividends (from net (.04) (.01)
investment income) ............... ----- -----
Distributions (from capital gains) .00 .00
Total Distributions ............. (.04) (.01)
----- -----
Net Asset Value,
End of Period .................... $1.00 $1.00
===== =====
Total Return* ....................... 4.56% 1.14%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ................... $ 582 $ 101
Ratio of Expenses to
Average Net Assets** .............. .89% .12%
Ratio of Net Investment
Income to Average Net Assets ...... 4.83% 1.14%
Ratio of Commission paid
to number of shares ............... N/A N/A
Portfolio Turnover Rate ............. N/A N/A
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO --------------------------------- 12/3/92 TO
6/30/96 1995 1994 1993 12/31/92
-------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 10.42 $ 9.72 $ 10.30 $ 10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) ................................ .28 .60 .50 .36 .02
Net Gains (Losses) on Securities (both realized and unrealized) (.29) .70 (.58) .29 .02
---------- ------ ------ ------- -------
Total Income (Loss) From Investment Operations ................ (.01) 1.30 (.08) .65 .04
---------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) .......................... (.17) (.60) (.50) (.35) (.02)
Distributions (from capital gains) .............................. .00 .00 .00 (.02) .00
---------- ------ ------ ------- -------
Total Distributions ........................................... (.17) (.60) (.50) (.37) (.02)
---------- ------ ------ ------- -------
Net Asset Value, End of Period ................................... $ 10.24 $10.42 $ 9.72 $ 10.30 $10.02
========== ====== ====== ======= =======
Total Return*** .................................................. (.12%) 13.54% (.43%) 4.58% .45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ........................ $ 24,836 $23,588 $20,356 $24,864 $2,509
Ratio of Expenses to Average Net Assets**** ...................... .69% .78% 0.81% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets ............ 5.46% 5.84% 4.95% 3.44% 3.24%
Ratio of Commission paid to number of shares ..................... N/A N/A N/A N/A N/A
Portfolio Turnover Rate .......................................... 26.87% 51.82% 93.70% 28.64% .00%
</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;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** 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.
*** 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.
3
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED PERIOD FROM
1/1/96 TO DECEMBER 31, 3/1/94 TO
6/30/96 1995 12/31/94
----------- -------------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................ $10.63 $ 9.24 $ 10.00
Income From Investment Operations
Net Investment Income .......................................... .18 .44 .34
Net Gains (Losses) on Securities (both realized and unrealized) .19 1.38 (.76)
------- ------- ------
Total Income (Loss) From Investment Operations ................ .37 1.82 (.42)
------- ------- ------
Less Distributions
Dividends (from net investment income) ......................... (.07) (.43) (.34)
Distributions (from capital gains) ............................. .00 .00 .00
------- ------- ------
Total Distributions ............................................ .07 (.43) (.34)
------- ------- ------
Net Asset Value, End of Period .................................. $ 10.93 $ 10.63 $ 9.24
======= ======= =======
Total Return* ................................................... 3.35% 19.80% (5.73%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ......................... $39,654 $31,114 $19,422
Ratio of Expenses to Average Net Assets** ....................... .87% .97% 1.00%
Ratio of Net Investment Income to Average Net Assets ........... 3.11% 4.38% 4.27%
Ratio of Commission paid to number of shares .................... .21% N/A N/A
Portfolio Turnover Rate ......................................... 47.40% 98.55% 57.73%
</TABLE>
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ------------------------ 3/31/93 TO
6/30/96 1995 1994 12/31/86
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 16.25 $ 11.55 $ 12.47 $ 10.00
Income From Investment Operations
Net Investment Income (Loss) ................................. .00 .01 .01 (.04)
Net Gains (Losses) on Securities (both realized and unrealized) 2.93 5.42 (.92) 2.51
--------- -------- -------- -------
Total Income (Loss) From Investment Operations ................ 2.93 5.43 (.91) 2.47
--------- -------- ------- -------
Less Distributions
Dividends (from net investment income) ......................... .00 .00 (.01) .00
Distributions (from capital gains) ............................. .00 (.73) .00 .00
--------- -------- ------- -------
Total Distributions ........................................... .00 (.73) (.01) .00
--------- -------- ------- -------
Net Asset Value, End of Period .................................. $ 19.18 $ 16.25 $ 11.55 $12.47
========= ======== ======= =======
Total Return*** ................................................. 18.09% 46.79% (7.36%) 24.71%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ....................... $387,576 $288,519 $182,650 $102,472
Ratio of Expenses to Average Net Assets**** ..................... .83% .91% .92% 1.00%
Ratio of Net Investment Income to Average Net Assets ........... (.14%) .03% .06% (.30%)
Ratio of Commission paid to number of shares .................... 5.77% N/A N/A N/A
Portfolio Turnover Rate ......................................... 40.39% 124.13% 72.62% 12.79%
</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;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** 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 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.
4
<PAGE>
EQUITY-INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, PERIOD FROM
1/1/96 TO ------------------------ 3/1/93 TO
6/30/96 1995 1994 12/31/93
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 12.86 $ 10.90 $ 11.23 $ 10.00
Income From Investment Operations
Net Investment Income ............................ .18 .37 .31 .19
Net Gains or (Losses) on
Securities (both realized and unrealized) ........ .71 2.33 (.33) 1.33
-------- -------- ------- -------
Total Income (Loss) From Investment Operations ... .89 2.70 (.02) 1.52
-------- -------- ------- -------
Less Distributions
Dividends (from net investment income) ........... (.09) (.37) (.31) (.19)
Distributions (from capital gains) ................. .00 (.37) .00 (.10)
-------- -------- ------- -------
Total Distributions ............................... (.09) (.74) (.31) (.29)
-------- -------- -------- -------
Net Asset Value, End of Period ...................... $ 13.66 $ 12.86 $ 10.90 $ 11.23
======== ======== ======== =======
Total Return* ....................................... 6.91% 24.66% (.53%) 13.49%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $302,736 $256,806 $183,867 $90,560
Ratio of Expenses to Average Net Assets** .......... .83% .87% .89% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.73% 3.07% 2.78% 1.70%
Ratio of Commission paid to number of shares ....... 5.68% N/A N/A N/A
Portfolio Turnover Rate ............................. 19.24% 52.59% 53.50% 27.41%
</TABLE>
AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR PERIOD FROM
1/1/96 TO ENDED 3/1/94 TO
6/30/96 12/31/95 12/31/94
----------- -------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 13.25 $ 9.86 $ 10.00
Income From Investment Operations
Net Investment Income (Loss) ..................... (.01) (.06) .02
Net Gains (Losses) on
Securities (both realized and unrealized) ........ .77 3.96 (.14)
-------- --------- -------
Total Income (Loss) From Investment Operations ... .76 3.90 (.12)
-------- --------- -------
Less Distributions
Dividends (from net investment income ............ .00 .00 (.02)
Distributions (from capital gains) ................. .00 (.51) .00
-------- --------- -------
Total Distributions ............................... .00 (.51) (.02)
-------- --------- -------
Net Asset Value, End of Period ...................... $ 14.0 $ 13.25 $ 9.86
======== ========= =======
Total Return*** ..................................... 5.74 38.02% (1.26%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $188,998 $ 158,534 $ 38,826
Ratio of Expenses to Average Net Assets**** ........ .84 1.07% 1.00%
Ratio of Net Investment Income to Average Net Assets (.1 (.48%) 0.20%
Ratio of Commission paid to number of shares ....... 7.20% N/A N/A
Portfolio Turnover Rate ............................. 49.72 108.04% 89.73%
</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; INCLUDING
THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL PERIODS SHOWN.
** 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 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.
5
<PAGE>
TACTICAL ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 1/3/95 TO
6/30/96 12/31/95
----------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period ................ $ 11.49 $ 10.00
Income From Investment Operations
Net Investment Income .......................... .18 .41
Net Gains (Losses) on Securities
(both realized and unrealized) .................. .38 1.93
-------- ---------
Total Income From Investment Operations ......... .56 2.34
-------- ---------
Less Distributions
Dividends (from net investment income) .......... (.07) (.41)
Distributions (from capital gains) ................ .00 (.44)
-------- ----------
Total Distributions .............................. (.07) (.85)
-------- ---------
Net Asset Value, End of Period ...................... $ 11.98 $ 11.49
======== =========
Total Return* ....................................... 4.81% 20.09%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $186,157 $ 120,531
Ratio of Expenses to Average Net Assets ............. .83% .93%
Ratio of Net Investment Income to Average Net Assets 3.01% 3.76%
Ratio of Commission paid to number of shares ....... 4.83% N/A
Portfolio Turnover Rate ............................. 20.57% 38.68%
</TABLE>
UTILITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED PERIOD FROM
1/1/96 TO DECEMBER 31, 3/1/94 TO
6/30/96 1995 12/31/94
------------ ----------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 11.12 $ 9.30 $ 10.00
Income From Investment Operations
Net Investment Income ............................ .18 .46 .43
Net Gains (Losses) on Securities
(both realized and unrealized) ................... .33 1.93 (.70)
--------- ------- ------
Total Income (Loss) From
Investment Operations ........................... .51 2.39 (.27)
--------- ------- ------
Less Distributions
Dividends (from net investment income) ........... (.08) (.46) (.43)
Distributions (from capital gains) ................. .00 (.11) .00
--------- ------- ------
Total Distributions ............................... (.08) (.57) (.43)
--------- ------- ------
Net Asset Value, End of Perid ....................... $ 11.55 $ 11.12 $ 9.30
========= ======= =======
Total Return** ...................................... 4.47% 25.25% (4.58%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........... $31,375 $24,607 $10,482
Ratio of Expenses to Average Net Assets*** ......... .88% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets 3.19% 4.56% 5.36%
Ratio of Commission paid to number of shares ....... 4.83% N/A N/A
Portfolio Turnover Rate ............................. 41.38% 78.34% 36.13%
</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;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** 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.
6
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 5/1/95 TO
6/30/96 12/31/95
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 11.66 $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .05 .12
Net Gains (Losses) on Securities (both realized and unrealized) .74 2.49
-------- -------
Total Income (Loss) From Investment Operations ................ .79 2.61
-------- -------
Less Distributions
Dividends (from net investment income) ....................... .00 (.12)
Distributions (from net realized gains) ........................ .00 (.83)
-------- -------
Total Distributions ........................................... .00 (.95)
-------- -------
Net Asset Value, End of Period ................................... $12.45 $ 11.66
======== =======
Total Return* .................................................... 6.77% 20.65%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........................ $7,347 $ 2,578
Ratio of Expenses to Average Net Assets** ........................ 1.65% 1.00%
Ratio of Net Investment Income to Average Net Assets ............ .79% 1.02%
Ratio of Commission paid to number of shares ..................... 6.03% N/A
Portfolio Turnover Rate .......................................... 90.07% 121.62%
</TABLE>
GLOBAL SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96* TO
8/31/96
----------
<S> <C>
Net Asset Value, Beginning of Period ............................. $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .03
Net Gains (Losses) on Securities (both realized and unrealized) (.05)
--------
Total Income (Loss) From Investment Operations ................ (.02)
--------
Less Distributions
Dividends (from net investment income) ....................... .00
Distributions (from net realized gains) ........................ .00
--------
Total Distributions ........................................... $ .00
--------
Net Asset Value, End of Period ................................... $ 9.98
========
Total Return*** .................................................. (.16%)
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) .......................... $ 1,872
Ratio of Expenses to Average Net Assets .......................... 2.55%
Ratio of Net Investment Income to Average Net Assets ............ 1.55%
Ratio of Commission paid to number of shares ..................... 6.28%
Portfolio Turnover Rate .......................................... 3.25%
</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;
INCLUDING THESE CHARGES WOULD REDUCE TOTAL RETURN FIGURES FOR ALL
PERIODS SHOWN.
** 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
<PAGE>
AVERAGE NET ASSETS WOULD HAVE BEEN 4.15% ABSENT THE ADVISORY FEE WAIVER
BY WESTERN RESERVE LIFE.
*** THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN IS NOT
ANNUALIZED.
7
<PAGE>
VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96* TO
8/31/96
----------
<S> <C>
Net Asset Value, Beginning of Period ............................. $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .03
Net Gains (Losses) on Securities (both realized and unrealized) .04
--------
Total Income (Loss) From Investment Operations ................ .07
--------
Less Distributions
Dividends (from net investment income) ....................... .00
Distributions (from net realized gains) ........................ .00
--------
Total Distributions ........................................... $ .00
--------
Net Asset Value, End of Period ................................... $10.07
========
Total Return* .................................................... .77%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........................ $ 3,286
Ratio of Expenses to Average Net Assets .......................... 1.56%
Ratio of Net Investment Income to Average Net Assets ............ 1.32%
Ratio of Commission paid to number of shares ..................... 8.00%
Portfolio Turnover Rate .......................................... 0.00%
</TABLE>
* THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN IS NOT
ANNUALIZED.
PORTFOLIOS AT A GLANCE
The Fund consists of twenty-two portfolios. This Prospectus provides
information on sixteen portfolios of the Fund. WRL Investment Management,
Inc. ("WRL Management") serves as the Fund's investment adviser ("Investment
Adviser"), and contracts on behalf of each Portfolio with an investment
sub-adviser ("Sub-Adviser") to provide investment advisory assistance and
portfolio management advice for each Portfolio. See "Management of the Fund",
p. 36. Each Portfolio has its own distinct investment objective and policies
which are summarized below:
\diamond\AGGRESSIVE GROWTH PORTFOLIO
OBJECTIVE: Seeks long-term capital appreciation.
INVESTMENT POLICY: The Aggressive Growth Portfolio invests primarily in a
diversified, actively managed portfolio of equity securities, such as common
stock or preferred stocks, or securities convertible into or exchangeable for
equity securities, including warrants and rights.
INVESTOR PROFILE: For the investor who aggressively seeks capital growth, and
who can tolerate substantial volatility in the value of an investment.
SUB-ADVISER: Fred Alger Management, Inc.
\diamond\EMERGING GROWTH PORTFOLIO
OBJECTIVE: Seeks capital appreciation by investing primarily in common stocks
of small and medium-sized companies.
INVESTMENT POLICY: The Emerging Growth Portfolio invests 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, believed to have the potential to become major
enterprises.
INVESTOR PROFILE: For the investor seeking greater opportunities for growth
of capital and willing to accept certain special risks. See "Portfolio
Securities and Risk Factors" on p. 28.)
SUB-ADVISER: Van Kampen American Capital Asset Management, Inc.
INTERNATIONAL EQUITY PORTFOLIO
\diamond\INTERNATIONAL EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The International Equity Portfolio invests primarily in
the common stock of foreign issuers traded on overseas exchanges and in
foreign over-the-counter ("OTC") markets.
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INVESTOR PROFILE: For the investor who seeks long-term growth of capital
through investments in foreign securities. The investor should also be able
to tolerate the significant risk factors associated with foreign investing.
CO-SUB-ADVISERS: Scottish Equitable Investment Management Limited and GE
Investment Management Incorporated.
\diamond\GLOBAL PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital in a manner consistent with
preservation of capital.
INVESTMENT POLICY: The Global Portfolio invests primarily in common stocks of
foreign and domestic issuers.
INVESTOR PROFILE: For the investor who wants capital growth without being
limited to investments in U.S. securities. The investor should also be able
to tolerate the significant risk factors associated with foreign investing.
SUB-ADVISER: Janus Capital Corporation
\diamond\GROWTH PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Growth Portfolio invests primarily in common stocks
listed on a national securities exchange or traded on NASDAQ, which the
Portfolio's Sub-Adviser believes have a good potential for capital growth.
INVESTOR PROFILE: For the investor who wants capital growth in a broadly
diversified stock portfolio, and who can tolerate significant fluctuations in
value.
SUB-ADVISER: Janus Capital Corporation
\diamond\C.A.S.E. GROWTH PORTFOLIO
OBJECTIVE: Seeks capital growth through investments in common stocks of small
to medium-sized companies.
INVESTMENT POLICY: The C.A.S.E. Growth Portfolio will primarily 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.
INVESTOR PROFILE: For the investor who seeks growth in excess of the Standard
& Poor's Index of 500 Common Stocks (the "S&P 500") on a quarterly basis, but
wants a diversified portfolio that seeks to have investments in companies
that have below-market risk characteristics. The investor should be
comfortable with the price fluctuations of a stock portfolio.
SUB-ADVISER: C.A.S.E. Management, Inc.
\diamond\U.S. EQUITY PORTFOLIO
OBJECTIVE: Seeks long-term growth of capital.
INVESTMENT POLICY: The U.S. Equity Portfolio invests primarily in equity
securities of U.S. companies. Under normal conditions, the Portfolio will
invest at least 65% of its assets in equity securities, consisting of common
stocks and preferred stocks, and securities convertible into common stocks,
consisting of convertible bonds, convertible debentures, convertible notes,
convertible preferred stocks and warrants or rights issued by U.S. companies.
INVESTOR PROFILE: For the investor seeking growth from a broadly diversified
portfolio consisting of both "value" and "growth" equities, which the
Portfolio's Sub-Adviser believes will have characteristics similar to the S&P
500 and the potential to outperform the S&P 500 on a total return basis. The
investor should be comfortable with the price fluctuations of a stock
portfolio.
SUB-ADVISER: GE Investment Management Incorporated
\diamond\VALUE EQUITY PORTFOLIO
OBJECTIVE: Seeks to achieve maximum, consistent total return with minimum
risk to principal.
INVESTMENT POLICY: The Value Equity Portfolio invests 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.
INVESTOR PROFILE: For the investor who seeks both capital preservation and
long-term capital appreciation.
SUB-ADVISER: NWQ Investment Management Company, Inc.
\diamond\GLOBAL SECTOR PORTFOLIO
OBJECTIVE: Seeks growth of capital.
INVESTMENT POLICY: The Global Sector Portfolio follows an asset allocation
strategy that shifts among a wide range of asset categories and within them,
market sectors. The Portfolio will invest primarily 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
9
<PAGE>
and other asset-backed securities and securities rated below investment
grade; real estate investment trusts ("REITs"); equity securities of
companies involved in the exploration, mining, processing, or dealing or
investing in gold; gold bullion; and domestic money market instruments.
INVESTOR PROFILE: For the investor who seeks long-term capital appreciation
and protection of buying power who, at the same time, can tolerate an
increased exposure to risk. The Portfolio is geared towards investors willing
to concentrate in industries and countries that offer an opportunity for
greater capital appreciation and are willing to take the additional risks
associated with sector investing and asset rotation.
CO-SUB-ADVISERS: Meridian Investment Management Corporation and INVESCO
Global Asset Management Limited
\diamond\TACTICAL ASSET ALLOCATION PORTFOLIO
OBJECTIVE: Seeks preservation of capital and competitive investment returns.
INVESTMENT POLICY: The Tactical Asset Allocation Portfolio invests primarily
in stocks, U.S. Treasury bonds, notes and bills, and money market funds.
INVESTOR PROFILE: For the investor who wants a combination of capital growth
and income, and who is comfortable with the risks associated with an actively
traded portfolio which shifts assets between equity and debt.
SUB-ADVISER: Dean Investment Associates
\diamond\EQUITY-INCOME PORTFOLIO
OBJECTIVE: Seeks to provide current income, long-term growth of income and
capital appreciation.
INVESTMENT POLICY: The Equity-Income Portfolio invests primarily in a blend
of equity and fixed-income securities, including common stocks, income
producing securities convertible into common stock, and fixed-income
securities.
INVESTOR PROFILE: For the investor who wants current income with the prospect
of income growth, plus the prospect of capital growth. The investor should be
comfortable with the price fluctuations of a stock portfolio.
SUB-ADVISER: Luther King Capital Management Corporation
UTILITY PORTFOLIO
\diamond\UTILITY PORTFOLIO
OBJECTIVE: Seeks to achieve high current income and moderate capital
appreciation.
INVESTMENT POLICY: The Utility Portfolio invests primarily in a diversified
portfolio of 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.
INVESTOR PROFILE: For the investor who seeks high current income and moderate
capital appreciation and is willing to accept certain special risks
associated with investments in utility companies.
SUB-ADVISER: Federated Investment Counseling
\diamond\BALANCED PORTFOLIO
OBJECTIVE: Seeks preservation of capital, reduced volatility, and superior
long-term risk-adjusted returns.
INVESTMENT POLICY: The Balanced Portfolio invests primarily in common stock,
convertible securities and fixed-income securities.
INVESTOR PROFILE: For the investor who wants capital growth and income from
the same investment, but who also wants an investment which has the prospect
of sustaining its interim principal value through maintaining a balance
between equity and debt. The Portfolio is not designed for investors who
desire a consistent level of income.
SUB-ADVISER: AEGON USA Investment Management, Inc.
\diamond\BOND PORTFOLIO
OBJECTIVE: Seeks 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.
INVESTMENT POLICY: The Bond Portfolio invests at least 65% of assets in debt
securities issued by the U.S. Government and its agencies and in medium to
high-quality corporate debt securities.
INVESTOR PROFILE: For the investor seeking current income consistent with
preservation of capital, and who can tolerate the fluctuation in the
principal associated with changes in interest rates.
SUB-ADVISER: Janus Capital Corporation
10
<PAGE>
\diamond\SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
OBJECTIVE: Seeks as high a level of current income as is consistent with
preservation of capital.
INVESTMENT POLICY: The Short-to-Intermediate Government Portfolio seeks to
achieve its objective by investing primarily in U.S. Government securities.
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.
INVESTOR PROFILE: For the investor seeking current income consistent with
preservation of capital, and who can tolerate the fluctuation in the
principal associated with changes in interest rates.
SUB-ADVISER: AEGON USA Investment Management, Inc.
\diamond\MONEY MARKET PORTFOLIO
OBJECTIVE: Seeks to obtain maximum current income consistent with
preservation of principal and maintenance of liquidity.
INVESTMENT POLICY: The Money Market Portfolio maintains a dollar-weighted
average portfolio maturity of not more than 90 days by investing in U.S.
dollar-denominated securities which have effective maturities of not more
than 13 months and present minimal credit risks.
INVESTOR PROFILE: For the investor seeking current income, preservation of
capital and maintenance of liquidity.
SUB-ADVISER: J.P. Morgan Investment Management Inc.
PERFORMANCE INFORMATION
The Fund may 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 performance information which show total return and yield
for the Separate Accounts, Policies or Annuity Contracts.
\diamond\TOTAL RETURN
Total return refers to the average annual percentage change in value of an
investment in a Portfolio held for a stated period of time as of a stated
ending date. When a Portfolio has been in operation for the stated period,
the total return for such period 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. They also reflect the
deduction of a proportionate share of a Portfolio's investment advisory fees
and expenses, and assume that all dividends and capital gains distributions
during the period are reinvested in the Portfolio when made.
\diamond\YIELD
Yield quotations for the Bond Portfolio and the Short-to-Intermediate
Government Portfolio refer to the income generated by a hypothetical
investment in a 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.
The Money Market Portfolio yield quotation refers to the income generated by
a hypothetical investment in the Money Market 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 Money Market Portfolio refers to the same
calculation adjusted to reflect the compounding effect of earnings on
reinvested dividends.
\diamond\PERFORMANCE SHOWN IN ADVERTISING
The Portfolios may 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. They may also
11
<PAGE>
disclose other nonstandardized data, such as cumulative total returns, actual
year-by-year returns, or any combination thereof.
\diamond\PERFORMANCE RANKINGS AND COMPARISONS TO STANDARD INDEXES
Performance of the Portfolios may also be compared to: (1) indexes, such as
the S&P 500, the Dow Jones Industrial Average or other widely recognized
indexes; (2) other mutual funds whose performance is reported by all or any
of Lipper Analytical Services, Inc., ("Lipper"), Variable Annuity Research &
Data Service ("VARDS") and Morningstar, Inc. ("Morningstar"), or as 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 indexes,
such as the S&P 500, may assume the reinvestment of dividends but usually do
not reflect any "deduction" for the expenses associated with operating and
managing a fund. In connection with a ranking, a Portfolio will also provide
information in sales literature, advertisements, and reports with respect to
the ranking, including the particular category of fund 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 any fee waivers and/or expense
reimbursements.
(See the SAI for more information about the Portfolios' performance.)
THE PORTFOLIOS IN DETAIL
This section takes a closer look at each Portfolio's policies and
techniques, and the securities in which the Portfolios invest. PLEASE
CAREFULLY REVIEW THE "OTHER INVESTMENT POLICIES AND RESTRICTIONS" AND
"PORTFOLIO SECURITIES AND RISK FACTORS" SECTIONS OF THIS PROSPECTUS FOR A
DESCRIPTION OF EACH OF THE PORTFOLIO INVESTMENTS IDENTIFIED BELOW AND THE
RISKS ASSOCIATED WITH THOSE INVESTMENTS. You should carefully consider your
goals, time horizon and risk tolerance before choosing a Portfolio.
Each Portfolio's investment objective and, unless otherwise noted,
investment policies and techniques, may be changed by the Board of Directors
of the Fund (the "Fund's Board") without Shareholder or Policyholder
approval. 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.
You will be notified of any such change so that you may determine whether
that Portfolio remains an appropriate investment for your Policy or Annuity
Contract. More information about each Portfolio's investment techniques and
restrictions is set forth in the Fund's Statement of Additional Information,
which is available without charge upon request.
PORTFOLIOS POLICIES AND TECHNIQUES
\diamond\AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks to achieve its investment 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 increase fluctuations in the
Portfolio's net asset value.
Except during temporary defensive periods, the Portfolio invests at least 85%
of its net assets in equity securities of companies of any size. The
Portfolio will generally invest in companies whose securities are traded on
domestic stock exchanges or in the OTC 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.
To afford the Portfolio the flexibility to take advantage of new
opportunities for investment in accordance with its investment objective, the
Portfolio may hold up to 15%
12
<PAGE>
of its net assets in money market instruments and repurchase agreements and
in 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. The Portfolio will only invest in
convertible debt securities rated in one of the three highest rating
categories by any nationally recognized statistical rating organizations
("NRSRO"). (See the SAI for further information on such ratings.)
The Portfolio may also borrow money for the purchase of additional securities
(leverage). 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, which is a
speculative technique, offer an opportunity for greater capital appreciation,
but at the same time increase exposure to capital risk.
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 it may enter into
futures contracts on securities indexes and purchase and sell call and put
options on these futures contracts.
The Portfolio may also invest in short sales; restricted and illiquid (up to
15% of net assets) securities (including those issued under Rule 144A); U.S.
Government securities; foreign bank obligations; variable rate master demand
notes; and repurchase agreements.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\EMERGING GROWTH PORTFOLIO
The Emerging Growth Portfolio seeks to achieve its investment 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 involve 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.
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
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 than 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. 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.
While the Portfolio invests primarily in common stocks, it may invest to a
limited extent in other securities such as preferred stocks, convertible
securities, warrants (up to 5% of assets), illiquid securities (up to 15% of
its net assets), repurchase agreements, restricted securities (up to 5% of
assets) and up to 20% of its total assets in securities of foreign issuers,
including American Depositary Receipts ("ADRs").
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.
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."
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
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.
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<PAGE>
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
opinion of the Sub-Adviser, a temporary defensive position is warranted, or
so that the Portfolio may receive a return on its idle cash.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio seeks to achieve its investment 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, the Portfolio may also invest in preferred
stocks convertible securities, warrants or rights, or fixed-income
instruments when the Co-Sub-Advisers deem appropriate.
Division of daily cash inflows attributable to shares purchased by the
Separate Accounts will be made with the objective of keeping the assets
managed by each Co-Sub-Adviser. It is anticipated that each Co-Sub-Adviser
may purchase securities for the Portfolio with its allocation of daily cash
inflows which are different from the securities purchased by the other
Co-Sub-Adviser with its respective allocation. In return, each Co-Sub-Adviser
will receive compensation, paid monthly, equal to 50% of the investment
management fees received by the Investment Adviser with respect to the amount
of Portfolio assets managed by each Co-Sub-Adviser during such period, and,
until at least December 31, 1997, less 50% of the amount of any excess
expenses paid by the Investment Adviser on behalf of the Portfolio pursuant
to an expense limitation (see "Management of the Fund - Investment Adviser,"
p. 37).
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. Under normal circumstances, the Portfolio will not be
invested in issuers of fewer than twelve countries other than the U.S. at any
time. (For this purpose, 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.) 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.
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 through both active country allocation and stock
selection in international equity markets.
In selecting investments on behalf of the Portfolio, GEIM seeks companies
that are expected to grow faster than relevant markets and whose securities
are available at a price that does not fully reflect the potential growth of
those companies. GEIM typically focuses on companies that possess one or more
of a variety of characteristics, including strong earnings growth relative to
price-to-earnings and price-to-cash earnings ratios, low price-to-book value,
strong cash flow, presence in an industry experiencing strong growth and high
quality management.
Under normal circumstances, the Portfolio will seek to invest as described
above, and may for cash management purposes and to meet operating expenses,
invest a portion of its total assets in cash and/or money market instruments
as described under "Portfolio Securities and Risk Factors" below, pending
investment in accordance with its investment objective and policies. During
periods when a Co-Sub-Adviser believes there are unstable market, economic,
political or currency conditions abroad, the portfolio may assume a temporary
defensive posture and (i) restrict the securities markets in which its assets
will be invested and/or invest all or a significant portion of its assets in
securities of the types described above issued by companies incorporated in
and/or having their principal activities in the United States, or (ii)
without limitation, hold cash and/or invest in such money market instruments.
To the extent that it holds cash or invests in money market instruments, the
Portfolio may not achieve its investment objective of long-term growth of
capital.
The Portfolio may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts and related
options, forward foreign currency contracts, and interest rate swaps, caps
and floors for hedging purposes only and not for speculation, subject to
certain limitations.
The Portfolio may invest in convertible securities; stock index futures
contracts, including indexes on specific securities, as a hedge against
changes in the market
14
<PAGE>
value of common stocks; interest rate future contracts as a hedge against
changes in interest rates; and illiquid securities (up to 15% of net assets).
\diamond\GLOBAL SECTOR PORTFOLIO
The Global Sector Portfolio seeks to achieve its investment 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 OTC 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. Meridian Investment Management Corporation ("Meridian") (one of
the Co-Sub-Advisers) determines the allocation of the Portfolio's assets
among the asset categories described above, based on proprietary quantitative
research.
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 U.S., 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 the SAI 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 U.S.
Market sectors within the asset categories include the industry, country or
bond markets available for investment. After asset allocations and relative
portfolio weightings of such allocations have been designated by Meridian,
INVESCO Global Asset Management Limited ("INVESCO") (the Portfolio's other
Co-Sub-Adviser) will select the specific securities within each asset
allocation category and the market sector in which the Portfolio will invest.
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. If Meridian's assessment determines these conditions to be
abnormal, 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 the SAI 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 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.
In selecting 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 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 OTC market.
Most of the 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) in
which the Portfolio may invest must be rated in the four highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P"). However, the Portfolio may also invest up to 15%
of its total assets in debt securities rated below these four
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levels (commonly referred to as "junk bonds"). In no event will the Portfolio
ever invest in a debt security rated below Caa by Moody's or CCC by S&P. (See
Appendix A for a description of debt securities ratings.)
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. 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, the Portfolio may enter into
forward foreign currency contracts.
Investments made by the Portfolio 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.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\GLOBAL PORTFOLIO
The Global Portfolio seeks to achieve its investment objective by investing
in companies 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. The
Portfolio may, on a temporary basis, invest all of its assets in less than
five, or even a single country. When recommending allocations of the
Portfolio's investments among regions and countries, the Portfolio's
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 when the Sub-Adviser
believes they are advisable, typically either as a result of a security
having reached a price objective or by reason of developments not foreseen at
the time of the security's purchase.
Because the sale of a security ordinarily will be made without reference to
the length of time the 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 a security has been held for an insufficient length
of time. Increased portfolio turnover necessarily results in correspondingly
higher brokerage costs for the Portfolio. These are ultimately borne by the
Policyholders.
The Sub-Adviser seeks to reduce the risks associated with these
considerations through diversification and active professional management.
The Portfolio seeks to invest substantially all of its assets in common
stocks when the Sub-Adviser believes that the relevant market environment
favors profitable investing in equity securities. Common stock investments
are selected from industries and companies that the Sub-Adviser 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 (up to 100% of
assets) 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, bank obligations,
high-grade commercial paper, preferred stocks, certificates of deposits or
other securities of U.S. issuers. These investments will be made when the
Sub-Adviser perceives an opportunity for capital growth from such securities,
or to enable the Portfolio to 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
government entities. The Portfolio may invest up to 15% of its net assets in
illiquid securities.
The Portfolio may also invest in futures contracts, related options
repurchase and reverse repurchase agreements, forward foreign currency
contracts and other derivative instruments, up to 5% in high-yield bonds, and
when issued securities (up to 20% of its assets).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
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\diamond\GROWTH PORTFOLIO
The Growth Portfolio seeks to achieve its investment objective by investing
substantially all of its assets in common stocks when the Sub-Adviser
believes that the relevant market environment favors profitable investing in
those securities.
Common stock investments are selected in industries and companies which the
Sub-Adviser 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 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.
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, in such case, 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.
The Portfolio may also invest in repurchase and reverse repurchase
agreements, illiquid securities (up to 15% of its net assets), futures
contracts, related options forward foreign currency contracts, and other
derivatives, and when-issued securities (up to 20% of its assets). The
Portfolio may also invest up to 25% of its net assets in foreign securities
(which may be pruchased through ADRs, EDRs and GDRs) and up to 5% in
high-yield bonds.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\C.A.S.E. GROWTH PORTFOLIO
The C.A.S.E. Growth Portfolio seeks to achieve its investment objective
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. 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 if its assets in common
stocks when the Sub-Adviser believes that the relevant market environment
favors profitable investing in those securities. Common stock investments are
selected from industries and companies that the Sub-Adviser 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 OTC 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 Policyholders' 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 for significant future growth.
As a result of these investment policies, the market price of many of the
securities purchased by the Portfolio may fluctuate widely; and 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. Because investment
changes ordinarily will be made without reference
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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.
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'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.
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.
The Portfolio may engage in hedging strategies to attempt to reduce the
overall length 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.
The Portfolio may invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets), when-issued securities and
"special situations."
The Portfolio may invest up to 25% of its net assets in the securities of
foreign issuers and obligors. Investments may be made in both domestic and
foreign companies. If appropriate and available, the Sub-Adviser may purchase
foreign securities through ADRs, EDRs, GDRs and other types of receipts of
shares evidencing ownership of the underlying foreign securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\U.S. EQUITY PORTFOLIO
The U.S. Equity Portfolio seeks to achieve its investment objective through
investment primarily in equity securities of U.S. companies. In pursuing its
objective, the Portfolio, under normal conditions, invests at least 65% of
its assets in equity securities, including common stocks and preferred
stocks, and securities convertible into common stocks, including convertible
bonds, convertible debentures, convertible notes, convertible preferred
stocks and warrants or rights issued by U.S. companies. In managing the
assets of the Portfolio, the Sub-Adviser uses a combination of
"value-oriented" and "growth-oriented" investing. Value-oriented investing
involves seeking securities that may have low price-to-earnings ratios, or
high yields, or that sell for less than intrinsic value as determined by the
Sub-Adviser, or that appear attractive on a dividend discount model. These
securities generally are sold from the Portfolio's portfolio when their
prices approach targeted levels. Growth-oriented investing generally involves
buying securities with above average earnings growth rates at reasonable
prices. The Portfolio holds these securities until the Sub-Adviser determines
that their growth prospects diminish or that they have become overvalued when
compared with alternative investments.
In investing on behalf of the Portfolio, the Sub-Adviser seeks to produce a
portfolio that it believes will have similar characteristics to the S&P 500,
by virtue of blending investments in both "value" and "growth" securities.
Since the Portfolio's strategy seeks to combine the basic elements of
companies comprising the S&P 500, but is designed to select investments
deemed to be the most attractive within each category, the Sub-Adviser
believes that the strategy should be capable of outperforming the U.S. equity
market as reflected by the S&P 500 on a total return basis.
The equity securities issued by U.S. companies in which the Portfolio invests
typically are traded on U.S. securities exchanges; those U.S. equity
securities held by the Portfolio that are not exchange-traded are
non-publicly traded or traded in the U.S. OTC market. Up to 15% of the
Portfolio's assets may be invested in foreign securities.
The Portfolio also may invest in certain equity-indexed securities and
securities of foreign issuers in the form of depositary receipts.
The Portfolio may, under normal market conditions, invest up to 35% of its
assets in notes, bonds and debentures issued by corporate or governmental
entities when the Sub-Adviser determines that investing in these kinds of
debt securities is consistent with the Portfolio's investment objective of
long-term growth of capital. The Sub-Adviser believes that such a
determination could be made, for example, upon the Portfolio's investing in
the debt securities of a company whose securities the Sub-Adviser anticipates
will increase in value as a result of a development particularly or uniquely
applicable to the
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company, such as a liquidation, reorganization, recapitalization or merger,
material litigation, technological breakthrough or new management or
management policies. In addition, the Sub-Adviser believes such a
determination could be made with respect to an investment by the Portfolio in
debt instruments issued by a governmental entity upon the Sub-Adviser's
concluding that the value of the instruments will increase as a result of
improvements or changes in public finances, monetary policies, external
accounts, financial markets, exchange rate policies or labor conditions of
the country in which the governmental entity is located.
During normal market conditions, a portion of the Portfolio's total assets
may be held in cash and/or invested in money market instruments of the types
described below under "Portfolio Securities and Risk Factors" for cash
management purposes, pending investment in accordance with the Portfolio's
investment objective and policies and to meet operating expenses. During
periods in which the Sub-Adviser believes that investment opportunities in
the U.S. equity markets are diminished (due to either fundamental changes in
those markets or an anticipated general decline in the value of U.S. equity
securities), the Portfolio may for temporary defensive purposes hold cash
and/or invest in the same types of money market instruments without
limitation. Included among the money market instruments in which the
Portfolio may invest are repurchase agreements. To the extent that it holds
cash or invests in money market instruments, the Portfolio may not achieve
its investment objective of long-term growth of capital.
The Portfolio's investments in debt securities are limited to those that are
rated investment grade, except that up to 5% of the Portfolio's assets may be
invested in securities rated lower than investment grade. A security is
considered investment grade if it is rated at the time of purchase within the
four highest grades assigned by S&P or by Moody's or has received an
equivalent rating from an NRSRO or, if unrated, is deemed by the Sub-Adviser
to be of comparable quality. (See Appendix A for a description of debt
securities ratings.)
The Portfolio, in addition to investing as described above, may hold the
following types of instruments: non-publicly traded securities, illiquid
securities, and securities that are not registered under the Securities Act
of 1933, as amended (the "1933 Act"), but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act (each,
a "Rule 144A Security" and collectively, "Rule 144A Securities"). In
addition, the Portfolio may engage in the following types of investment
techniques and strategies: purchasing put and call options on securities,
writing put and call options on securities, purchasing put and call options
on securities indexes, entering into interest rate, financial and stock or
bond index futures contracts or related options that are traded on a U.S. or
foreign exchange or board of trade or in the over-the-counter market,
engaging in forward currency transactions, purchasing and writing put and
call options on foreign currencies, entering into securities transactions on
a when-issued or delayed-delivery basis and lending portfolio securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\VALUE EQUITY PORTFOLIO
The Value Equity Portfolio seeks to achieve its investment objective by
investing its assets in common stocks with above-average statistical value
which, the Sub-Adviser believes 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 Sub-Adviser will begin the process of evaluating potential common stock
and equity-related securities investments by screening a universe of 1,100
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 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 different from those of
other value-oriented investment managers in the following ways: the use of
earnings averaged over both strong and weak periods 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 a part of 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
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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. Company visits and interviews with management augment
fundamental research in seeking to identify the potential value in these
investments. The Portfolio will seek to be concentrated in those industries
with positive fundamentals and likewise will seek to 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 U.S.-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 presently intends to
limit its investment in foreign securities and ADRs to up to 25% of its total
assets.
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. Some of the other securities
the Portfolio may invest in are repurchase agreements (up to 25% of its total
assets); certificates of deposit and certain bankers' acceptance and other
securities; when-issued, delayed settlement or forward delivery securities;
short-term investments; illiquid securities (up to 15% of its net assets) and
Rule 144A securities; and non-investment grade convertible bonds and
preferred stock (up to 10% of its assets).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\TACTICAL ASSET ALLOCATION PORTFOLIO
The Tactical Asset Allocation Portfolio seeks to achieve its investment
objective by investing primarily in stocks, U.S. 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 S&P 500. The Portfolio
seeks to invest its assets primarily in income producing common or preferred
stock, while the remainder of the Portfolio will ordinarily be invested in
debt obligations, typically some of which will be convertible into common
stock.
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
earning/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 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.
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.
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 ADRs. The Portfolio may
also invest in American Depositary Shares ("ADSs").
The Portfolio may also invest in U.S. Government securities, corporate bonds
and debentures, high-grade commercial paper (rated Prime-1 by Moody's or A-1
by S&P), 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
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uninvested cash. The Portfolio may only invest in debt securities of U.S.
issuers. Corporate debt securities in which the Portfolio may invest will
have a rating within the four highest grades as determined by Moody's or S&P.
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. (See Appendix A
for a description of debt securities ratings.)
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.
The Portfolio may also invest in zero coupon bonds, "strips" and convertible
securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\EQUITY-INCOME PORTFOLIO
The Equity-Income Portfolio seeks to achieve its investment objective by
investing primarily in a blend of equity and fixed-income securities,
including common stocks, income producing securities convertible into common
stock, and fixed-income securities. The Portfolio will primarily invest in
equity and debt securities of companies with established operating histories
and strong fundamental characteristics. The Portfolio seeks to achieve an
income yield in excess of the dividend income yield of the S&P 500 primarily
by utilizing both equity and fixed-income securities.
In selecting equity and fixed-income 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. However, the Sub-Adviser may select
securities based on factors other than those described above.
For example, some securities may be purchased at an apparent discount to
their appropriate value, anticipating that they will increase to that value
over time. 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. 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.
OTCs.
The Portfolio may increase its cash position when the Sub-Adviser determines
that investment opportunities with desirable risk/reward characteristics are
unavailable.
The Portfolio may invest up to 10% of its total assets in foreign securities
not publicly traded in the United States. In addition, the Portfolio may
invest in ADRs.
The Portfolio may also invest in U.S. and foreign government securities,
corporate bonds and debentures, high-grade commercial paper (rated Prime-1 by
Moody's or A-1 by S&P), 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. The Portfolio may invest up to 15% of
its net assets in illiquid securities.
Corporate debt securities in which the Portfolio invests will generally have
a rating within the four highest grades as determined by Moody's or S&P. (See
Appendix A for a description of debt securities ratings.)
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\UTILITY PORTFOLIO
The Utility Portfolio seeks to achieve its investment objective by investing
at least 65% of its assets in a professionally managed and diversified
portfolio of 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.
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 earnings
of such companies.
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
Sub-Adviser. 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.
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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.
The Portfolio presently intends to invest up to 15% of its total assets in
the securities of foreign issuers which are freely traded on U.S. securities
exchanges or in the OTC market in the form of ADRs. The Portfolio intends to
limit its investment in foreign securities to 15% of its total assets.
Foreign securities may be from developed and developing countries.
The Portfolio intends to invest in restricted and illiquid securities.
However, the Portfolio will limit investments in illiquid securities (up to
15% of its net assets), including certain restricted securities not
determined by the Fund's Board to be liquid, non-negotiable time deposits,
and repurchase agreements providing for settlement in more than seven days
after notice.
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.
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).
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. 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.
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 Portfolio will only purchase
puts which are traded on a recognized exchange.
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 Fund's
Board.
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.
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. 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.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\BALANCED PORTFOLIO
The Balanced Portfolio seeks to achieve its investment objective by investing
primarily in common stock, convertible securities and fixed-income
securities. The Portfolio may also invest in preferred stocks and interests
in REITs. A minimum of 25% of the Portfolio's assets will always be invested
in non-convertible 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 will seek to achieve income yield in
excess of the dividend income yield of the S&P 500.
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. OTC markets.
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.
In selecting equity securities and securities convertible into equity
securities for the Portfolio, the Sub-Adviser typically seeks companies which
exhibit strong fundamental characteristics 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
22
<PAGE>
investment opportunities. However, the Sub-Adviser may select securities
based on factors other than those described above.
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 may invest up to 25% of its total assets in securities of
foreign issuers. It is anticipated that most of the Portfolio's investments
in securities of foreign issuers will be ADRs.
The Portfolio may invest in Government securities, corporate bonds and
debentures, high-grade commercial paper (rated Prime-1 by Moody's or A-1 by
S&P), preferred stocks, certificates of deposit or other securities of U.S.
issuers when the Sub-Adviser perceives attractive opportunities from such
securities, or to enable the Portfolio to receive a competitive return on its
uninvested cash. The Portfolio may invest in debt securities of U.S. and
foreign issuers.
Corporate debt securities in which the Portfolio invests will generally have
a rating within the four highest grades as determined by Moody's or S&P. 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). If the securities are unrated, the
Portfolio will not invest if they are judged by the Sub-Adviser not to
possess investment qualities at least equivalent to a "B" or "b" rating. (See
Appendix A for a description of debt securities ratings.)
In the event that ratings decline after the Portfolio's investment in such
securities, the Sub-Adviser will consider all factors as it deems relevant to
the advisability of retaining such securities.
The Portfolio may also invest in zero coupon bonds, "strips", illiquid
securities (up to 15% of its net assets) and convertible securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\BOND PORTFOLIO
The Bond Portfolio seeks to achieve its investment objective by investing at
least 65%, and usually a higher percentage, of its assets in debt securities
issued by the U.S. Government and its agencies and instrumentalities and in
other medium to high-quality debt securities.
Generally, the Portfolio will invest in debt securities that have a rating
within the three highest grades as determined by Moody's or S&P. The
Portfolio may, however, invest in debt securities within the fourth highest
grade as determined by Moody's or S&P, if the Sub-Adviser determines such
investments meet the Portfolio's investment objective. (See Appendix A for a
description of debt securities 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 Portfolio's performance is, accordingly, quite sensitive to market
interest rate fluctuations. To take advantage of differences in securities
prices and yields, or fluctuations in interest rates, consistent with its
investment objective, the Portfolio may trade for short-term profits.
The Portfolio may invest in repurchase and reverse repurchase agreements,
illiquid securities (up to 15% of its net assets) when-issued securities (up
to 20% of its assets), futures contracts, related options and other
derivatives, zero coupon bonds up to 5% in high-yield bonds, "strips",
pay-in-kind and step coupon securities and, up to 25% of its net assets in
foreign securities. If appropriate and available, the Sub-Adviser may
purchase foreign securities through ADRs, EDRs and GDRs, and other types of
receipts or shares evidencing ownership of the underlying foreign securities.
The Portfolio does not intend to invest more than 10% of its assets in zero
coupon bonds or "strips".
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
The Short-to-Intermediate Government Portfolio seeks to achieve its
investment 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 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 or reverse repurchase agreements not
terminable within seven days, together with other illiquid investments. The
Portfolio itself, and its share price and yield, are not guaranteed by the
U.S. Government.
The Portfolio seeks to manage share price stability by investing in
obligations with short or intermediate maturities that are not as sensitive
to interest rate
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changes as obligations with longer maturities. In selecting securities for
the Portfolio, the Portfolio's Sub-Adviser attempts to maintain the
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 Portfolio's dollar-weighted average maturity may be longer than seven
years from time to time, but will not exceed ten years under normal operating
conditions. The Portfolio may hold individual securities with maturities of
more than ten years as long as its average maturity remains within this
range.
The Portfolio may also invest in debt securities of all types, e.g., bonds,
debentures, notes, equipment lease and trust certificates, (debt securities
secured by direct or indirect interest in specified equipment or equipment
leases), mortgage-backed securities, asset-backed securities (rated at least
"A" by S&P or Moody's), taxable municipal bonds, bond warrants, obligations
issued or guaranteed by supranational issuers or collateralized mortgage
obligations ("CMOs") assembled for sale to investors by governmental agencies
("mortgage securities"). The Portfolio may also invest in commercial paper
(rated Prime-1 by Moody's or A-1 by S&P).
Corporate debt securities in which the Portfolio invests will generally have
a rating within the three highest grades as determined by Moody's or S&P. The
Portfolio may, however, invest in debt securities within the fourth highest
grade as determined by Moody's or S&P, 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. (See Appendix A for a
description of debt securities ratings.)
The 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 Portfolio may invest
up to 100% of its assets in these instruments.
The Portfolio may invest up to 15% of its net assets in illiquid securities.
The Portfolio may also invest up to 10% of its total assets in foreign
securities.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\MONEY MARKET PORTFOLIO
The Money Market 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 seeks to achieve its investment objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days through
investment in U.S. dollar-denominated securities which have effective
maturities of not more than 13 months and which, in accordance with
guidelines adopted by the Fund's Board, are determined to present minimal
credit risks. (See the SAI for a more detailed description of these
instruments.) Such instruments may include:
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.
4. Commercial paper, including variable amount master demand notes and
corporate bonds issued by U.S. corporations. The Portfolio may also
invest in bonds and commercial paper of
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<PAGE>
foreign issuers if the obligation is U.S. dollar-denominated and is not
subject to foreign withholding tax.
5. Repurchase and reverse repurchase agreements.
The Portfolio will limit its investment to securities that present minimum
credit risks, as determined by guidelines adopted by the Fund's Board. In
addition, the Portfolio will limit its investment in the securities of any
one issuer to 5% of its total assets, measured at the time of purchase. (U.S.
Government securities and securities that benefit from certain types of
credit enhancement arrangements are not included in this limitation.) The
Portfolio may invest up to 25% of its total assets in securities of a single
issuer if the securities will not be held for 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 NRSROs, such as Moody's and S&P, or (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 Fund's
Board. The Fund's Board must approve or ratify the acquisition of any unrated
security or a security rated by only one NRSRO.
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 Fund's Board, except in certain circumstances where
there is a finding by the Fund's Board that disposing of the investment would
not be in the Portfolio's best interest. (For a description of the NRSRO
ratings, see the SAI.)
The Portfolio may also invest in securities of a when-issued or delayed
delivery basis and in certain privately-placed securities and repurchase and
reverse repurchase agreements. The Portfolio may invest up to 10% of its net
assets in illiquid securities.
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 money market funds in which it
invests, in addition to the Portfolio's own investment advisory fee and
expenses paid.
The Portfolio operates under a rule of the SEC that permits it, subject to
certain conditions, to use the amortized cost method of valuing its shares.
(See the SAI for a description of these conditions.)
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolios are subject to certain other investment policies and
restrictions which are described in the SAI for the Portfolios. Unless
otherwise noted, the investment policies, techniques, and percentage
restrictions described below are non-fundamental and may be changed by the
Fund's Board without Policyholder approval.
Unless otherwise stated, each of the following policies applies to all of the
Portfolios. In addition, unless otherwise stated below, the percentage
limitations included in these policies and elsewhere in this Prospectus apply
only at the time of purchase of the security.
\diamond\CASH POSITION
A Portfolio may, at times, choose to hold some portion of its net assets in
cash, or to invest that cash in a variety of debt securities. This may be
done as a defensive measure at times when desirable risk/reward
characteristics are not available in stocks or to earn income from otherwise
uninvested cash. When a Portfolio increases its cash or debt investment
position, its income may increase while its ability to participate in stock
market advances or declines decreases.
\diamond\DIVERSIFICATION AND CONCENTRATION
The 1940 Act classifies investment companies as either diversified or
non-diversified.
Diversification is the practice of spreading a portfolio's assets over a
number of investments, investment types, industries or countries to reduce
risk. A non-diversified portfolio has the ability to take larger positions in
fewer issuers. Because the appreciation or depreciation of a single security
may have a greater impact on the net asset value of a non-diversified
portfolio, its share price can be expected to fluctuate more than a
comparable portfolio.
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All of the Portfolios qualify as diversified funds under the 1940 Act. The
Portfolios are subject to the following diversification requirements:
\diamond\ As a fundamental policy, no Portfolio may own more than 10% of the
outstanding voting shares of any issuer other than U.S. Government
securities, bank money marketing instruments or bank repos.
\diamond\ As a fundamental policy, with respect to 75% of the total assets of a
Portfolio, the Portfolio will not purchase a security of any issuer if such
purchase would cause the Portfolio's holdings of that issuer to amount to
more than 5% of the Portfolio's total assets.
\diamond\ As a fundamental policy governing concentration, no Portfolio (except
the Utility Portfolio) will invest more than 25% of its assets in any one
particular industry, other than U.S. Government securities.
\diamond\PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage calculated 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 1-8 for more information on
historical turnover rates.)
Changes in security holdings are made by a Portfolio's Sub-Adviser when it is
deemed necessary. Such changes 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 developments not foreseen at
the time of the investment decision.
A Sub-Adviser may engage in a significant number of short-term transactions
if such investing serves a Portfolio's objective. The rate of portfolio
turnover will not be a limiting factor when such short-term investing is
considered appropriate.
Increased turnover results in higher brokerage costs or mark-up charges for a
Portfolio; these charges are ultimately borne by the Policyholders. For
further discussion of portfolio turnover, see the SAI.
\diamond\BORROWING
Each Portfolio may borrow money from banks for temporary or emergency
purposes. The amount borrowed shall not exceed 33-1/3% of total assets for
the Global Sector, the International Equity, the U.S. Equity and the
Aggressive Growth Portfolios; 10% of total assets for the Value Equity
Portfolio; and 25% of total assets for all other Portfolios. (The Utility
Portfolio does not presently intend to borrow.)
To secure borrowings, a Portfolio may not mortgage or pledge its securities
in amounts that exceed 15% of its net assets (10% for the Value Equity
Portfolio). (See the SAI for any exceptions to this limitation.)
The Portfolios with a common Sub-Adviser may also borrow (or lend) money to
other funds that permit such transactions and are also advised by that
Sub-Adviser, provided each Portfolio seeks and obtains permission from the
SEC. There is no assurance that such permission would be granted.
The Aggressive Growth Portfolio may borrow for investment purposes - this is
called "leveraging." The Portfolio may borrow only from banks, not from other
investment companies. There are risks associated with leveraging:
\diamond\ If a Portfolio's asset coverage drops below 300% of borrowings, the
Portfolio may be required to sell securities within three days to reduce its
debt and restore the 300% coverage, even though it may be disadvantageous to do
so.
\diamond\ Leveraging may exaggerate the effect on net asset value of any
increase or decease in the market value of a Portfolio's securities.
\diamond\ Money borrowed for leveraging will be subject to interest costs. In
certain cases, interest costs may exceed the return received on the securities
purchased.
\diamond\ A Portfolio may be required to maintain minimum average balances in
connection with 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.
Notwithstanding the limitations set forth above, 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 the borrowing limitation for a Portfolio, the
Portfolio may conduct borrowings in accordance with such revised limits.
State laws and regulations may impose additional limitations on borrowings.
See the SAI for further information on borrowing.
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<PAGE>
\diamond\LENDING
Each Portfolio may lend securities to broker-dealers and financial
institutions to realize additional income. As a fundamental policy, the
Utility and Global Sector Portfolios will not lend securities or other
assets, if as a result, more than 33-1/3% of total assets would be lent to
other parties; the International Equity Portfolio, the U.S. Equity Portfolio
and the Short-to-Intermediate Government Portfolio may lend up to 30% of
total assets; and all other Portfolios (except the Aggressive Growth
Portfolio) may lend up to 25% of total assets.
The Aggressive Growth Portfolio may not make loans to others, except through
buying qualified debt obligations, lending portfolio securities or entering
into repurchase agreements. The Aggressive Growth Portfolio will not lend
securities or other assets if, as a result, more than 20% of its total assets
would be lent to other parties.
If the borrower of a security defaults, the Portfolio may be delayed or
prevented from recovering collateral, or may be otherwise required to cover a
transaction in the security loaned.
If portfolio securities are loaned, collateral values must be continuously
maintained at no less than 100% by pricing both the securities loaned and the
collateral 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 actions as may be
appropriate in order to vote its shares.
The Growth, Bond, Global, International Equity, Short-to-Intermediate
Government, Emerging Growth and Equity-Income Portfolios may also lend (or
borrow) money to other funds that are managed by their respective Sub-Adviser
provided each Portfolio seeks and obtains permission from the SEC.
For more information about Portfolio lending, see the SAI.
\diamond\SHORT SALES
Each Portfolio may sell securities "short against the box." A short sale is
the sale of a security that the Portfolio does not own. A short sale is
"against the box" if at all times when the short position is open, the
Portfolio owns an equal amount of the securities sold short or securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
\diamond\OTHER INVESTMENT COMPANIES
A 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. (Investments by the
International Equity and U.S. Equity Portfolios in the GEI Short-Term
Investment Trust, as described below under "Portfolio Securities and Risk
Factors - Money Market Instruments," is not considered an investment in
another investment company for purposes of these limitations.) A Portfolio
(except the Growth, Bond and Global Portfolios) 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. If the Growth, Bond and Global Portfolios
invest in a money market fund, the Investment Adviser will reduce the
advisory or administrative service fees paid to the investment manager of the
money market fund.
\diamond\SPECIAL SITUATIONS
Each Portfolio may invest in "special situations" from time to time. A
special situation arises when, in the opinion of its Sub-Adviser, 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 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.
PORTFOLIO SECURITIES AND RISK FACTORS
This section provides a more detailed description of some of the types of
securities and other instruments in which a Portfolio may invest. A Portfolio
may invest in these instruments to the extent permitted by its investment
objective, policies, and restrictions. Not all of these instruments are used
by each Portfolio. A Portfolio is not
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<PAGE>
limited by this discussion and may invest in other types of instruments not
precluded by the policies discussed above. (See "Portfolio Policies and
Techniques," above, and the SAI for more information regarding a Portfolio's
investment objective and its policies, that include limitations imposed on
certain investments.)
\diamond\EQUITY SECURITIES
Equity securities include common stocks, preferred stocks and securities
convertible into common stocks, such as rights, warrants and convertible debt
securities. Equity securities may also include certain equity-indexed
securities, the value of which is linked to a securities index (E.G., the S&P
500).
Common stock represents the basic ownership of a corporation. Common stocks
historically have provided the greatest long-term growth potential in a
company, but future results are not guaranteed. Owners of common stock share
directly in the success or failure of the business.
Preferred stock ranks senior to common stock and has certain fixed-income
features.
Preferred stockholders receive dividends before they are distributed to the
common stockholders.
\diamond\Risk Factors
The price of any equity security rises and falls. Common stocks generally
represent the riskiest investment in a company. It is possible that investors
may lose their entire investment.
In addition to the risk associated with individual equity securities, an
equity-indexed security carries overall market risk and the risk of
fluctuation inherent in the indexed security as distinguished from the
securities comprising the applicable index.
\diamond\SMALL CAPITALIZATION COMPANIES
A Portfolio may invest in equity securities issued by small-cap companies.
For these purposes, a Sub-Adviser may define small-cap companies differently.
Generally a small-cap company will have market capitalizations of $1 billion
or less. A 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. See each
Portfolio's discussion of small-cap companies under the section "The
Portfolios In Detail."
\diamond\DEBT SECURITIES AND FIXED-INCOME INVESTING
Debt securities include such securities as corporate bonds and debentures,
commercial paper, debt securities issued by the U.S. Government, its agencies
and instrumentalities, or foreign governments, asset-backed securities, CMOs,
zero coupon bonds, "strips", pay-in-kind and step securities.
Fixed-income investing is the purchase of a debt security that maintains a
level of income that does not change. For instance, bonds paying interest at
a specified rate that does not change are fixed-income securities. When a
debt security is purchased, the Portfolio owns "debt" and becomes a creditor
to the company or government.
Fixed-income securities generally include short-and long-term government,
corporate and municipal obligations that pay a specified rate of interest or
coupons for a specified period of time, or preferred stock, which pays fixed
dividends. Coupon and dividend rates may be fixed for the life of the issue
or, in the case of adjustable and floating rate securities, for a shorter
period of time. A Portfolio may vary the average maturity of its portfolio of
debt securities based on the Sub-Adviser's analysis of interest rate trends
and factors.
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. (See Appendix A for a description of debt securities
ratings.)
\diamond\Risk Factors
Investments in debt securities are generally 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
value of debt securities, whereas a decline in interest rates will tend to
increase their value.
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<PAGE>
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.
Such securities 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.
\diamond\CONVERTIBLE SECURITIES
Convertible securities may include corporate notes or preferred stock, but
ordinarily are a long-term debt obligation of the issuer such as a bond or
debenture convertible at a stated exchange rate into common stock of the
issuer.
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 decline in market value than the issuer's common stock. However, the
extent to which such risk is reduced depends greatly 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.
\diamond\Risk Factors
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 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.
\diamond\REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
A repurchase agreement involves the purchase of a security by a Portfolio and
a simultaneous agreement (generally from a bank or broker-dealer) to
repurchase that security back from the Portfolio at a specified price and
date 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. Repurchase agreements not terminable within seven days
are considered illiquid securities.
A Portfolio invests in a reverse repurchase agreement when 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, a Portfolio will
segregate with its custodian cash and other liquid assets 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.
\diamond\Risk Factors
Repurchase agreements involve the risk that the seller will fail to
repurchase the security, as agreed. In that case, a Portfolio will bear the
risk of market value fluctuations until the security can be sold and may
encounter delays and incur costs in liquidating the security. In the event of
bankruptcy or insolvency of the seller, delays and costs are incurred.
Reverse repurchase agreements may expose a Portfolio to greater fluctuations
in the value of its assets.
diamond\MONEY MARKET INSTRUMENTS
Except as described below with respect to the International Equity and U.S.
Equity Portfolios, a Portfolio, other than the Money Market Portfolio, may
invest in the following types of money market instruments: U.S. Government
Securities; obligations issued or guaranteed by foreign governments or by any
of their political subdivisions, authorities, agencies or instrumentalities;
bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of foreign or domestic banks, domestic savings and loan
associations and other banking institutions); commercial paper; and
repurchase agreements.
The International Equity and U.S. Equity Portfolios may also invest in the
GEI Short-Term Investment Fund (the "Investment Fund"), a private investment
fund created specifically to serve as a vehicle for the collective investment
of cash balances of these Portfolios and other accounts advised by GE
Investment Management Incorporated ("GEIM") or its affiliate, General
Electric Investment Corporation ("GEIC"). The Investment Fund is not
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registered with the SEC as an investment company. The Investment Fund invests
exclusively in the money market instruments described in (i) through (vii)
below. The Investment Fund is advised by GEIM. No advisory fee is charged by
GEIM to the Investment Fund, nor will a Portfolio incur any sales charge,
redemption fee, distribution fee or service fee in connection with its
investments in the Investment Fund. The International Equity and U.S. Equity
Portfolios may each invest up to 25% of its assets in the Investment Fund.
The types of money market instruments in which the International Equity and
U.S. Equity Portfolios may invest directly or indirectly through their
investment in the Investment Fund are as follows: (i) securities issued or
guaranteed by the U.S. Government or one of its agencies or
instrumentalities; (ii) debt obligations of banks, savings and loan
institutions, insurance companies and mortgage bankers; (iii) commercial
paper and notes, including those with variable and floating rates of
interest; (iv) debt obligations of foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities; (vi) debt securities issued by foreign issuers; and
(vii) repurchase agreements.
\diamond\U.S. GOVERNMENT SECURITIES
U.S. Government securities are 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 ("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 ("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.
\diamond\Risk Factors
Investors should be aware that the value of the U.S. Government securities
held by a 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 drop
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.
They have a comparable risk of decline during periods of rising interest
rates.
\diamond\BANK OBLIGATIONS
Subject to its investment policy, a Portfolio may invest in bank obligations
such as CDs or time deposits. Such investments involve the risks that an
investment in the banking industry may entail.
\diamond\Risk Factors
Banks are subject to extensive governmental regulations which may limit both
the amount 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.
Exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations.
\diamond\FOREIGN BANK OBLIGATIONS
A Portfolio may invest in foreign bank obligations and obligations of foreign
branches of domestic banks. These investments prevent certain risks.
\diamond\Risk Factors
Risks include 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 adversely affect 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.
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\diamond\FOREIGN SECURITIES
Foreign securities include equity and debt securities of foreign issuers.
Each Portfolio may invest in foreign securities subject to its investment
limitations.
In accordance with the requirements of current California regulations, a
Portfolio will be invested in a minimum of five different foreign countries
at all times. However, this minimum is reduced to four when foreign country
investments comprise less than 80% of the Portfolio's net asset value; to
three when less than 60% of such value; to two when less than 40%; and to one
when less than 20%. No more than 20% of a Portfolio's net assets shall be
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 foreign countries: Australia, Canada,
France, Japan, the United Kingdom or Germany. If California's insurance
regulations are changed at some future time to permit a larger percentage of
a 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.
In addition to direct foreign investment, many of the Portfolios may invest
in foreign securities through ADRs or ADSs, which are dollar-denominated
receipts issued by domestic banks or securities firms. ADRs and ADSs are
publicly traded on U.S. exchanges, and may not involve the same risks as
securities denominated in foreign currency.
Some Portfolios may also indirectly invest in foreign securities through
EDRs, which are typically issued by European banks; in GDRs, which may be
issued by domestic or foreign banks; and in other types of receipts
evidencing ownership of foreign securities.
/diamond/Risk Factors
For U.S. investors, the returns on foreign securities are influenced not only
by the returns on the foreign investments themselves, but also by several
risks which include:
\diamond\CURRENCY RISK. Changes in the value of the currencies in which the
securities are denominated relative to the U.S. dollar may affect the value of
foreign securities and the value of their dividend or interest payments and,
therefore, a Portfolio's share price and returns.
Generally, in a period when the U.S. dollar commonly rises against foreign
currencies, the return 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.
Exchange rates are affected by numerous factors, including relative interest
rates, balances of trade, levels of foreign investment and manipulation by
central banks. The foreign currency market is essentially unregulated and can
be subject to speculative trading. From time to time, many countries impose
exchange controls which limit or prohibit trading in certain currencies.
ADRs and ADSs do not involve the same direct currency and liquidity risks as
securities denominated in foreign currencies. However, the value of the
currency in which the foreign security represented by the ADR or ADS is
denominated may affect the value of the ADR or ADS.
To the extent that a Portfolio invests in foreign securities denominated in
foreign currencies, its share price reflects the price movements both of its
securities and of the currencies in which they are denominated. The share
price of a Portfolio that invests in both U.S. and foreign securities may
have a low correlation with movements in the U.S. markets. If most of the
securities in a Portfolio are denominated in foreign currencies or depend on
the value of foreign currencies, the relative strength of the U.S. dollar
against those foreign currencies may be an important factor in the
Portfolio's performance.
\diamond\CURRENCY TRADING COSTS. A Portfolio incurs costs in converting foreign
currencies into U.S. dollars, and vice versa.
\diamond\DIFFERENT ACCOUNTING AND REPORTING PRACTICES. Foreign companies are
generally subject to tax laws and to accounting, auditing and financial
reporting standards, practices and requirements different from those
that apply in the U.S.
\diamond\LESS INFORMATION AVAILABLE. There is generally less public information
available about foreign companies.
\diamond\MORE DIFFICULT BUSINESS NEGOTIATIONS. A Portfolio may find it difficult
to enforce obligations in foreign countries or to negotiate favorable
brokerage commission rates.
\diamond\REDUCED LIQUIDITY/INCREASED VOLATILITY. Some foreign securities are
less liquid and their prices more volatile, than securities of
comparable U.S. companies.
\diamond\SETTLEMENT DELAYS. Settling foreign securities may take longer than
settlements in the U.S.
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\diamond\HIGHER CUSTODY CHARGES. Custodianship of shares may cost more for
foreign securities than it does for U.S. securities.
\diamond\ASSET VULNERABILITY. In some foreign countries, there is a risk of
direct seizure or appropriation through taxation of assets of a
Portfolio. Certain countries may also impose limits on the removal of
securities or other assets of a Portfolio. Interest, dividends and
capital gains on foreign securities held by a Portfolio may be subject
to foreign withholding taxes.
diamond\POLITICAL INSTABILITY. In some countries, political instability, war or
diplomatic developments could affect investments.
These risks may be greater in developing countries or in countries with limited
or developing markets. In particular, developing countries have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade only a small number of securities. As a result, securities of
issuers located in developing countries may have limited marketability and may
be subject to abrupt or erratic price fluctuations.
At times, a Portfolio's foreign securities may be listed on exchanges or traded
in markets which are open on days (such as Saturday) when the Portfolio does not
compute a price or accept orders for purchase, sale or exchange of shares. As a
result, the net asset value of the Portfolio may be significantly affected by
trading on days when Policyholders cannot make transactions.
ADRS and ADSs are subject to some of the same risks as direct investments in
foreign securities, including the currency risk discussed above. 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 U.S., and, therefore, such
information may not be reflected in the market value of the ADRs.
\diamond\ILLIQUID SECURITIES
Securities 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 sold 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-Advisers will determine the liquidity of Rule 144A
Securities under guidelines approved by the Fund's Board. (See the SAI for a
description of these guidelines.)
\diamond\Risk Factors
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.
\diamond\FUTURES, OPTIONS AND OTHER DERIVATIVES
Instruments commonly called "derivatives" include options on securities or
foreign currency futures contracts, options on futures contracts, forward
contracts, interest rate swaps, caps and floors, stock index futures and options
on stock index futures. These instruments are commonly called derivatives
because their price is derived from an underlying index, security or other
measure of value.
Each Portfolio that may use derivatives may do so only as a hedge - that is, for
example, to protect portfolio positions against market or currency swings, to
equitize a cash position, for duration management, or to reduce the risk
inherent in the management of the Portfolio involved.
A Portfolio may engage in futures contracts and options. The Portfolios intend
to use such techniques primarily for bona fide hedging purposes, including to
protect portfolio positions against market, interest rate or currency
fluctuations, to equitize a cash position, for duration management, or to reduce
the risk inherent in the management of the portfolio involved. If used for 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 the rules of the CFTC, 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.
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts are not
currently exchange traded and are typically negotiated on an individual basis. A
Portfolio may enter into forward currency contracts to hedge against declines in
the value of non-dollar denominated securities or to reduce the impact of
currency appreciation on purchases of non-dollar
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denominated securities. A Portfolio may also enter into forward contracts to
purchase or sell securities or other financial indices.
FUTURES CONTRACTS are contracts that obligate the buyer to receive and the
seller to deliver an instrument or money at a specified price on a specified
date. A Portfolio may buy and sell futures contracts on foreign currencies,
securities and financial indexes including interest rates or an index of U.S.
Government, foreign government, equity or fixed-income securities.
A Portfolio may also buy options on futures contracts. An option on a futures
contract gives the buyer the right, but not the obligation, to buy or sell a
futures contract at a specific price on or before a specified date.
Futures contracts and options on futures are standardized and traded on
designated exchanges.
INTEREST RATE SWAPS involve the exchange by two parties of their respective
commitments to pay or receive interest (E.G., an exchange of floating rate
payments for fixed rate payments).
INTEREST RATE FUTURES CONTRACTS involve the purchase or sale of contracts for
the future delivery of fixed-income securities at an established price. 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.
OPTIONS are the right, but not the obligation, to buy or sell a specified amount
of securities or other assets on or before a fixed date at a predetermined
price. A Portfolio may purchase put and call options on securities, securities
indexes and foreign currencies, subject to its investment restrictions.
CALL OPTIONS give a buyer the right to purchase a portfolio security at a
designated price until a certain date. The option must be "covered" -for
example, the seller may own the securities required to fulfill the
contract.
PUT OPTIONS give the buyer the right to sell the security at a designated
price until a certain date. Put options are "covered", for example, by
segregating an amount of cash or securities equal to the exercise price.
STOCK INDEX FUTURES obligate 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 specified 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.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, 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.
\diamond\Risk Factors
There can be no assurance the use of derivatives will help a Portfolio
achieve its investment objective. Derivatives involve special risks and
transaction costs, and draw upon skills and experience which are different
from those needed to choose the other securities or instruments in which a
Portfolio invests. Special risks of these instruments include:
\diamond\INACCURATE MARKET PREDICTIONS. If interest rates, securities prices or
currency markets do not move in the direction expected by a Sub-Adviser
who used derivatives based on those measures, these instruments may
fail in their intended purpose and result in losses to the Portfolio.
\diamond\IMPERFECT CORRELATION. Derivatives' prices may be imperfectly
correlated with the prices of the securities, interest rates or
currencies being hedged. When this happens, the expected benefits may
be diminished.
\diamond\ILLIQUIDITY. A liquid secondary market may not be available for a
particular instrument at a particular time. A Portfolio may therefore
be unable to control losses by closing out a derivative position.
\diamond\TAX CONSIDERATIONS. A Portfolio may have to delay closing out certain
derivative positions to avoid adverse tax consequences.
The risk of loss from investing in derivative instruments is potentially
unlimited.
FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract ("forward contract") is used to purchase
or sell foreign currencies at a future date as a hedge against fluctuations
in foreign exchange rates pending the settlement of transactions in foreign
securities or during the time a Portfolio has exposure to foreign currencies.
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.
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\diamond\Risk Factors
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 portfolio
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.
\diamond\WHEN-ISSUED, DELAYED SETTLEMENT AND FORWARD DELIVERY SECURITIES
Securities may be purchased and sold on a "when-issued," "delayed
settlement," or "forward (delayed) delivery" basis.
"When-issued" or "forward delivery" refers to securities whose terms 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.
A 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 a 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 purpose
of investment leverage.
"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 a Portfolio until it receives payment or
delivery from the other party to any of the above transactions.
The Portfolio will segregate with its custodian cash, U.S. Government
securities or other liquid assets 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 a Portfolio may earn
income in securities it has segregated to collateralize its delayed delivery
purchases.
New issues of stocks and bonds, private placements and U.S. Government
securities may be sold in this manner.
\diamond\Risk Factors
At the time of settlement, the market value of the security may be more or
less than the purchase price. The Portfolio bears the risk of such market
value fluctuations. These transactions also involve risk to a Portfolio if
the other party to the transaction defaults on its obligation to make payment
or delivery, and the Portfolio is delayed or prevented from completing the
transaction.
\diamond\MORTGAGE-AND OTHER ASSET-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.
CMOs are "pass-through" securities collateralized by mortgages or
mortgage-backed securities. (Pass-through securities mean that principal and
interest payments on the underlying securities, less servicing fees, are
passed through to Policyholders on a pro rata basis.) CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
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.
\diamond\Risk Factors
Prepayments will shorten these securities' weighted average life and may lower
their returns. The value of these securities may change because of changes in
the market's perception of the creditworthiness of the federal agency or private
institution that issued them, in the case of mortgage-backed securities, or in
the servicing agent for the pool, the originator of the pool or the financial
institution providing the credit support or enhancement in the case of
asset-backed securities. Interest rate risks are also involved with these
investments; see "Debt Securities and Fixed-Income Investing," page 28.
In addition, the mortgage securities market may be adversely affected by
changes in government regulation or tax policies.
\diamond\REAL ESTATE INVESTMENT TRUSTS ("REITs")
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate
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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 Policyholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code").
\diamond\Risk Factors
REITs may subject a Portfolio 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.
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 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. (See
"Debt Securities and Fixed-Income Investing," page 28.)
\diamond\ZERO COUPON, STRIPS, PAY-IN-KIND AND STEP COUPON SECURITIES
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.
\diamond\Risk Factors
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.
A Portfolio may realize greater gains or losses as a result of such
fluctuations. In order to pay cash distributions from these types of securities,
a Portfolio may sell certain portfolio securities and may incur a gain or loss
on such sales.
\diamond\HIGH-YIELD/HIGH-RISK SECURITIES
High-yield/high-risk securities (or "junk bonds") are debt securities rated
below investment grade by the primary rating agencies (such as S&P and Moody's).
(See Appendix A for a description of debt securities ratings.)
\diamond\Risk Factors
The value of lower quality securities generally is more dependent on the
ability of the issuer to meet interest and principal payments (i.e., credit
risk) than is the case for higher quality securities. Conversely, the value
of higher quality securities may be more sensitive to interest rate movements
than lower rated securities. Issuers of high-yield securities may not be as
strong financially as those issuing bonds with higher credit ratings.
Investments in such companies are considered to be more speculative than
higher quality investments.
Issuers of high-yield securities are more vulnerable to real or perceived
economic changes (for instance, an economic downturn or prolonged period of
rising interest rates), political changes or adverse developments specific to
the issuer. Adverse economic, political or other developments may impair the
issuer's ability to service principal and interest obligations, to meet
projected business goals and to obtain additional financing, particularly if
the issuer is highly leveraged.
In the event of a default, a Portfolio would experience a reduction of its
income and could expect a decline in the market value of the defaulted
securities.
The market for lower quality securities is generally less liquid than the
market for higher quality bonds. Adverse publicity and investor perceptions,
as well as new or proposed laws, may also have a greater negative impact on
the market for lower quality securities. Unrated debt,
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while not necessarily of lower quality than rated securities, may not have as
broad a market as higher quality securities.
\diamond\VARIABLE RATE MASTER DEMAND NOTES
Variable rate master demand notes 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 a Portfolio and the issuer, they are
not normally traded.
Although no active secondary market may exist for these notes, a 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 a Sub-Adviser that the ratings
are within the two highest ratings of commercial paper. (See the SAI for
further information on these ratings.)
In addition, when purchasing variable rate master demand notes, a 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.
\diamond\Risk Factors
In the event an issuer of a variable rate master demand note defaulted on its
payment obligations, a 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.
\diamond\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.
\diamond\Risk Factors
Warrants and rights may be considered more speculative than certain other types
of investments because they do not entitle a holder to the dividends or voting
rights for the securities that may be purchased. They do not 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. A warrant or right ceases to have value if it is
not exercised prior to the expiration date.
\diamond\GOLD STOCK AND GOLD BULLION
Gold stocks are equity securities involved in the exploration, mining,
processing, or dealing or investing in gold. Investments in gold bullion involve
the purchase of bars or ingots of the precious metal.
\diamond\Risk Factors
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 gold producers
- - South Africa and the Commonwealth of Independent States (the former Soviet
Union)- may have a direct impact on the price of gold worldwide.
A Portfolio's 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, a 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.
MANAGEMENT OF THE FUND
\diamond\DIRECTORS
The Board of Directors is responsible for managing the business affairs of
the Fund. It oversees the operation of the Fund by its officers. It also
reviews the management of the Portfolios' assets by the Investment Adviser
and Sub-Advisers. Information about the Directors and executive officers of
the Fund is contained in the SAI.
36
<PAGE>
\diamond\INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is an
indirect, wholly-owned subsidiary of Western Reserve Life Assurance Co. of
Ohio ("Western Reserve"), a stock life insurance company which is
wholly-owned by First AUSA 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 January 1, 1997. Prior to this date, Western Reserve served as
investment adviser to each Portfolio.
Subject to the supervision of the Fund's Board, the Investment Adviser is
responsible for furnishing 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; 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 each investment portfolio of the Portfolios, the investment
recommendations of the Investment Adviser, and the investment considerations
which have given rise to those recommendations; to supervise the purchase and
sale of securities of the Portfolios as directed by the appropriate officers
of the Fund; and to maintain all books and records required to be maintained
by the Investment Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on behalf of
the Fund.
\diamond\ADVISORY FEES PAID BY THE PORTFOLIOS
Subject to the supervision and direction of the Fund's Board, the Investment
Adviser is responsible for managing the Portfolios in accordance with each
Portfolio's stated investment objective and policies. As compensation for its
services to the Portfolios, the Investment Adviser receives monthly
compensation at an annual rate of a percentage of the average daily net
assets of each Portfolio. The table below lists each Portfolio and the annual
rate of the monthly compensation the Investment Adviser received for the
fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
ADVISORY ADVISORY
PORTFOLIO FEE PORTFOLIO FEE
--------- -------- --------- --------
<S> <C> <C> <C>
Growth 0.80% Emerging Growth 0.80%
Bond 0.50% Equity-Income 0.80%
Global 0.80% Aggressive Growth 0.80%
Money Market 0.40% (prior to 5/1/96, Utility 0.75%
0.50%) Tactical Asset Allocation 0.80%
Short-to-Intermediate Government 0.60% C.A.S.E. Growth 0.80%
Balanced 0.80% Value Equity 0.80%*
International Equity 1.00%* Global Sector 1.10%
U.S. Equity 0.80%*
<FN>
- ------------
* No advisory fees were paid by these Portfolios in 1995 because they had not
commenced operations as of December 31, 1995.
</FN>
</TABLE>
\diamond\ADVISORY FEE REIMBURSEMENT
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 a certain percentage of each Portfolio's average daily net assets. The
table below shows the expense limit and actual expenses for each Portfolio
and the reimbursement a Portfolio received, if any, for the fiscal year ended
December 31, 1995.
37
<PAGE>
<TABLE>
<CAPTION>
EXPENSE ACTUAL
PORTFOLIO LIMIT EXPENSES REIMBURSEMENT
--------- ----- -------- -------------
<S> <C> <C> <C>
Growth 1.00% 0.86% NONE
Bond 0.70% 0.61% NONE
Global 1.00% 0.99% NONE
Money Market 0.70% 0.46% NONE
Short-to-Intermediate Government 1.00% 0.78% NONE
Balanced 1.00% 0.97% NONE
Emerging Growth 1.00% 0.91% NONE
Equity-Income 1.00% 0.87% NONE
Aggressive Growth 1.00% 0.92%* NONE
Utility 1.00% 1.08% $14,417
Tactical Asset Allocation 1.00% 0.93% NONE
C.A.S.E. Growth 1.00% 0.93% NONE
Value Equity 1.00% ** NONE
International Equity 1.50% ** NONE
U.S. Equity 1.30% ** NONE
<FN>
- ----------
* The actual expenses of the Aggressive Growth Portfolio as a percentage of
average daily net assets were 1.07%. Of these expenses, 0.15% were
attributable to interest paid by this Portfolio resulting from borrowing
activities; as noted above, such interest is not subject to the voluntary
expense limitation. Therefore, the expenses of this Portfolio to which the
expense limitation was applicable were 0.92%; and no expenses were paid by
the Investment Adviser on behalf of this Portfolio.
** These Portfolios had not commenced operations as of December 31, 1995.
</FN>
</TABLE>
\diamond\DISTRIBUTION AND SERVICE PLANS
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant
to the Plan, has entered into a Distribution Agreement with InterSecurities,
Inc. ("ISI"), whose principal office is located at 201 Highland Avenue,
Largo, Florida 33770. ISI is an affiliate of the Investment Adviser, and
serves as principal underwriter for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective investors; costs relating to development
and preparation of Fund advertisements, sales literature and brokers' and
other promotional materials describing and/or relating to the Fund; expenses
in connection with presentation of seminars and sales meetings describing the
Fund; development of consumer-oriented sales materials describing the Fund;
and expenses attributable to "distribution-related services" provided to the
Fund (E.G., salaries and benefits, office expenses, equipment expenses (I.E.,
computers, software, office equipment, etc.), training expenses, travel
costs, printing costs, supply expenses, programming time and data center
expenses, each as they relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing such
Portfolio's shares, up to a maximum rate of 0.15% on an annualized basis of
the average daily net assets. This fee is measured and accrued daily and paid
monthly.
ISI will submit to the Fund's Board for approval annual distribution expenses
with respect to each Portfolio. ISI allocates to each Portfolio distribution
expenses specifically attributable to the distribution of shares of such
Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the
net asset value of all Portfolios, or such other factors as ISI deems fair
and are approved by the Fund's Board. ISI has determined that it will not
seek payment by the Fund of distribution expenses with respect to any
Portfolio during the fiscal year ending December 31, 1997.
\diamond\ADMINISTRATIVE AND TRANSFER
AGENCY SERVICES
Effective January 1, 1997, the Fund has entered into an Administrative
Services and Transfer Agency Agreement with WRL Investment Services, Inc.
("WRL Services"), located at 201 Highland Avenue, Largo, Florida 33770, an
38
<PAGE>
affiliate of WRL Management and Western Reserve, to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Board, supervisory,
administrative, and transfer agency services, including recordkeeping and
reporting. WRL Services is reimbursed by the Fund monthly on a cost incurred
basis. Prior to January 1, 1997, Western Reserve performed these services in
connection with its serving as the Fund's investment adviser.
\diamond\SUB-ADVISERS
Each Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for its respective Portfolio(s).
Subject to review and supervision by the Investment Adviser and the Fund's
Board, each Sub-Adviser is responsible for the actual investment management
of its Portfolio(s) and for making decisions to buy, sell or hold any
particular security. Each Sub-Adviser also places orders to buy or sell
securities on behalf of that Portfolio. Each 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 its Portfolio(s). Each Sub-Adviser is a registered investment
adviser under the Investment Advisers Act of 1940, as amended.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
JANUS CAPITAL CORPORATION
Janus Capital Corporation ("Janus Capital"), located at 100 Fillmore Street,
Denver, CO 80206, serves as the Sub-Adviser to the Growth, Bond and Global
Portfolios. Thomas H. Bailey is the President of Janus Capital. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 83% of Janus Capital.
Janus Capital provides investment management and related services to other
mutual funds, and individuals, corporate, charitable and retirement accounts.
See "Management of the Fund - The Sub-Advisers" in the SAI for a more detailed
description of the previous experience of Janus Capital as an investment
adviser.
\diamond\PORTFOLIO MANAGERS:
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 Janus
Capital, 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 Janus Capital (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 Janus Capital since
1987.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\J.P. MORGAN INVESTMENT MANAGEMENT INC.
J. P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), located
at 522 Fifth Avenue, New York, NY 10036, has served as the Sub-Adviser to the
Money Market Portfolio since May 1, 1996. J. P. Morgan Investment is a
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated. J.P. Morgan
Investment provides investment management and related services for corporate,
public, and union employee benefit funds, foundations, endowments, insurance
companies and government agencies.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AEGON Management"), located at 4333
Edgewood Road, N.E., Cedar Rapids, IA 52499, serves as the Sub-Adviser to the
Short-to-Intermediate Government and Balanced Portfolios. AEGON Management is
an indirect wholly-owned subsidiary of AEGON.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS AND JARRELL D. FREY serve as Portfolio Managers of the
Short-to-Intermediate Government Portfolio. Mr. 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 AEGON Management
since 1990. Prior to joining AEGON Management, Mr. Sheets was head of the
Fixed Income Management Department of the Trust and Asset Management Group of
Bank One, Indianapo-lis NA. Mr. Frey has served as Portfolio Manager for the
Short-to-Intermediate Government Portfolio since May,
39
<PAGE>
1995. Mr. Frey joined AEGON Management in 1994. Prior to joining AEGON
Management, Mr. Frey was employed for five years by 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 AEGON Management. Mr. Van Meter was
President and Managing Partner of Perpetual Investment Advisors from 1983 to
1989, when AEGON acquired that firm.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
Van Kampen American Capital Asset Management, Inc. ("Van Kampen"), located at
One Parkview Plaza, Oakbrook Terrace, IL 60181, serves as the Sub-Adviser to
the Emerging Growth Portfolio.
Van Kampen became an indirect wholly-owned subsidiary of Morgan Stanley Group
Inc. on October 31, 1996.
\diamond\PORTFOLIO MANAGER:
GARY M. LEWIS has served as Portfolio Manager for the Emerging Growth
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.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
LUTHER KING CAPITAL
MANAGEMENT CORPORATION
Luther King Capital Management Corporation ("Luther King Capital"), located
at 301 Commerce Street, Suite 1600, Fort Worth, TX 76102, serves as the
Sub-Adviser to the Equity-Income Portfolio. Ultimate control of Luther King
Capital is exercised by J. Luther King, Jr. Luther King Capital provides
investment management services to accounts of individual investors, mutual
funds and other institutional investors. See "Management of the Fund -The
Sub-Advisers" in the SAI for a more detailed description of the previous
experience of Luther King Capital as an investment adviser.
\diamond\PORTFOLIO MANAGERS:
LUTHER KING, JR. AND SCOT HOLLMANN have served as Portfolio Managers of the
Equity-Income Portfolio since its inception. Mr. King has been President of
Luther King Capital since 1979. Mr. Hollmann has served as Vice President of
Luther King Capital since 1983.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
FRED ALGER MANAGEMENT, INC.
Fred Alger Management, Inc. ("Alger Management"), located at 75 Maiden Lane,
New York, NY 10038, serves as the Sub-Adviser to the Aggressive Growth
Portfolio. 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
controlled by Fred M. Alger and David D. Alger. As of September 30, 1996,
Alger Management had approximately $6.8 billion in assets under management
for investment companies and private accounts.
\diamond\PORTFOLIO MANAGERS:
DAVID D. ALGER, SEILAI KHOO AND RONALD TARTARO are primarily responsible for
the day-to-day management of the Aggressive Growth Portfolio. Mr. Alger has
been employed by Alger Management as Executive Vice President and Director of
Research since 1971 and as President since 1995. Ms. Khoo has been employed
by Alger Management as a senior research analyst since 1989 and as a Senior
Vice President since 1995. Mr. Tartaro has been employed by Alger Management
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 Aggressive
Growth Portfolio since its inception. Ms. Khoo and Mr. Tartaro have each
served as Co-Portfolio Managers of the Aggressive Growth 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 Alger Management.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling ("Federated"), located at Federated Investors
Tower, Pittsburgh, PA 15222-3779, serves as the Sub-Adviser to the Utility
Portfolio. Federated is a Delaware business trust organized on April 11,
1989. It is a subsidiary of Federated Investors. Federated serves as
investment adviser to a number of investment companies and private accounts.
Total assets under management or administered by Federated and other
subsidiaries of Federated Investors is approximately $85 billion.
40
<PAGE>
\diamond\PORTFOLIO MANAGERS:
CHRISTOPHER H. WILES AND LINDA A. DUESSEL serve as Co-Portfolio Managers of
the Utility Portfolio. Mr. Wiles has been a Portfolio Manager of the
Portfolio since its inception. Mr. Wiles joined Federated in 1990 and has
been a Vice President of an affiliate of Federated since 1992. Mr. Wiles
served as Assistant Vice President of Federated from 1990 to 1992. Mr. Wiles
is a Chartered Financial Analyst and received his MBA in Finance from
Cleveland State University. Ms. Duessell has served as Co-Portfolio Manager
of the Utility Portfolio since July, 1996. Ms. Duessel is a Chartered
Financial Analyst and also serves as co-portfolio manager for other utility
funds managed by Federated. Ms. Duessel received her B.S., Finance, from the
Wharton School of the University of Pennsylvania and her M.S.I.A., from
Carnegie Mellon University. Ms. Duessel has been a Vice President of an
affiliate of Federated since 1995, and was an Assistant Vice president from
1991 -1995.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
DEAN INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean"), a Division of C.H. Dean and Associates,
Inc., located at 2480 Kettering Tower, Dayton, OH 45423-2480, serves as the
Sub-Adviser to the Tactical Asset Allocation Portfolio. Dean is wholly-owned
by C.H. Dean and Associates, Inc. Founded in 1972, Dean manages portfolios
for individuals and institutional clients worldwide. Dean provides a full
range of investment advisory services and as of January 31, 1996 had $3.756
billion of assets under management.
\diamond\PORTFOLIO MANAGERS:
The Tactical Asset Allocation Portfolio is managed by a team of 10 senior
investment professionals (Central Investment Committee), with over 135 years
of total investment experience.
JOHN C. RIAZZI, CFA, has served as the Senior Portfolio Manager of the
Tactical Asset Allocation Portfolio and ARVIND SACHDEVA, CFA has served as
Senior Equity Strategist of this Portfolio since its inception. Mr. Riazzi
joined Dean in March of 1989. Before being promoted to Vice President and
Director of Consulting Services at Dean, 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 Dean in 1993. Prior to working at
Dean, he was the Senior Security Analyst and Equity Portfolio Manager for
Carillon Advisors, Inc., from January, 1985 to September, 1993. Carillon
Advisors, Inc. is an investment subsidiary of the Union Central Life
Insurance Co.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), located at 2255 Glades Road, Suite
221-A, Boca Raton, FL 33431, serves as the Sub-Adviser to the C.A.S.E. Growth
Portfolio. C.A.S.E. is 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.
/diamond/PORTFOLIO MANAGERS:
Informally, C.A.S.E.'s Board members confer on a continuous basis, gathering
economic sector, industry and stock specific information from C.A.S.E.'s
research and management resources. Each Board member is individually
responsible for the analytical coverage of one or two of the market's eight
economic sectors. C.A.S.E.'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
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.
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
NWQ Investment Management Company, Inc. ("NWQ Investment"), located at 655
South Hope Street, 11th Floor, Los Angeles, CA 90017, serves as the
Sub-Adviser to the Value Equity Portfolio. NWQ Investment was founded in 1982
and is a wholly-owned subsidiary of United Asset Management Corporation. NWQ
Investment provides investment management services to institutions and high
net worth individuals. As of September 30, 1996, NWQ Investment had over $6.3
billion in assets under management.
/diamond/PORTFOLIO MANAGER:
An investment policy committee is responsible for the day-to-day management of
the Value Equity Portfolio's investments. David A. Polak, CFA, Edward C.
Friedel,
41
<PAGE>
CFA, James H. Galbreath, CFA, Phyllis G. Thomas, CFA, and Jon D. Bosse, CFA,
constitute the committee.
EDWARD C. FRIEDEL, CFA serves as Senior Portfolio Manager for the Value
Equity Portfolio. Mr. Friedel has been a managing director and investment
strategist/portfolio manager of NWQ Investment 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).
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
MERIDIAN INVESTMENT
MANAGEMENT CORPORATION
Meridian Investment Management Corporation ("Meridian"), located at 12835
East Arapahoe Road, Tower II, 7th Floor, Englewood, CO 80112, serves as a
Co-Sub-Adviser to the Global Sector 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 provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for the Global Sector Portfolio. Meridian also provides quantitative
investment research and portfolio management advice. Subject to review and
supervision by the Investment Adviser and the Fund's Board, Meridian is
responsible for making decisions and recommendations as to asset allocation
and industry and country selections for the Global Sector Portfolio.
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
INVESCO Global Asset Management Limited ("INVESCO"), located at Rosebank, 12
Bermudiana Road, Hamilton, Bermuda HM11, serves as a Co-Sub-Adviser to the
Global Sector 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 Global Sector Portfolio. Subject to
review and supervision by the Investment Adviser and the Fund's Board,
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 Portfolio's investments in foreign securities,
and with INVESCO Trust Company ("ITC"), 7800 East Union Avenue, Denver, CO
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 September 30, 1996. 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 September 30, 1996.
\diamond\PORTFOLIO MANAGER:
Meridian's Investment Committee determines the guidelines for asset, country
and industry weightings based on Meridian's proprietary quantitative research
methods. The Committee is comprised of Dr. Craig T. Callahan, Michael J.
Hart, Patrick S. Boyle and Bryan M. Ritz. Dr. Craig T. Callahan is Chairman
of the Investment Committee and Chief Investment Officer of Meridian, and
directs Meridian's investment research and analysis. Dr. Callahan obtained
his D.B.A. from Kent State University. Michael Hart is President of Meridian
Investment Management and holds an M.B.A. from the University of Denver.
Patrick S Boyle, a Chartered Financial Analyst, acts as a Portfolio Manager
for several of Meridian's private accounts. Bryan R. Ritz, also a Chartered
Financial Analyst, serves as a Portfolio Manager for Meridian's private
accounts. Mr. Ritz holds a Bachelor of Science in Business Administration and
a M.B.A. from the University of Denver. In performing sub-advisory services
Meridian may draw upon additional members of its research team. These
employees are generally specialists within Meridian's research department.
However, the Investment Committee supervises the members of the research
department and remains fully responsible for all such services.
42
<PAGE>
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
SCOTTISH EQUITABLE INVESTMENT
MANAGEMENT LIMITED
Scottish Equitable Investment Management Limited ("Scottish Equitable"),
located at Edinburgh Park, Edinburgh EH12 9SE, Scotland, serves as a
Co-Sub-Adviser to the International Equity Portfolio. Scottish Equitable is a
wholly-owned subsidiary of Scottish Equitable plc. Scottish Equitable plc, is
successor to Scottish Equitable Life Assurance Society, which was founded in
Edinburgh in 1831. As of December 31, 1995, Scottish Equitable plc had
approximately $15.9 billion in assets under management. Like the Investment
Adviser, Scottish Equitable is also an indirect wholly-owned subsidiary of
AEGON nv. Scottish Equitable has not previously advised a U.S.-registered
mutual fund. Scottish Equitable currently provides investment advisory and
management services to certain of its affiliates, including Scottish
Equitable plc and to external organizations.
\diamond\PORTFOLIO MANAGER:
CAROL CLARK has served as a Portfolio Manager of the Portfolio since its
inception. Ms. Clark is the Manager of Scottish Equitable's Asset Allocation
group and has served both as a Portfolio Manager and Investment Analyst. Ms.
Clark joined Scottish Equitable in 1983 directly from Glasgow University
where she earned a MA (Honors) in Political Economy; and she also holds the
Securities Industry Diploma.
GE INVESTMENT MANAGEMENT INCORPORATED
GE Investment Management Incorporated ("GEIM") serves as a Co-Sub-Adviser to
the International Equity Portfolio and as the Sub-Adviser to the U.S. Equity
Portfolio. GEIM, located at 3003 Summer Street, Stamford, Connecticut 06905,
was formed under the laws of Delaware in 1988. GEIM is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal officers and
directors serve in similar capacities with respect to General Electric
Investment Corporation ("GEIC", and, together with GEIM and their
predecessors, collectively referred to as "GE Investments"), which like GEIM
is a wholly-owned subsidiary of GE. GEIC serves as investment adviser to
various GE pension and benefit plans and certain employee mutual funds. GE
Investments has roughly 70 years of investment management experience, and has
managed mutual funds since 1935. As of June 30, 1996, GEIM and GEIC together
managed assets in excess of $55 billion.
\diamond\PORTFOLIO MANAGERS:
RALPH R. LAYMAN has served as a Portfolio Manager of the International Equity
Portfolio since its inception. Mr. Layman has more than 17 years of
investment experience and has held positions with GE Investments since 1991.
From 1989 to 1991, Mr. Layman served as Executive Vice President, Partner and
Portfolio Manager of Northern Capital Management, and prior thereto, served
as Vice President and Portfolio Manager of Templeton Investment Counsel. Mr.
Layman is currently a Director and Executive Vice President of GE
Investments.
EUGENE K. BOLTON is responsible for the overall management of the U.S. Equity
Portfolio and has served in that capacity since its inception. Mr. Bolton has
more than 12 years of investment experience and has held positions with GE
Investments since 1984. Mr. Bolton is currently a Director and Executive Vice
President of GE Investments.
DAVID B. CARLSON is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. Mr. Carlson is
also responsible for the management of the equity related investments of the
portfolio of the Strategic Fund. He has more than 13 years of investment
experience and has held positions with GE Investments since 1982. Mr. Carlson
is currently a Senior Vice president of GE Investments.
CHRISTOPHER D. BROWN is one of the four Portfolio Managers for the U.S.
Equity Portfolio and has served in that capacity since its inception. He has
ten years of investment experience, and has held positions with GE
Investments since 1985. Mr. Brown is currently a Vice President of GE
Investments.
PETER J. HATHAWAY is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more
than 35 years of investment experience and has held positions with GE
Investments since 1985. Mr. Hathaway is currently a Senior Vice President of
GE Investments.
PAUL C. REINHARDT is one of the four Portfolio Managers for the U.S. Equity
Portfolio and has served in that capacity since its inception. He has more
than 14 years of investment experience and has held positions with GE
Investments since 1982. Mr. Reinhardt is currently a Senior Vice President of
GE Investments.
43
<PAGE>
\diamond\SUB-ADVISERS' COMPENSATION
Each Sub-Adviser receives monthly compensation from the Investment Adviser at
the annual rate of a specified percentage of the average daily net assets of
each Portfolio managed by that Sub-Adviser. The table below lists those
percentages by Portfolio.
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE
PORTFOLIO DAILY NET ASSETS
--------- --------------------------------------------------------
<S> <C>
Growth 0.40%
Bond 0.25%
Global 0.40%
Money Market 0.15% (Prior to May 1, 1996, Janus Capital
Corporation, previous Sub-Adviser, received 0.25%)
Short-to-Intermediate Government 0.30%, less 50% of amount of excess expenses*
Balanced 0.40%, less 50% of amount of excess expenses*
Emerging Growth 0.40%, less 50% of amount of excess expenses*
Equity-Income 0.40%
Aggressive Growth 0.40%
Tactical Asset Allocation 0.40%, less 50% of amount of excess expenses*
C.A.S.E. Growth 0.40%
Utility 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
Value Equity 0.40%, less 50% of amount of excess expenses*
Global Sector Meridian: 0.30% of first $100 million of assets, and
0.35% of assets in excess of $100 million;
INVESCO**: 0.40% of first $100 million of assets,
and 0.35% of assets in excess of $100 million
International Equity Scottish Equitable: 0.50% of assets managed by
Scottish Equitable, less 50% of amount of excess
expenses attributable to such assets/dagger/
GEIM: 0.50% of assets managed by GEIM, less
50% of amount of excess expenses attributable to
such assets*
U.S. Equity 0.40%, less 50% of amount of excess expenses/dagger/
<FN>
- ------------
* Excess expenses are those expenses paid by the Investment Adviser on
behalf of a Portfolio pursuant to any expense limitation.
** With respect to the Global Sector Portfolio, neither IAML nor ITC
receives any compensation from the Investment Adviser. IAML and ITC are
compensated for their services by INVESCO. INVESCO pays 50% of the
compensation it receives from the Investment Adviser 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.
/dagger/ Any amount borne by GEIM pursuant to any expense limitation
constitutes an agreement between the Investment Adviser and GEIM
only for the first twelve months following the Portfolio's
commencement of operations. Thereafter, any such arrangements will
be as mutually agreed upon by GEIM and the Investment Adviser.
</FN>
</TABLE>
PORTFOLIO TRANSACTIONS
\diamond\ \diamond\ \diamond\ \diamond\ \diamond\
\diamond\PORTFOLIO TRANSACTIONS
Each Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for its respective Portfolio(s). 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. Within these parameters, each 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. Each Sub-Adviser may
occasionally place portfolio brokerage with InterSecurities, Inc., an
affiliated broker of the Investment Adviser. The Sub-Adviser is authorized to
pay higher commissions to brokerage firms that provide it with investment and
research
44
<PAGE>
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 a Portfolio.
With respect to the Aggressive Growth Portfolio, it is anticipated that
Alger, Inc., an affiliate of Alger Management, will serve as the Portfolio's
broker in effecting substantially all of the Aggressive Growth Portfolio's
transactions on securities exchanges and will retain commissions in
accordance with certain regulations of the SEC.
With respect to the Short-to-Intermediate Government and Balanced Portfolios,
it is anticipated that AEGON Management may occasionally place portfolio
business with InterSecurities, Inc. and AEGON USA Securities, Inc.,
affiliated brokers of the Investment Adviser and AEGON Management.
The other Sub-Advisers may also from time to time place portfolio brokerage
with their affiliates in accordance with SEC regulations.
OTHER INFORMATION
\diamond\JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board, the Growth, Bond and Global
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 other clients, including registered mutual fund
clients, of Janus Capital or its affiliates. The Growth, Bond and Global
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. Janus Capital anticipates
that the investment 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 "Management of the Fund -The
Sub-Advisers" in the SAI.)
\diamond\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 Fund's Board. 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 Fund's Board 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.
\diamond\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.
\diamond\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 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 Portfolios other than the Money Market 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 or
Sub-Adviser under the
45
<PAGE>
supervision of the Fund's Board. Money market instruments maturing in 60 days
or less are valued on the amortized cost basis. (See the SAI for details.)
The Fund's Board 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 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 SAI
for details concerning the amortized cost valuation method, including the
conditions under which it may be used.)
\diamond\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 policyholders or to variable annuity contract owners. Any Life
Company may notify the Fund's Board of a potential or existing conflict. The
Fund's Board will then determine if a material conflict exists and what
action, if any, should be taken in response. 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 policyholders and those given by variable annuity contract owners.
The Fund's Board might conclude that separate funds should be established for
variable life and variable annuity Separate Accounts. If this happens, the
affected Life Companies will bear the attendant expenses of establishing
separate funds. As a result, variable life insurance policyholders 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 a Portfolio have equal voting rights, but only shares of a
particular Portfolio are entitled to vote on matters concerning only that
Portfolio. Each of the issued and outstanding shares of a 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 a 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. 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 so choose. 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 Policyholder 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 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.
\diamond\REPORTS TO POLICYHOLDERS
The fiscal year of each Portfolio ends on December 31 of each year. The Fund
will send to the Portfolios' Policyholders, at least semi-annually, reports
showing the Portfolios' composition and other information. An annual report,
containing financial statements audited by the Fund's independent
accountants, will be sent to Policyholders each year.
46
<PAGE>
\diamond\CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111, acts as
Custodian and Dividend Disbursing Agent of the Portfolios' assets.
\diamond\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.
DISTRIBUTION AND TAXES
\diamond\DIVIDENDS AND DISTRIBUTIONS
Each Portfolio intends to distribute substantially all of its net investment
income, if any. Dividends from investment income of a 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.
\diamond\TAXES
Each Portfolio (except the International Equity and U.S. Equity Portfolios,
and they intend to qualify) 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 qualified under Subchapter M, a
Portfolio is not subject to Federal income tax on that part of its investment
company taxable income that it distributes to its Policyholders. Taxable
income consists 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. 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, an insurance company pays no tax with respect to
income of a qualifying separate account when the income is 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.
Section 817(h) of the Code and the regulations thereunder impose
"diversification" requirements on each Portfolio. Each Portfolio intends to
comply with the diversification requirements. These requirements are in
addition to the diversification requirements imposed on each Portfolio by
Subchapter M and the 1940 Act. The 817(h) requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer. These limitations 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 "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 Policyholders; see the
SAI for a more detailed discussion. Prospective investors are urged to
consult their tax advisors.
47
<PAGE>
APPENDIX A
BRIEF EXPLANATION OF RATING CATEGORIES
BOND RATING EXPLANATION
----------- --------------------------
STANDARD & POOR'S CORPORATION AAA Highest rating; extremely
strong capacity to pay
principal and interest.
AA High quality; very strong
capacity to pay principal
and interest.
A Strong capacity to pay
principal and interest;
somewhat more susceptible
to the adverse effects of
changing circumstances and
economic conditions.
BBB Adequate capacity to pay
principal and interest;
normally exhibit adequate
protection parameters, but
adverse economic conditions
or changing circumstances
more likely to lead to a
weakened capacity to pay
principal and interest than
for higher rated bonds.
BB,B, Predominantly speculative
with respect to the
issuer's capacity to meet
CC,CC,C required interest and
principal payments. BB
-lowest degree of
speculation; C-the highest
degree of speculation.
Quality and protective
characteristics outweighed
by large uncertainties or
major risk exposure to
adverse conditions.
D In default.
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.
MOODY'S INVESTOR SERVICES, INC. Aaa Highest quality, smallest
degree of investment risk.
Aa High quality; together with
Aaa bonds, they compose the
high-grade bond group.
A Upper-medium grade
obligations; many favorable
investment attributes.
Baa Medium-grade obligations;
neither highly protected
nor poorly secured.
Interest and principal
appear adequate for the
present but certain
protective elements may be
lacking or may be
unreliable over any great
length of time.
Ba More uncertain, with
speculative elements.
Protection of interest and
principal payments not well
safeguarded during good and
bad times.
B Lack characteristics of
desirable investment;
potentially low assurance
of timely interest and
principal payments or
maintenance of other
contract terms over time.
Caa Poor standing, may be in
default; elements of danger
with respect to principal
or interest payments.
Ca Speculative in a high
degree; could be in default
or have other marked
short-comings.
C Lowest-rated; extremely
poor prospects of ever
attaining investment
standing.
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.
<PAGE>
WRL SERIES FUND, INC.
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770-2597
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER: CUSTODIAN:
WRL INVESTMENT MANAGEMENT, INC. INVESTORS BANK & TRUST COMPANY
201 HIGHLAND AVENUE 89 SOUTH STREET
LARGO, FL 33770-2597 BOSTON, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
SUB-ADVISERS:
JANUS CAPITAL CORPORATION
100 Fillmore Street
Denver, CO 80206
LUTHER KING CAPITAL MANAGEMENT CORPORATION
301 Commerce Street
Fort Worth, TX 76102
FEDERATED INVESTMENT COUNSELING
Federated Investors Tower
Pittsburgh, PA 15222-3779
C.A.S.E. MANAGEMENT, INC.
2255 Glades Road
Suite 221-A
Boca Raton, FL 33431
J.P. MORGAN INVESTMENT MANAGEMENT INC.
522 Fifth Avenue
New York, NY 10036
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
12835 East Arapahoe Road
Tower II, 7th Floor
Englewood, CO 80112
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
Edinburgh Park
Edinburgh EH12 9SE, Scotland
AEGON USA INVESTMENT MANAGEMENT, INC.
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52449
DEAN INVESTMENT ASSOCIATES
2480 Kettering Tower
Dayton, OH 45423-2480
FRED ALGER MANAGEMENT, INC.
75 Maiden Lane
New York, NY 10038
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Rosebank, 12 Bermudiana Road
Hamilton, Bermuda HM11
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
655 South Hope Street
11th Floor
Los Angeles, CA 90017
GE INVESTMENT MANAGEMENT INCORPORATED
3003 Summer Street
Stamford, CT 06905
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. 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.
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
GLOBAL SECTOR PORTFOLIO
GLOBAL PORTFOLIO
GROWTH PORTFOLIO
C.A.S.E. GROWTH
U.S. EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
TACTICAL ASSET ALLOCATION PORTFOLIO
EQUITY-INCOME PORTFOLIO
UTILITY PORTFOLIO
BALANCED PORTFOLIO
BOND PORTFOLIO
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
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 WRL Series Fund, Inc. (the "Fund")
Prospectus. A copy of the Prospectus may be obtained from the Fund by writing
the Fund at 201 Highland Avenue, Largo, Florida 33770-2597 or by calling the
Fund at (800) 851-9777.
Investment Adviser:
WRL INVESTMENT MANAGEMENT, INC.
Sub-Advisers:
FRED ALGER MANAGEMENT, INC.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED
GE INVESTMENT MANAGEMENT INCORPORATED
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
INVESCO GLOBAL ASSET MANAGEMENT LIMITED
JANUS CAPITAL CORPORATION
C.A.S.E. MANAGEMENT, INC.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
LUTHER KING CAPITAL MANAGEMENT CORPORATION
FEDERATED INVESTMENT COUNSELING
AEGON USA INVESTMENT MANAGEMENT, INC.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is January
1, 1997.
<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 12-25
Investment Restrictions 1 25
Aggressive Growth Portfolio 1 12-13
Emerging Growth Portfolio 2 13-14
International Equity Portfolio 3 14-15
Global Portfolio 5 16
Growth, C.A.S.E. Growth and Bond Portfolios 7 17-18; 23
U.S. Equity Portfolio 8 18
Value Equity Portfolio 10 19
Global Sector Portfolio 11 15-16
Tactical Asset Allocation Portfolio 12 20
Equity-Income Portfolio 13 21
Utility Portfolio 15 21
Balanced Portfolio 16 22
Short-to-Intermediate Government Portfolio 17 23
Money Market Portfolio 18 24-25
Investment Policies 20 25-27
Lending 20 27
Borrowing 20 26
Foreign Securities 20 31
Investment Funds (International Equity Portfolio) 21 N/A
Repurchase and Reverse Repurchase
Agreements 21 29
U.S. Government Securities 22 30
Non-Investment Grade Debt Securities 22 35
Convertible Securities 22 29
Investments in Futures, Options and Other
Derivative Instruments 23 32-33
Zero Coupon, Pay-In-Kind and Step Coupon
Securities 34 35
Warrants and Rights 34 36
Mortgage-Backed Securities 35 34
Asset-Backed Securities 35 34
Pass-Through Securities 35 34
Other Income Producing Securities 36 N/A
Illiquid and Restricted/144A Securities 36 32
Other Investment Companies 37 27
Quality and Diversification Requirements (Money
Market Portfolio) 37 24
Bank and Thrift Obligations 38 30
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
--------------------------- -----------------------
<S> <C> <C>
Management of the Fund 39 36
Directors and Officers 39 36
The Investment Adviser 41 37
The Sub-Advisers 45 39-43
Portfolio Transactions and Brokerage 48 44
Portfolio Turnover 48 26
Placement of Portfolio Brokerage 49 26
Purchase and Redemption of Shares 52 44
Determination of Offering Price 52 45
Net Asset Valuation 52 45
Investment Experience Information 52 45
Calculation of Performance Related Information 53 11
Total Return 53 11
Yield Quotations 54 11
Yield Quotations - Money Market Portfolio 54 11
Taxes 55 11
Capital Stock of the Fund 57 47
Registration Statement 57 46
Financial Statements 57 N/A
Other Information 58 45
Appendix A - Description of Portfolio Securities A-1 N/A
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Aggressive Growth Portfolio, Emerging Growth
Portfolio, International Equity Portfolio, Global Sector Portfolio, Global
Portfolio, Growth Portfolio, C.A.S.E. Growth Portfolio, U.S. Equity
Portfolio, Value Equity Portfolio, Tactical Asset Allocation Portfolio,
Equity-Income Portfolio, Utility Portfolio, Balanced Portfolio, Bond
Portfolio, Short-to-Intermediate Government Portfolio, and Money Market
Portfolio, (a "Portfolio" or 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
("Western Reserve") 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, each Portfolio's investment objective 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 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
/diamond/ AGGRESSIVE GROWTH PORTFOLIO
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:
1
<PAGE>
(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 by the Portfolio as part of a unit or attached to securities at the
time of acquisition are not subject to this limitation.
(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
than 5% of the securities.
/diamond/ EMERGING GROWTH
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).
2
<PAGE>
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:
(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 Act 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.
/diamond/ INTERNATIONAL EQUITY PORTFOLIO
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
3
<PAGE>
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. All securities of a foreign government and its agencies will be
treated as a single issuer for purposes of this restriction.
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, 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.
For purposes of this restriction, (a) the government of a country, other than
the United States, will be viewed as one industry; and (b) all supranational
organizations together will be viewed as one industry.
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 securities or other instruments backed by real estate,
including mortgage-backed securities, or 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 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 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 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.
(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 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, 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 purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GE
Investment Management Incorporated ("GEIM"), created specifically to serve as
a vehicle for the collective investment of cash balances of the Portfolio and
other accounts advised by GEIM or General Electric Investment Corporation
("GEIC"), are not subject to this restriction, pursuant to and in accordance
with necessary regulatory approvals.
4
<PAGE>
(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 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.
(F) The Portfolio may borrow money only for temporary or emergency
purposes (not for leveraging 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). Any borrowings that
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 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. (California
insurance regulations currently limit such borrowings to 25% of total assets.
See the Prospectus for the Fund's Portfolios, page 26.)
(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 Act or any other
securities as to which a determination as to liquidity has been made pursuant
to guidelines adopted by the Board of Directors, 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 as permitted by
the 1940 Act.
With respect to investment restriction 2. above, the Portfolio may use the
industry classifications reflected by the S&P 500 Composite Stock Index, if
applicable at the time of determination. For all other Portfolio holdings,
the Portfolio may use the Directory of Companies Required to File Annual
Reports with the SEC and Bloomberg Inc. In addition, the Portfolio may select
its own industry classifications, provided such classifications are
reasonable.
/diamond/ 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, and 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
5
<PAGE>
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 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 Act 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.
(K) The Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
6
<PAGE>
/diamond/ GROWTH PORTFOLIO, C.A.S.E.
GROWTH PORTFOLIO AND BOND
PORTFOLIO
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% (15% for C.A.S.E. Growth Portfolio) 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.
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 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
7
<PAGE>
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 Act 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 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.
(K) A Portfolio may not issue senior securities, except as permitted by
the 1940 Act.
/diamond/ U.S. EQUITY PORTFOLIO
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. All securities of a foreign government and its
agencies will be treated as a single issuer for purposes of this restriction.
2. Purchase any security 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
(as defined in the 1940 Act). For purposes of this restriction, (a) the
government of a country, other than the United States, will be viewed as one
industry; and (b) all supranational organizations together will be viewed as
one industry.
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 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.
8
<PAGE>
7. Borrow money 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) 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) at the time the borrowing
is made. Whenever borrowings, including reverse repurchase agreements, of 5%
or more of the Portfolio's total assets are outstanding, the Portfolio will
not purchase securities. (California insurance regulations currently limit
such borrowings to 25% of total assets. See the Prospectus for the Portfolios
of the Fund, page 26.)
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 sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount of the securities
sold short.
(B) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for clearance
of transactions. (For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts, financial
futures contracts or related options, and options on securities, options on
securities indexes and options on currencies will not be deemed to be a
purchase of securities on margin by the Portfolio.)
(C) The Portfolio may not purchase securities of other investment
companies, other than a security acquired in connection with a merger,
consolidation, acquisition, reorganization or offer of exchange and except as
otherwise permitted under the 1940 Act. Investments by the Portfolio in GEI
Short-Term Investment Fund, a private investment fund advised by GE
Investment Management Incorporated ("GEIM"), created specifically to serve as
a vehicle for the collective investment of cash balances of the Portfolio and
other accounts advised by GEIM or General Electric Investment Corporation
("GEIC") are not subject to this restriction, pursuant to and in accordance
with necessary regulatory approvals.
(D) The Portfolio may not invest more than 15% of its net assets in
illiquid securities. For purposes of this restriction, illiquid securities
are securities that cannot be disposed of by the Portfolio within seven days
in the ordinary course of business at approximately the amount at which the
Portfolio has valued the securities. This Restriction does not include
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 Act or any other securities as to which a determination as to
liquidity has been made pursuant to guidelines adopted by the Board of
Directors, as permitted under the 1940 Act.
(E) The Portfolio may not purchase restricted securities if more than 10%
of the total assets of the Portfolio would be invested in restricted
securities. Restricted securities are securities that are subject to
contractual or legal restrictions on transfer, excluding for purposes of this
restriction, restricted securities that are eligible for resale pursuant the
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A
Securities), that have been determined to be liquid under guidelines
established by the Fund's Board of Directors. In no event, will the
Portfolio's investment in illiquid and non-publicly traded securities, in the
aggregate, exceed 15% of its net assets.
(F) 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.
(G) The Portfolio may not purchase or sell put options, call options,
spreads or combinations of put options, call options and spreads, except that
the Portfolio may purchase and sell covered put and call options on
securities and stock indexes, and futures contracts and options on futures
contracts.
With respect to investment restriction 2. above, the Portfolio may use the
industry classifications reflected by the S&P 500 Composite Stock Index, if
applicable at the time of determination. For all other Portfolio holdings,
the Portfolio may use the Directory of Companies Required to File Annual
Reports with the SEC and Bloomberg Inc. In addition, the Portfolio may select
its own industry classifications, provided such classifications are
reasonable.
9
<PAGE>
/diamond/ VALUE EQUITY PORTFOLIO
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.
(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.
10
<PAGE>
/diamond/ GLOBAL SECTOR PORTFOLIO
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).
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,
11
<PAGE>
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 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 Act, 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 (H) 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 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).
/diamond/ TACTICAL ASSET ALLOCATION
PORTFOLIO
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
12
<PAGE>
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 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", p. 20.
(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.
/diamond/ EQUITY-INCOME PORTFOLIO
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
13
<PAGE>
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 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
14
<PAGE>
does not include securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 Act 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.
/diamond/ UTILITY PORTFOLIO
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 1933 Act in connection with the sale of restricted
securities which the Portfolio may purchase pursuant to its investment
objective and policies.
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 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 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.
(B) 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.
(C) 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 Act 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.
(D) 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.
(E) 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
15
<PAGE>
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.
(F) 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.
(G) 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.
(H) 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.
(I) 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 than 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.
(J) 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.
/diamond/ BALANCED PORTFOLIO
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 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 purchase 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
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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 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 Act 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 25% of the Portfolio's total assets
would be invested in such securities. See "Foreign Securities", p. 20.
/diamond/ SHORT-TO-INTERMEDIATE
GOVERNMENT 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, and 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
17
<PAGE>
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 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, 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 Act 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. 20.
/diamond/ MONEY MARKET PORTFOLIO
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
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<PAGE>
(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 interest 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 interest 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.
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.
(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.
(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 in the investment restrictions for each Portfolio is complied with at
the time of the investment, a subsequent change in the percentage resulting
from any change in value of a Portfolio's net assets will not result in a
violation of such restriction.
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<PAGE>
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 a Portfolio's investments
in foreign securities to meet additional diversification and other
requirements.
INVESTMENT POLICIES
This section explains certain other Portfolio policies, subject to each
Portfolio's investment restrictions. PLEASE CAREFULLY REVIEW THE "INVESTMENT
RESTRICTIONS" FOR EACH PORTFOLIO LISTED ABOVE. (For a complete discussion of
each Portfolio's investment policies and restrictions, please refer to the
Fund's Prospectus for these Portfolios.)
/diamond/ LENDING
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
Portfolio must receive any dividends or interest paid by the issuer on such
securities; (c) each 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) each Portfolio 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.
The Growth, Bond, Global, International Equity, Short-to-Intermediate
Government, Emerging Growth and Equity-Income Portfolios may also lend (or
borrow) money to other funds that are managed by their respective
Sub-Adviser, provided each Portfolio seeks and obtains permission from the
SEC. (See "Other Investment Policies And Restrictions - Borrowing" in the
Fund's Prospectus.)
/diamond/ BORROWING
Subject to its investment restrictions, each Portfolio may borrow money from
banks for temporary or emergency purposes. (The Aggressive Growth Portfolio
may also borrow for investment purposes.) For a complete discussion of
Portfolio borrowing, see "Other Investment Policies And Restrictions
- - Borrowing" in the Fund's Prospectus.
/diamond/ FOREIGN SECURITIES
Subject to the limitations set forth above, a 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 for each
Portfolio under the supervision of the Board of
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<PAGE>
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 Portfolio's Investment Adviser and each Sub-Adviser will consider
these and other factors before investing in foreign securities.
A Portfolio may also purchase 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. A
Portfolio may also invest in American Depositary Shares ("ADSs"), European
Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") and other
types of receipts of shares evidencing ownership of the underlying foreign
security.
FOREIGN EXCHANGE TRANSACTIONS. 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 "Portfolio Securities And Risk Factors - Foreign
Securities" and "Portfolio Securities And Risk Factors - Foreign Bank
Obligations" in the Fund's Prospectus.
/diamond/ INVESTMENT FUNDS (INTERNATIONAL
EQUITY PORTFOLIO)
The International Equity 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.
/diamond/ REPURCHASE AND REVERSE
REPURCHASE AGREEMENTS
Subject to a Portfolio's investment restrictions and Policies, a Portfolio
may enter into repurchase or 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 the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and
found satisfactory by a Portfolio's Sub-Adviser. (See "Repurchase and Reverse
Repurchase Agreements", page 29 of the Fund's Prospectus.)
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
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<PAGE>
particular price and time. While a reverse repurchase agreement is
outstanding, the Portfolio will segregate with its custodian cash and
appropriate liquid assets to cover its obligation under the agreement. A
Portfolio will enter into reverse repurchase agreements only with parties
that the Portfolio's Sub-Adviser deems creditworthy.
/diamond/ U.S. GOVERNMENT SECURITIES
Subject to a Portfolio's investment restrictions or policies, a 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. Examples of the types of U.S. Government securities that
the Portfolio may hold include the Federal Housing Administration, Small
Business Administration, General Services Administration, Federal Farm Credit
Banks, Federal Intermediate Credit 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 U.S. 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.
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 Association
("FNMA").
/diamond/ NON-INVESTMENT GRADE DEBT
SECURITIES
Subject to limitations set forth in a Portfolio's investment policies, a
Portfolio may invest 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") (lower than Baa)
or Standard & Poor's Corporation (lower than BBB). Bonds and preferred stock
rated "B" or "b" by Moody's are not considered investment grade debt
securities. (See Appendix A in the Prospectus for a description of debt
security ratings.)
Before investing in any lower-grade debt securities, a Portfolio's
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 Portfolio's 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 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 each 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.
/diamond/ CONVERTIBLE SECURITIES
Subject to any investment limitations set forth in a Portfolio's policies or
investment restrictions, a 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
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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 a Portfolio may invest are
subject to the same rating criteria as the Portfolio's investment in
non-convertible debt securities.
/diamond/ INVESTMENTS IN FUTURES, OPTIONS
AND OTHER DERIVATIVE
INSTRUMENTS
The following investments are subject to limitations as set forth in each
Portfolio's investment restrictions and policies:
FUTURES CONTRACTS. A Portfolio may enter into contracts for the purchase or
sale for future delivery of equity or 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 contracts.
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 generally will not be made
other than to seek to hedge against potential changes in interest or currency
exchange rates or the prices 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 futures contracts 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 Portfolio's 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 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
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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 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 a Portfolio's net asset value from
declining as much as it otherwise would have. A 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 a 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 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 a Portfolio's Sub-Adviser still may not
result in a successful use of futures contracts.
Futures contracts entail risks. Although each Portfolio's Sub-Adviser
believes that use of such contracts can benefit a Portfolio, 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 a Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
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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
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 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. A Portfolio may buy and write 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. 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 29. Transactions in options on futures contracts will generally 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
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adversely affect either the value of the Portfolio's securities or the
process 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
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 increase 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 contact 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. A 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 or exposed to fluctuations in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction
hedge").
Additionally, when a Portfolio's Sub-Adviser believes that a foreign currency
in which portfolio securities are denominated may suffer a substantial
decline against the U.S. dollar, a 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
Portfolio's Sub-Adviser believes that the U.S. dollar may suffer a
substantial decline against a foreign currency for a fixed U.S. dollar amount
("position hedge"). This type of hedge
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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
a Portfolio's 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 a Portfolio's 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 a
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 Portfolio's 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.
A 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 a Portfolio
is not able to cover its forward currency positions with underlying portfolio
securities, the Fund's custodian will segregate cash or other 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 and
cross-hedges. If the value of the segregated securities declines, additional
cash or liquid assets will be segregated 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 assets, 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 a 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
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are subject of the cross-hedging transactions 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.
A 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, 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.
A Portfolio 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.
A 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
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such circumstances, the Portfolio collateralizes the option by maintaining
segregated 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 Portfolio's
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
Portfolio's 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 ("OTC"). 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 a 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 other 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 segregating with its custodian cash or other 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
Portfolio's 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.
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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.
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 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
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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.
A Portfolio 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 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 a 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 a
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, a Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. A 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 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
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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 OTC 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 a 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 other liquid assets having an aggregate
net asset value of at least equal to the accrued excess will be segregated
with the Fund's custodian. If a Portfolio enters into an interest rate swap
on other than a net basis, the Portfolio would segregate assets 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. A Portfolio's
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, a 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-Advisers have 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
segregate with the custodian cash or other 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.
Interest rate swap transactions are subject to limitations set forth in each
Portfolio's policies. 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. A 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 each Portfolio's Sub-Adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
instruments and techniques are developed. A Sub-Adviser may use these
opportunities to the extent they are consistent with each Portfolio's
respective investment objective 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
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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 OTC 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, assets must be
segregated 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 SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded OTC. In an
OTC 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 OTC 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
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involve certain risks not presented by the OTC 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.
/diamond/ ZERO COUPON, PAY-IN-KIND AND
STEP COUPON SECURITIES
Subject to any limitations set forth in the policies and investment
restrictions for a Portfolio, a Portfolio may invest in zero coupon,
pay-in-kind or 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,
each 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 the period before interest payments begin, in some years
a 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 a 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.
/diamond/ WARRANTS AND RIGHTS
Subject to its investment limitations, a Portfolio may invest in warrants and
rights. 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, usually higher than the market price at the time of
issuance, for a period of years or to perpetuity. The purchaser of a warrant
expects the market price of the security will exceed the
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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.
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 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.
/diamond/ MORTGAGE-BACKED SECURITIES
A 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.
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.
/diamond/ 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. A Portfolio will invest its assets in asset-backed
securities subject to any limitations set forth in its investment policies or
restrictions.
/diamond/ PASS-THROUGH SECURITIES
Subject to a Portfolio's investment restrictions and policies, a Portfolio
may invest 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 mortgage-backed securities. GNMA Certificates are
mortgage-backed securities that evidence an undivided interest in a pool of
mortgage
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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.
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.
/diamond/ OTHER INCOME PRODUCING
SECURITIES
Subject to each Portfolio's investment restrictions and policies, other types
of income producing securities that a 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 a
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. A Portfolio
will not invest more than 5% of its assets in inverse floaters.
SEE "DEBT SECURITIES AND FIXED-INCOME INVESTING," PAGE 28 OF THE PROSPECTUS
FOR A DESCRIPTION OF RISKS INVOLVED WITH THESE SECURITIES.
A 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 Appendix A in this Statement of
Additional Information regarding income producing securities in which a
Portfolio may invest.
/diamond/ ILLIQUID AND RESTRICTED/144A
SECURITIES
A Portfolio may invest up to 15% of its net assets in illiquid securities
(I.E., securities that are not readily marketable).
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.
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Rule 144A under the 1933 Act established 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.
The Fund's Board of Directors has authorized each Portfolio's 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 Portfolio's 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
OTC markets. The Portfolio may be restricted in its ability to sell such
securities at a time when a Portfolio's Sub-Adviser deems it advisable to do
so. In addition, in order to meet redemption requests, a Portfolio may have
to sell other assets, rather than such illiquid securities, at a time which
is not advantageous.
/diamond/ OTHER INVESTMENT COMPANIES
In accordance with certain provisions of the 1940 Act, 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
1940 Act also provides that a Portfolio generally 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. A Portfolio (except the Growth, Bond and Global Portfolios) will
indirectly bear its proportionate share of any investment advisory fees and
expenses paid by the funds in which it invest, in addition to the investment
advisory fee and expenses paid by the Portfolio. If the Growth, Bond and
Global Portfolios invest 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.
The International Equity and U.S. Equity Portfolios may not purchase
securities of other investment companies, other than a security acquired in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange and except as otherwise permitted under the 1940 Act. Investments
by the International Equity and U.S. Equity Portfolios in GEI Short-Term
Investment Fund, an investment fund advised by GEIM, created specifically to
serve as a vehicle for the collective investment of cash balances of these
Portfolios and other accounts advised by GEIM or GEIC, is not considered an
investment in another investment company for purposes of these restrictions.
The GEI Short-Term Investment Fund is not registered with the Securities and
Exchange Commission as an investment company.
/diamond/ QUALITY AND DIVERSIFICATION
REQUIREMENTS (MONEY MARKET
PORTFOLIO)
For the purpose of maintaining a stable net asset value per share, the Money
Market 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
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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 A to the Fund's Prospectus. 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 securities with a remaining maturity of not more
than 13 months; and (iii) require the Portfolio, in the event of certain
downgrading 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.
/diamond/ BANK AND THRIFT OBLIGATIONS
Bank and thrift obligations in which a 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
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$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 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.
A 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.
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 33771. Chairman of the Board, Peter Brown Construction Company,
(construction contractors and engineers), Largo, Florida (1963 - present);
Trustee of IDEX Series Fund, former 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); Trustee of IDEX Series
Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3.
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 (1982 - 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 (September, 1996 - present), WRL
Investment Management, Inc. (investment adviser), Largo, Florida; Chairman
of the Board of Directors (September, 1996 - present), WRL Investment
Services, Inc., Largo, Florida; 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 - 1990) and Director (December, 1990 - present); Idex
Management, Inc. (investment adviser), Largo, Florida; Trustee (1987
- September. 1996), Chairman (December, 1989 - September, 1990 and November,
1990 - September, 1996) and President and Chief Executive Officer (November,
1986 - September, 1990), IDEX Fund, IDEX II Series Fund and IDEX Fund 3;
Trustee and Chairman (September, 1996 - present) of IDEX Series Fund,
(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; Director
(September, 1996 - present), WRL Investment Management, Inc. (investment
adviser), Largo, Florida; Director (September, 1996 - present), WRL
Investment Services, Inc., Largo, Florida; President and Chief
39
<PAGE>
Executive Officer (September, 1990 - September, 1996), Trustee (June, 1990
- September, 1996) and Executive Vice President (June, 1988 - September, 1990)
of IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies);
Trustee, President and Chief Financial Officer (September, 1996 - present) of
IDEX Series Fund; 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)
(financial services), 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 - December, 1996), 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 - September, 1996) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies);
Secretary, Vice President and Counsel of IDEX Series Fund (September, 1996
- present); Attorney (September, 1992 - August, 1993), Hearne, Graziano, Nader
& Buhr, P.A.; Legal Writing Instructor (August, 1991 - June, 1992), Florida
State University College of Law.
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; Director (September,
1996 - present), WRL Investment Management, Inc., (investment adviser) Largo,
Florida; Director (September, 1996 - present), WRL Investment Services, Inc.,
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
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-Advisers
("disinterested Director"). Each Director also receives $500, plus expenses,
per each regular and special Board meeting attended. The table below shows
each Portfolio's allocation of Directors' fees and expenses paid for the year
ended December 31, 1995. The compensation table provides compensation amounts
paid to disinterested Directors of the Fund for the fiscal year ended
December 31, 1995.
40
<PAGE>
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1995
PORTFOLIO AMOUNT PAID
- --------- -----------
Aggressive Growth $ 2,251
Emerging Growth 4,959
International Equity(1) N/A
Global Sector(1) N/A
Global 4,495
Growth 10,513
C.A.S.E. Growth 3
U.S. Equity(1) N/A
Value Equity(1) N/A
Tactical Asset Allocation 396
Equity-Income 3,426
Utility 411
Balanced 521
Bond 1,255
Short-to-Intermediate Government 242
Money Market 528
- -----------------
(1) Portfolio had not commenced operations as of December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID
AGGREGATE COMPENSATION TO DIRECTORS FROM
FROM WRL SERIES FUND, INC.
NAME OF PERSON, POSITION WRL SERIES FUND, INC. AND IDEX SERIES FUND
- ------------------------ -------------------------- ------------------------
<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, or IDEX Series Fund to a disinterested Director or
Trustee on a current basis for services rendered as director. (IDEX Fund and
IDEX Fund 3 were merged with and into the Growth Portfolio of IDEX II Series
Fund on September 20, 1996, at which time IDEX II Series Fund was renamed
IDEX Series Fund.) Deferred compensation amounts will accumulate based on the
value of Class A shares of a portfolio of IDEX 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 December 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.
/diamond/ 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 Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
wholly-owned subsidiary of Western Reserve, which is a wholly-owned
subsidiary of First AUSA
41
<PAGE>
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 October 3, 1996 and by
the shareholders of each Portfolio of the Fund on December 16, 1996. The
Investment Advisory Agreement provides that it will continue in effect for an
initial term ending January 1, 1999, 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 each 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 each
Portfolio of the Fund, see "The Sub-Advisers", on page 45-48.
ADVISORY FEE. The method of computing the investment advisory fee is fully
described in the Fund's Prospectus. For the years ended December 31, 1995,
1994 and 1993, the Investment Adviser was paid fees for its services to each
Portfolio in the following amounts:
ADVISORY FEES
YEAR ENDED DECEMBER 31
---------------------------------------------
PORTFOLIO 1995 1994 1993
- --------- -------------- -------------- ------------
Aggressive Growth $ 849,097 $ 125,449(1) $ N/A
Emerging Growth 1,838,573 1,262,170 240,6113
International Equity(2) N/A N/A N/A
Global Sector(2) N/A N/A N/A
Global 2,075,054 1,600,706 232,026
Growth 7,847,750 6,850,340 6,840,711
C.A.S.E. Growth 5,519(4) N/A N/A
U.S. Equity(2) N/A N/A N/A
Value Equity(2) N/A N/A N/A
Tactical Asset Allocation 433,844(5) N/A N/A
Equity-Income 1,746,022 1,180,759 224,748(3)
Utility 128,859 33,553(1) N/A
Balanced 195,339 67,043(1) N/A
Bond 409,862 407,667 387,264
Short-to-Intermediate Government 126,134 133,919 72,622
Money Market 422,357 351,798 224,406
-------------- -------------- -------------
TOTAL $16,078,410 $12,013,404 $8,222,388
============== ============== =============
- -----------------
(1) Portfolio commenced operations March 1, 1994.
(2) Portfolio had not commenced operations as of December 31, 1995.
(3) Portfolio commenced operations March 1, 1993.
(4) Portfolio commenced operations May 1, 1995.
(5) Portfolio commenced operations January 3, 1995.
42
<PAGE>
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.
Each Portfolio pays: all expenses incurred in connection with the formation
and organization of a Portfolio, including the preparation (and filing, when
necessary) of the Portfolio's contracts, plans, and documents, conducting
meetings of organizers, directors and shareholders; preparing and filing the
post-effective amendment to the Fund's registration statement effecting
registration of a Portfolio and its shares under the 1940 Act and the 1933
Act and all other matters relating to the information and organization of a
Portfolio and the preparation for offering its shares; expenses in connection
with ongoing registration or qualification requirements under Federal and
state securities laws; investment advisory fees; pricing costs (including the
daily calculations of net asset value); brokerage commissions and all other
expenses in connection with execution of portfolio transactions, including
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; any compensation, fees, or reimbursements
which the Fund pays to its Directors who are not "interested persons," as
that phrase is defined in the 1940 Act, of the Fund or WRL Management;
compensation of the Fund's custodian, administrative and transfer agent,
registrar and dividend disbursing agent; legal, accounting and printing
expenses; other administrative, clerical, recordkeeping and bookkeeping
expenses; auditing fees; certain insurance premiums; services for
shareholders (including allocable telephone and personnel expenses); costs of
certificates and the expenses of delivering such certificates to the
purchaser of shares relating thereto; expenses of local representation in
Maryland; fees and/or expenses payable pursuant to any plan of distribution
adopted with respect to the Fund in accordance with Rule 12b-1 under the 1940
Act; expenses of shareholders' meetings and of preparing, printing, and
distributing notices, proxy statements 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 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 Fund; extraordinary expenses; and all other expenses
properly payable by the Fund or the Portfolios.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1997, to pay expenses on behalf of the Portfolios (except the Global Sector
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% (0.70% for the Bond and Money Market Portfolios,
1.50% for the International Equity Portfolio and 1.30% for the U.S. Equity
Portfolio). The following expenses were paid by the previous investment
adviser, Western Reserve, for the fiscal years ended December 31, 1995, 1994,
and 1993:
43
<PAGE>
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1995 1994 1993
- --------------------------------- ------------ ------------- -----------
Aggressive Growth $ -0-(1) $ 28,885(2) $ N/A
Emerging Growth -0-(1) -0-(1) 51,181(6)
International Equity(7) N/A N/A N/A
Global Sector(7) N/A N/A N/A
Global(3) -0-(1) -0-(1) -0-(1)
Growth -0-(1) -0-(1) -0-(1)
C.A.S.E. Growth 23,832(4) N/A N/A
U.S. Equity(7) N/A N/A N/A
Value Equity(7) N/A N/A N/A
Tactical Asset Allocation(5) -0-(1) N/A N/A
Equity-Income -0-(1) -0-(1) 36,518(6)
Utility 14,417 40,1482 N/A
Balanced -0-(1) 28,629(2) N/A
Bond -0-(1) -0-(1) -0-(1)
Short-to-Intermediate Government -0-(1) -0-(1) 2,226
Money Market -0-(1) -0-(1) -0-(1)
- -----------------
(1) There were no expenses paid on behalf of this Portfolio because the
expenses did not exceed the limitations.
(2) Portfolio commenced operations on March 1, 1994.
(3) Prior to May 1, 1994, the Investment Adviser had voluntarily undertaken
to pay expenses on behalf of the Global Portfolio to the extent that
these expenses exceeded 2.50% of the first $30 million of assets, 2.00%
of the next $70 million of assets, and 1.50% of assets in excess of $100
million.
(4) Portfolio commenced operations on May 1, 1995.
(5) Portfolio commenced operations on January 3, 1995.
(6) Portfolio commenced operations on March 1, 1993.
(7) Portfolio had not commenced operations as of December 31, 1995.
SERVICE AGREEMENT. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and Western Reserve, to furnish the Fund with administrative
services to assist the Fund in carrying out certain of its functions and
operations. The Service Agreement was approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act) on October 3, 1996. Under this
Agreement, WRL Services shall furnish to each Portfolio, subject to the
overall supervision of the Fund's Board, supervisory, administrative, and
transfer agency services, including recordkeeping and reporting. WRL Services
is reimbursed by the Fund monthly on a cost incurred basis.
DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan ("Distribution Plan") pursuant to Rule 12b-1 under the 1940
Act, as amended. Pursuant to the Distribution Plan, the Fund has entered into
a Distribution Agreement with InterSecurities, Inc. ("ISI"), whose principal
office is located at 201 Highland Avenue, Largo, Florida 33770. The
Distribution Plan and related Agreement were approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act) on October 3, 1996, and the
Distribution Plan was approved by the shareholders of each Portfolio of the
Fund on December 16, 1996. ISI is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on behalf
of the Portfolios, will reimburse ISI after each calendar month for certain
Fund distribution expenses incurred or paid by ISI, provided that these
expenses in the aggregate do not exceed 0.15%, on an annual basis, of the
average daily net asset value of shares of each Portfolio.
Distribution expenses for which ISI may be reimbursed under the Distribution
Plan and Distribution Agreement include, but are not limited to, expenses of
printing and distributing the Fund's prospectus and statement of additional
information to potential investors; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars
44
<PAGE>
and sales meetings designed to promote distribution of Fund shares; the
development of consumer-oriented sales materials describing and/or relating
to the Fund; and expenses attributable to "distribution-related services"
provided to the Fund, which include such things as salaries and benefits,
office expenses, equipment expenses, training costs, travel costs, printing
costs, supply expenses, computer programming time, and data center expenses,
each as they relate to the promotion of the sale of Fund shares.
ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all
Portfolios, or such other factors as ISI deems fair and are approved by the
Fund's Board of Directors. ISI has determined that it will not seek payment
by the fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI seeking reimbursement,
policyowners will be notified in advance.
It is anticipated that benefits provided by the Distribution Plan may include
lower fixed costs as a percentage of assets as Fund assets increase through
the growth of the Fund due to enhanced marketing efforts.
/diamond/ THE SUB-ADVISERS
This discussion supplements the information provided about each Portfolio's
Sub-Adviser under the caption "Management of the Fund - The Sub-Advisers" in
the Prospectus.
Each Sub-Adviser serves, pursuant to each Sub-Advisory Agreement dated
January 1, 1997 between WRL Management and the respective Sub-Adviser, on
behalf of each 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
October 3, 1996 and by the shareholders of each Portfolio of the Fund on
December 16, 1996. The Sub-Advisory Agreements provide that they will
continue in effect for an initial term ending January 1, 1999, 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, each Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
for their respective Portfolio(s). Subject to review by the Investment
Adviser and the Board of Directors of the Fund, the Sub-Advisers are
responsible for the actual management of their respective Portfolio(s) and
for making decisions to buy, sell or hold a particular security. Each
Sub-Adviser bears all of its expenses in connection with the performance of
its services under their Sub-Advisory Agreement such as compensating and
furnishing office space for their officers and employees connected with
investment and economic research, trading and investment management of the
respective Portfolio(s).
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. The Sub-Advisers for the Portfolios of the
Fund are:
FRED ALGER MANAGEMENT, INC. ("Alger Management") serves as Sub-Adviser to the
Aggressive Growth Portfolio. Alger Management, 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. Alger Management is generally
engaged in the business of rendering investment advisory services to
institutions and, to a lesser extent, individuals. Alger Management has been
engaged in the business
45
<PAGE>
of rendering investment advisory services since 1964 and has approximately
$5.4 billion under management.
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("Van Kampen") serves as
Sub-Adviser to the Emerging Growth Portfolio. Van Kampen, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, is an indirect wholly-owned
subsidiary of VK/AC Holding, Inc. ("VK/AC Holding"). VK/AC Holding is a
wholly-owned subsidiary of MSAM Holdings II, Inc., which, in turn, is a
wholly-owned subsidiary of Morgan Stanley Group, Inc.
MERIDIAN INVESTMENT MANAGEMENT CORPORATION ("MERIDIAN") AND INVESCO GLOBAL
ASSET MANAGEMENT LIMITED ("INVESCO") serve as Co-Sub-Advisers to the Global
Sector Portfolio. 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 designed by
Meridian, INVESCO will select the specific securities within each category,
country or industry.
Meridian is located at 12835 East Arapahoe Road, Tower II, 7th Floor,
Englewood, Colorado 80112. 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 is located at Rosebank, 12 Bermudiana Road, Hamilton, Bermuda HM11.
In performing services under its Sub-Advisory Agreement with WRL Management,
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.
JANUS CAPITAL CORPORATION ("Janus") serves as the Sub-Adviser to the Growth
Portfolio, the Bond Portfolio and the Global Portfolio.
Janus, located at 100 Fillmore Street, Denver, Colorado 80206, has been
engaged in the management of the Janus funds since 1969. Janus 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 Janus was over $40 billion as of October 1, 1996.
Kansas City Southern Industries, Inc. ("KCSI") owns 83% of Janus. 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.
C.A.S.E. MANAGEMENT, INC. ("C.A.S.E. Management") serves as Sub-Adviser to
the C.A.S.E. Growth Portfolio.
C.A.S.E. Management, located at 2255 Glades Road, Suite 221-A, Boca Raton,
Florida 33431, is a wholly-owned subsidiary of C.A.S.E., Inc. C.A.S.E.
Management provides investment management services to financial institutions,
high net worth individuals, and other professional money managers.
NWQ INVESTMENT MANAGEMENT COMPANY, INC. ("NWQ") serves as the Sub-Adviser to
the Value Equity Portfolio.
NWQ, 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. NWQ had approximately $5.6 billion in assets under
management as of December 31, 1995.
46
<PAGE>
DEAN INVESTMENT ASSOCIATES ("Dean Investment") serves as Sub-Adviser to the
Tactical Asset Allocation Portfolio.
Dean Investment, located at 2480 Kettering Tower, Dayton, Ohio 45423-2480, is
wholly-owned by C.H. Dean and Associates, Inc. Founded in 1972, Dean
Investments manages portfolios for individuals and institutional clients
worldwide. Dean Investments provides a full range of investment advisory
services and currently has $3.756 billion of assets under management.
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Luther King") serves as
Sub-Adviser to the Equity-Income Portfolio.
Luther King is located at 301 Commerce Street, Suite 1600, Fort Worth, Texas
76102. Ultimate control of Luther King is exercised by J. Luther King, Jr.
Luther King provides investment management services to accounts of individual
investors, mutual funds, and other institutional investors. Luther King has
served as an investment adviser for approximately 17 years; as of March 1,
1996, the total assets managed by Luther King exceeded $4.5 billion.
FEDERATED INVESTMENT COUNSELING ("Federated") serves as the Sub-Adviser to
the Utility Portfolio.
Federated, 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.
AEGON USA INVESTMENT MANAGEMENT, INC. ("AEGON Investment") serves as
Sub-Adviser to the Short-to-Intermediate Government Portfolio and the
Balanced Portfolio.
AEGON Investment, located at 4333 Edgewood Road, N.E., Cedar Rapids, Iowa
52499, is a wholly-owned subsidiary of AEGON and thus is an affiliate of the
Investment Adviser. AEGON Investment also serves as sub-adviser to the two
bond portfolios of IDEX Series Fund. AEGON Investment 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.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan") serves as Sub-Adviser
to the Money Market Portfolio.
J.P. Morgan, located at 522 Fifth Avenue, New York, New York 10036, is a
wholly-owned subsidiary of J.P. Morgan & Co., Incorporated. J.P. Morgan
provides investment management and related services for corporate, public,
and union employee benefit funds, foundations, endowments, insurance
companies and government agencies.
SCOTTISH EQUITABLE INVESTMENT MANAGEMENT LIMITED ("Scottish Equitable")
serves as a Co-Sub-Adviser to the International Equity Portfolio. Scottish
Equitable is located at Edinburgh Park, Edinburgh EH12 9SE. Scottish
Equitable is a wholly-owned subsidiary of Scottish Equitable plc, successor
to Scottish Equitable Life Assurance Society. Scottish Equitable is also an
indirect wholly-owned subsidiary of AEGON nv. As of December 31, 1995
Scottish Equitable plc had approximately $15.9 billion in assets under
management. The Co-Sub-Adviser provides investment advisory and management
services to certain of its affiliates and to external organizations.
GE INVESTMENT MANAGEMENT INCORPORATED ("GEIM") serves as a Co-Sub-Adviser to
the International Equity Portfolio and as Sub-Adviser to the U.S. Equity
Portfolio.
GEIM is located at 3003 Summer Street, Stamford, Connecticut 06905. GEIM,
which was formed under the laws of Delaware in 1988, is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal officers and
directors serve in similar capacities with respect to General Electric
Investment Corporation ("GEIC", and, together with GEIM, collectively
referred to as "GE Investments"), which like GEIM is a wholly-owned
subsidiary of GE. As of June 30, 1996, GEIM and GEIC together managed assets
in excess of $ 55 billion. GE Investments provides investment management
services to external organizations and to certain of its affiliates.
47
<PAGE>
The method of computing each Sub-Adviser's fees is set forth in the Fund's
Prospectus. For the years ended December 31, 1995, 1994 and 1993 each
Sub-Adviser was paid fees for their services in the following amounts:
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
SUB-ADVISER PORTFOLIO 1995 1994 1993
- ------------------------ -------------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Alger Management Aggressive Growth $ 424,549 $ 62,724(2) -0-
Van Kampen Emerging Growth 919,287 630,629 $ 120,306(3)
Scottish Equitable/GEIM International Equity(1) N/A N/A N/A
Meridian/INVESCO Global Sector(1) N/A N/A N/A
Janus 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
C.A.S.E. Management C.A.S.E. Growth 2,759(5) N/A N/A
GEIM U.S. Equity(1) N/A N/A N/A
NWQ Value Equity(1) N/A N/A N/A
Dean Investment Tactical Asset Allocation 216,922(4) N/A N/A
Luther King Equity-Income 873,011 590,528 112,374(3)
Federated Utility 85,906 22,369(2) N/A
AEGON Investment Short-to-Intermediate 63,067 66,959 36,310
Government
Balanced 94,669 19,275(2) N/A
J.P. Morgan Money Market 211,178(6) 176,549(6) 112,155(6)
<FN>
- -----------------
(1) Portfolio had not commenced operations as of December 31, 1995.
(2) Portfolio commenced operations March 1, 1994.
(3) Portfolio commenced operations March 1, 1993.
(4) Portfolio commenced operations January 3, 1995.
(5) Portfolio commenced operations May 1, 1995.
(6) Fees paid to Janus, the Portfolio's previous Sub-Adviser.
</FN>
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
/diamond/ PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "Other Investment Policies and
Restrictions - 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
cal-culated 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 following table provides the Portfolios' turnover rates for the fiscal
years ended December 31, 1995, 1994 and 1993:
48
<PAGE>
PORTFOLIO TURNOVER RATES
YEAR ENDED DECEMBER 31
------------------------------------------
PORTFOLIO 1995 1994 1993
- --------------------------------- ----------- ---------- --------------
Aggressive Growth 108.04% 89.73%(5) N/A
Emerging Growth 124.13% 72.62% 12.79%(2)
International Equity(1) N/A N/A N/A
Global Sector(1) N/A N/A N/A
Global 130.60% 192.06% 79.93%
Growth 130.48% 107.33% 77.91%
C.A.S.E. Growth 121.62%(3) N/A N/A
U.S. Equity(1) N/A N/A N/A
Value Equity(1) N/A N/A N/A
Tactical Asset Allocation 38.68%(4) N/A N/A
Equity-Income 52.59% 53.50% 27.41%(2)
Utility 78.34% 36.13%(5) N/A
Balanced 98.55% 57.73%(5) N/A
Bond 120.54% 131.73% 149.02%
Short-to-Intermediate Government 51.82% 93.70% 28.64%
Money Market(6) N/A N/A N/A
- -----------------
(1) Portfolio had not yet commenced operations as of December 31, 1995.
(2) Portfolio commenced operations March 1, 1993.
(3) Portfolio commenced operations May 1, 1995.
(4) Portfolio commenced operations January 3, 1995.
(5) Portfolio commenced operations March 1, 1994.
(6) Money Market 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.
The future annual turnover rates cannot be precisely predicted, although an
annual turnover rate in excess of 100 % is not presently anticipated for the
Aggressive Growth, Tactical Asset Allocation, Utility, Balanced and
Short-to-Intermediate Government Portfolios; 50 % for the Value Equity
Portfolio; 150 % for the Growth Portfolio; and 200% for the Global Portfolio.
There are no fixed limitations regarding the portfolio turnover rates 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 each Portfolio may be disposed of when they are
no longer deemed suitable.
/diamond/ PLACEMENT OF PORTFOLIO
BROKERAGE
Subject to policies established by the Board of Directors of the Fund, each
Portfolio's Sub-Adviser (INVESCO, a Co-Sub-Adviser to the Global Sector
Portfolio, determines placement of portfolio brokerage for that Portfolio ) is
primarily responsible for placement of a Portfolio's securities transactions. In
placing orders, it is the policy of a 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
each Sub-Adviser generally will seek reasonably competitive spreads or
commissions, a Portfolio will not necessarily be paying the lowest spread or
commission available. A 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 a 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 Money Market(6)
N/A obtained for a flat fee,
49
<PAGE>
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 each 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 a
Sub-Adviser. The expenses of a Sub-Adviser will not necessarily be reduced as
a result of the receipt of such supplemental information. A Sub-Adviser may
use such research products and services in servicing other accounts in
addition to the respective Portfolio. If a 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 a Sub-Adviser will be considered by
and may be useful to the Sub-Adviser in carrying out its obligations to a
Portfolio.
When a Portfolio purchases or sells a security in the OTC 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 a 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 a 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 a 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 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 a Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of each 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.
50
<PAGE>
The Board of Directors of the Fund has authorized the Sub-Advisers 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-Advisers may occasionally place portfolio business with
affiliated brokers of the Investment Adviser or a Sub-Adviser, including:
InterSecurities, Inc. P.O. Box 5068, Clearwater, Florida 33518; DST
Securities, Inc., 301 West 11th Street, Kansas City, Missouri 64105; Fred
Alger & Company, Inc., 75 Maiden Lane, New York, New York 10038; 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.
COMMISSIONS PAID BY THE PORTFOLIOS
<TABLE>
<CAPTION>
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
----------------------------
PORTFOLIO 1995 1994
- --------------- ------------- -------------
<S> <C> <C>
Aggressive
Growth $ 240,067 $ 76,028(2)
Emerging 542,420 317,287
Global 712,827(4) 241,051
Growth 1,577,115 1,466,443
C.A.S.E.
Growth 8,662(5) N/A
Tactical Asset
Allocation 208,950(6) N/A
Equity-Income 316,489 354,400
Utility 52,921 40,095(2)
Balanced 90,724 43,311(2)
</TABLE>
<TABLE>
<CAPTION>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------
PORTFOLIO 1993 1995 % 1994 % 1993 %
- --------- ------------- ----------- ---------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive
Growth N/A $240,067 100%(1) $75,128 98.82%(1) N/A N/A
Emerging 74,070(3) N/A N/A N/A N/A N/A N/A
Global 53,250 N/A N/A N/A N/A N/A N/A
Growth 1,022,522 N/A /less than/1% 2,796 /less than/1% 85,404 /less than/1%
C.A.S.E.
Growth N/A N/A N/A N/A N/A N/A N/A
Tactical Asset
Allocation N/A N/A N/A N/A N/A N/A N/A
Equity-Income 113,996(3) N/A N/A N/A N/A N/A N/A
Utility N/A N/A N/A N/A N/A N/A N/A
Balanced N/A 1,040 1.15% 8,700 20.09%(7) N/A N/A
The Aggressive Growth Portfolio paid affiliated brokerage commissions to Alger,
Inc., the Growth Portfolio paid affiliated brokerage commissions to DST
Securities, Inc. and the Balanced Portfolio paid affiliated brokerage
commissions to AEGON USA Securities, Inc.
The Bond Portfolio, the Money Market Portfolio and the Short-to-Intermediate
Government Portfolio did not pay any brokerage commissions for the years ended
December 31, 1995, 1994 and 1993.
No information is included for the Global Sector, Value Equity, International
Equity or U.S. Equity Portfolios as they had not commenced operations as of
December 31, 1995.
<FN>
- -----------------
(1) 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.
(2) Portfolio commenced operations March 1, 1994.
(3) Portfolio commenced operations March 1, 1993.
(4) This figure is higher than 1994 due to the relative increase in the
amount of total assets invested in foreign securities.
(5) Portfolio commenced operations May 1, 1995.
(6) Portfolio commenced operations January 3, 1995.
(7) The percentage of the 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 and for the
period March 1, 1994 to December 31, 1994 was 9.63% and 38.06%,
respectively.
</FN>
</TABLE>
51
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
/diamond/ 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 a 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.
/diamond/ NET ASSET VALUATION
As stated in the Prospectus, the net asset value of the Portfolios' 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 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 for which
quotations are not readily available are valued at fair values as determined
in good faith by a Portfolio's Investment 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. Values of gold bullion held
by a Portfolio are based upon daily quotes provided by banks or brokers
dealing in such commodities.
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, Money Market and Bond Portfolios commenced operations on October
2, 1986; the Global and Short-to-Intermediate Government Portfolios commenced
operations on December 3, 1992; the Emerging Growth and the Equity-Income
Portfolios commenced operations March 1, 1993; the Aggressive Growth,
Balanced and Utility Portfolios commenced operations on March 1, 1994; the
Tactical Asset Allocation Portfolio commenced operations on January 3, 1995;
and the C.A.S.E. Growth Port-folio commenced operations on May 1, 1995. The
rates of return shown below depict the actual investment experience of each
Portfolio for the periods shown. (The Value Equity, Global Sector,
International Equity, and U.S. Equity Portfolios had not commenced operations
as of December 31, 1995, so performance information is not yet available for
these Portfolios).
52
<PAGE>
CALCULATION OF PERFORMANCE RELATED INFORMATION
The Prospectus contains a brief description of how performance is calculated.
/diamond/ TOTAL RETURN
The rates of return shown 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>
Aggressive Growth (1.26%)(4) N/A N/A N/A N/A 38.02%
Emerging Growth 24.71% (3) N/A N/A N/A (7.36%) 46.79%
International Equity(7) N/A N/A N/A N/A N/A N/A
Global Sector(7) N/A N/A N/A N/A N/A N/A
Global 18.67% (2) N/A N/A 18.55% 11.07% 23.06%
Growth 17.63% (1) 18.06% 9.46% 11.94% 16.15% 47.12%
C.A.S.E. Growth 20.65% (6) N/A N/A N/A N/A N/A
U.S. Equity(7) N/A N/A N/A N/A N/A N/A
Value Equity(7) N/A N/A N/A N/A N/A N/A
Tactical Asset Allocation 20.09% (5) N/A N/A N/A N/A N/A
Equity-Income 13.49% (3) N/A N/A N/A (0.53%) 24.66%
Utility (4.58%)(4) N/A N/A N/A N/A 25.25%
Balanced (5.73%)(4) N/A N/A N/A N/A 19.80%
Bond 8.48% (1) 10.50% 8.50% 9.08% 6.98% 22.99%
Short-to-Intermediate
Government N/A (2) N/A N/A 4.58% (0.43%) 13.54%
Money Market 4.98% (1) 3.91% 3.57% 3.76% 4.42% 5.40%
Standard & Poor's Index
of 500 Common Stocks 14.68% 16.59% 13.36% 15.34% 18.07% 37.58%
<FN>
- -----------------
(1) Portfolio commenced operations on October 2, 1986.
(2) Portfolio commenced operations on December 3, 1992.
(3) Portfolio commenced operations on March 1, 1993.
(4) Portfolio commenced operations on March 1, 1994.
(5) Portfolio commenced operations on January 3, 1995.
(6) Portfolio commenced operations on May 1, 1995.
(7) Portfolio had not yet commenced operations as of December 31, 1995.
</FN>
</TABLE>
53
<PAGE>
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.
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
appears in the Prospectus.
/diamond/ YIELD QUOTATIONS
The yield quotations for a Portfolio (for Money Market Portfolio yield, see
"Yield Quotations - Money Market Portfolio", below) 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:
YIELD = 2 [ (a-b
--- + 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 Bond Portfolio and the Short-to-Intermediate Government
Portfolio as computed above for the thirty day period ended December 31, 1995
was 5.75% and 5.58%, respectively.
/diamond/ YIELD QUOTATIONS - MONEY
MARKET PORTFOLIO
From time to time the Money Market 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 a
Portfolio declared and reinvested daily based upon the net investment income
earned by a 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 for the Money Market Portfolio for the seven-day period ended
December 31, 1995, was 5.32% and was equivalent to a compound effective yield
of 5.46%. The current yield for the Money Market Portfolio is an
annualization, without compounding, of the portfolio rate of return, 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
54
<PAGE>
realized gains and losses or unrealized appreciation and depreciation. The
Money Market 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 Money Market 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 Money Market 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 Money Market Portfolio, portfolio maturity and operating
expenses.
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 (except the U.S. Equity Portfolio and
International Equity Portfolio which intend 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, 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 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
55
<PAGE>
interests in the same real property project, and all interest 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.
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 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 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 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.
A 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, a 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 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 obligations, 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
56
<PAGE>
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: International Equity Portfolio; Aggressive Growth Portfolio;
Emerging Growth Portfolio; Global Sector Portfolio; Global Portfolio; Growth
Portfolio; C.A.S.E. Growth Portfolio; Value Equity Portfolio; Tactical Asset
Allocation Portfolio; Equity-Income Portfolio; Utility Portfolio; Balanced
Portfolio; Bond Portfolio; Short-to-Intermediate Government Portfolio; Money
Market Portfolio; C.A.S.E. Growth & Income Portfolio; C.A.S.E. Quality Growth
Portfolio; Foreign Sector Portfolio; US Sector Portfolio; Janus Balanced
Portfolio; Leisure Portfolio; and U.S. 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
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 (except the Global Sector
Portfolio, the Value Equity Portfolio, the International Equity Portfolio and
the U.S. Equity 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. The
financial statements (unaudited) of the Fund for the six-month period ended
June 30, 1996 are included in the Fund's Semi-Annual Report and are
incorporated herein by reference to such report. Unaudited financial
statements for the Global Sector and Value Equity Portfolios are included in
this Statement of Additional Information. Because the International Equity
and U.S. Equity Portfolios did not commence operations until January 2, 1997,
there are no financial statements for these Portfolios.
57
<PAGE>
OTHER INFORMATION
/diamond/ INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
standards, its annual report. In addition, Price Waterhouse LLP signs the tax
returns for each of the Portfolios of the Fund.
/diamond/ CUSTODIAN
Investors Bank & Trust Company ("IBT")located at 89 South Street, Boston,
Massachusetts 02111, serves as the Fund's Custodian and Dividend Disbursing
Agent. IBT provides comprehensive asset administrative services to the Fund and
other members of the financial industry which include: multi-currency
accounting; institutional transfer agency services; domestic and global custody;
performance measures; foreign exchange; and securities lending and mutual fund
administrative services.
58
<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 issue 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, a
Portfolio will consider the liquidity of the issuer through periodic credit
analysis based upon publicly available information.
7. 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 prospectus for capital appreciation or risks of capital loss.
8. CONVERTIBLE SECURITIES. A 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.
9. COMMERCIAL PAPER.* Commercial paper is a short-term promissory note
issued by a corporation primarily to finance short-term credit needs.
10. 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
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. 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
- -----------------
* Short-term Securities.
A-1
<PAGE>
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.
11. REVERSE REPURCHASE AGREEMENT. A reverse repurchase agreement involves
the sale of securities held by a Portfolio, with an agreement to repurchase
the securities at an agreed upon price, date and interest payment. A
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. A 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 transactions.
12. 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.
13. 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 a Portfolio may invest in them if it
is determined they are consistent with the Portfolio's investment objective
and policies.
14. 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.
15. 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
A-2
<PAGE>
shorten the effective maturities of those securities an may lower their total
return. 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.
16. 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.
17. 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. Each
Portfolio, and its share price and yield, are not guaranteed by the U.S.
Government.
18. 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 zero coupon bond's purchase price
and its face value.
19. 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.
20. 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.
A-3
<PAGE>
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.
21. EQUIPMENT LEASE AND TRUST CERTIFICATES. A Portfolio may invest in
equipment lease and trust certificates, which are debt securities that are
secured by direct or indirect interest in specified equipment or equipment
leases (including, but not limited to, railroad rolling stock, planes,
trucking or shipping fleets, or other personal property).
A-4
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
ASSETS: AUGUST 31, 1996
Investments in securities, at market value
(cost $ 3,088,114)............................. $ 3,067,842
Short-term securities, at amortized cost 0
Cash............................................ 481,096
Receivables:
Fund shares sold.............................. 0
Securities sold............................... 0
Interest...................................... 12,265
Dividends..................................... 1,900
Foreign Receivable............................ 132
Other......................................... 0
------------
Total assets................................ 3,563,235
------------
LIABILITIES:
Fund shares purchased.......................... 0
Securities purchased........................... 258,767
Accounts payable and accrued liabilities:
Investment advisory fees..................... 2,523
Custody fees................................. 459
Dividends to shareholders.................... 0
Deposits for securities on loan.............. 0
Other Fees................................... 0
------------
Total liabilities.......................... 261,749
------------
Total net assets......................... $ 3,301,486
============
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized) $ 3,336
Additional paid-in capital..................... 3,311,952
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss).............................. 12,736
Accumulated undistributed net realized
gain (loss) on:
Investment transactions.................... (6,461)
Foreign currency transactions.............. 71
Net unrealized appreciation (depreciation) on:
Investment securities........................ (20,272)
Foreign currency transactions................ 124
Net assets applicable to outstanding ------------
shares of capital............................ $ 3,301,486
============
Shares outstanding at August 31, 1996 333,551
============
Net asset value per share...................... $ 9.90
============
STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*
Interest....................................... $ 16,172
Dividends (Net of foreign tax of $95) 4,569
---------
Total investment income.................... 20,741
---------
EXPENSES:
Investment advisory fees....................... 6,773
Printing and shareholder reports............... 192
Custody fees................................... 10,181
Legal fees..................................... 17
Auditing and accounting fees................... 1,505
Directors fees................................. 3
Registration fees.............................. 4
Other fees..................................... 7
---------
Total expenses............................. 18,682
Less:
Advisory fee waiver..........................
and expense reimbursement.................. 10,677
Fees paid indirectly......................... 0
---------
Net expenses............................. 8,005
---------
Net investment income (loss)................... 12,736
---------
Net realized gain (loss) on:
Investment securities........................ (6,461)
Foreign currency transactions................ 71
---------
Total net realized gain (loss)............. (6,390)
---------
Change in unrealized appreciation
(depreciation) on:
Investment securities........................ (20,272)
Foreign currency transactions................ 124
Total change in unrealized ---------
appreciation (depreciation)................ (20,148)
---------
Net gain (loss) on investments................ (26,538)
---------
Net increase (decrease) in net assets
resulting from operations..... ........... $ (13,802)
=========
* The inception of this portfolio was May 1, 1996.
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
AUGUST 31, 1996*
OPERATIONS:
<S> <C>
Net investment income (loss)........................................... $ 12,736
Net realized gain (loss) on investments and foreign
currency transactions................................................ (6,390)
Change in unrealized appreciation (depreciation) on investments and
foreign currency transactions........................................ (20,148)
-----------
Net increase (decrease) in net assets resulting from operations...... (13,802)
-----------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income................................................. 0
Net realized gains.................................................... 0
-----------
Total distributions................................................. 0
-----------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares..................................... 3,438,371
Dividends and distributions reinvested................................ 0
Cost of shares repurchased............................................ (123,083)
-----------
Increase (decrease) in net assets from capital shares transactions.. 3,315,288
-----------
Net increase (decrease) in net assets .............................. 3,301,486
NET ASSETS:
Beginning of period................................................... 0
-----------
End of period......................................................... $ 3,301,486
===========
Undistributed net investment income................................. $ 12,736
===========
SHARE ACTIVITY:
Shares outstanding - beginning of period ............................. 0
-----------
Shares issued......................................................... 345,983
Shares issued - reinvestment of dividends and distributions........... 0
Shares redeemed....................................................... (12,432)
-----------
Increase (decrease) in shares outstanding............................. 333,551
-----------
Shares outstanding - end of period.................................... 333,551
===========
* The inception of this portfolio was May 1, 1996
</TABLE>
<PAGE>
WRL SERIES FUND, INC
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
---------
1996/dagger/
-----
Net asset value, beginning of period ................ $ 10.00
Income from operations:
Net investment income (loss) .................... .07
Net realized and unrealized
gain (loss) on investments..................... (.17)
---------
Total income (loss) from operations............ (.10)
---------
Distributions:
Dividends from net investment income............. (.00)
Distributions from net realized gains
on investments................................. .00
---------
Total distributions............................ (.00)
---------
Net asset value, end of period....................... $ 9.90
=========
Total return ........................................ -1.01%
Ratios and supplemental data:
Net assets at end of period
(in thousands)................................... $ 3,301
Ratio of expenses to average net assets ........... 1.10%
Ratio of net investment income (loss)
to average net assets............................ 1.74%
Ratio of commissions paid to number of shares...... 3.43%
Portfolio turnover rate............................ 10.57%
* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.
/dagger/ The inception of this portfolio was May 1, 1996. The total return is
not annualized.
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
ASSETS: AUGUST 31, 1996
Investments in securities, at market value
(cost $ 16,470,141) ...................................... $16,609,973
Short-term securities, at .................................. 5,372,743
amortized cost
Cash ....................................................... 0
Receivables:
Fund shares sold ......................................... 0
Securities sold .......................................... 0
Interest ................................................. 2,229
Dividends ................................................ 23,508
Other .................................................... 0
-----------
Total assets ........................................... 22,008,453
-----------
LIABILITIES:
Fund shares purchased ..................................... 0
Securities purchased ...................................... 1,371,441
Accounts payable and accrued liabilities:
Investment advisory fees ................................ 8,894
Custody and transfer agent fees ......................... 0
Auditing and accounting fees .............................. 2,223
Dividends to shareholders ............................... 0
Deposits for securities on loan ......................... 0
Other fees .............................................. 0
-----------
Total liabilities ..................................... 1,382,558
-----------
Total net assets .................................... $20,625,895
===========
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized) .................. $ 20,273
Additional paid-in capital ................................. 20,425,689
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss) .......................................... 40,110
Accumulated undistributed net realized
gain (loss) on:
Investment transactions ................................ (9)
Net unrealized appreciation (depreciation) on:
Investment securities .................................... 139,832
------------
Net assets applicable to outstanding
shares of capital ........................................ $ 20,625,895
============
Shares outstanding at August 31, 1996 ...................... 2,027,264
============
Net asset value per share .................................. $ 10.17
============
STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*
Interest ..................................................... $ 25,702
Dividends .................................................... 33,135
---------
Total investment income .................................. 58,837
---------
EXPENSES:
Investment advisory fees ..................................... 14,981
Printing and shareholder reports ............................. 885
Custody fees ................................................. 10,691
Legal fees ................................................... 55
Auditing and accounting fees ................................. 1,505
Directors fees ............................................... 9
Registration fees ............................................ 13
Other fees ................................................... 32
---------
Total expenses ........................................... 28,171
Less:
Advisory fee waiver
and expense reimbursement ................................ 9,440
Fees paid indirectly ....................................... 4
---------
Net expenses ........................................... 18,727
---------
Net investment income (loss) ................................. 40,110
---------
Net realized gain (loss) on:
Investment securities ...................................... (9)
---------
Total net realized gain (loss) ......................... (9)
Change in unrealized appreciation
(depreciation) on:
Investment securities ...................................... 139,832
---------
Total change in unrealized
appreciation (depreciation) ........................... 139,832
---------
Net gain (loss) on investments ............................... 139,823
---------
Net increase (decrease) in net
assets resulting from
operations ............................................... $ 179,933
=========
* The inception of this portfolio was May 1, 1996
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
OPERATIONS: AUGUST 31, 1996*
Net investment income (loss) ................................ $ 40,110
Net realized gain (loss) on investments ..................... (9)
Change in unrealized appreciation (depreciation) ............ 139,832
on investments ------------
Net increase (decrease) in net assets ..................... 179,933
resulting from operations ------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income ....................................... 0
Net realized gains .......................................... 0
------------
Total distributions ....................................... 0
------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares ......................... 20,722,618
Dividends and distributions reinvested .................... 0
Cost of shares repurchased ................................ (276,656)
------------
Increase (decrease) in net assets from capital .......... 20,445,962
shares transactions ------------
Net increase (decrease) in net assets ................... 20,625,895
NET ASSETS:
Beginning of period ....................................... 0
------------
End of period ............................................. $ 20,625,895
============
Undistributed net investment income ..................... $ 40,110
============
SHARE ACTIVITY:
Shares outstanding - beginning of period .................. 0
------------
Shares issued ............................................. 2,055,476
Shares issued - reinvestment of dividends ................. 0
and distributions
Shares redeemed ........................................... (28,212)
------------
Increase (decrease) in shares outstanding ................. 2,027,264
------------
Shares outstanding - end of period ........................ 2,027,264
============
* The inception of this portfolio was May 1, 1996.
<PAGE>
WRL SERIES FUND, INC.
VALUE EQUITY PORTFOLIO
(UNAUDITED)
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
------------
1996\dagger\
------------
Net asset value, beginning of period .............................. $ 10.00
Income from operations:
Net investment income (loss) .................................. .06
Net realized and unrealized
gain (loss) on investments .................................. .11
----------
Total income (loss) from operations ......................... .17
----------
Distributions:
Dividends from net investment income .......................... .00
Distributions from net realized gains
on investments .............................................. .00
----------
Total distributions ......................................... .00
----------
Net asset value, end of period .................................... $ 10.17
===========
Total return ...................................................... 1.74%
Ratios and supplemental data:
Net assets at end of period
(in thousands) ................................................ $ 20,626
Ratio of expenses to average net assets ......................... 0.65%
Ratio of net investment income (loss)
to average net assets ......................................... 1.39%
Ratio of commissions paid to number of shares ................... 7.30%
Portfolio turnover rate ......................................... 1.62%
* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.
\dagger\ The inception of this portfolio was May 1, 1996.
<PAGE>
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
AUGUST 31, 1996
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
Meridian/INVESCO Global Sector Portfolio, and the Value Equity Portfolio (the
"Portfolios"). Shares of the Fund are sold 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.
On May 1, 1996, WRL supplied seed capital as follows:
Meridian/INVESCO Global Sector $1,000,000
Value Equity 500,000
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
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 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
<PAGE>
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 (CONTINUED)
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 normally paid by WRL.
NOTE 2 - INVESTMENT ADVISORY AND 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:
PORTFOLIO PERCENT OF ASSETS
--------- -----------------
Meridian/INVESCO Global Sector 1.10%
Value Equity .80%
WRL has entered into a sub-advisory agreement with various management
companies. Pursuant to the Meridian/INVESCO Global Sector Portfolio
agreement, Meridian Investment Management Corporation 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 Global Asset Management Limited 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.
Pursuant to the Value Equity Portfolio agreement, fifty percent of the
advisory fee paid to WRL less fifty percent of any expense reimbursement is
due to NWQ Investment Management, Inc.
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:
PORTFOLIO PERCENTAGE OF ASSETS
--------- --------------------
Value Equity 1.00%
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 contract holders 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.
<PAGE>
<TABLE>
<CAPTION>
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - SECURITY TRANSACTIONS
Securities transactions are summarized as follows:
MERIDIAN/
INVESCO
GLOBAL VALUE
SECTOR EQUITY
PORTFOLIO PORTFOLIO
--------- ---------
For the period ended August 31, 1996:
<S> <C> <C>
Purchases of securities:
Long-term excluding U.S. Government........... $ 2,634,192 $ $ 16,563,929
U.S. Government securities.................... 630,462 0
Proceeds from maturities and sales of securities:
Long-term excluding U.S. Government........... 33,625 93,778
U.S. Government securities.................... 136,763 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,
if applicable, are treated as ordinary income for Federal income tax purposes
pursuant to Section 988 of the Internal Revenue Code.
Each portfolio has and will continue to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies, and
accordingly, has made or intends to make sufficient distributions of net
investment income and net realized gains, if any, to relieve it from all federal
and state income taxes and federal excise taxes.
The aggregate cost of investments and composition of unrealized appreciation
and depreciation for federal income tax purposes as of August 31, 1996 are as
follows:
<TABLE>
<CAPTION>
NET UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO COST BASIS APPRECIATION DEPRECIATION (DEPRECIATION)
- --------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Meridian/INVESCO Global Sector............ $ 3,088,114 $ 75,119 $ 95,391 $ (20,272)
Value Equity.............................. 21,842,884 322,808 182,976 139,832
</TABLE>
NOTE 5 - FINANCIAL HIGHLIGHTS
The Financial Highlights for each Portfolio is for the period from
inception, which is less than one year; therefore the total return shown is not
annualized.
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 deduction under the applicable
annuity contracts.
The ratio of expenses to average net assets in the financial highlights is
net of advisory fee waiver (see Note 2). The August 31, 1996 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:
Meridian/INVESCO Global Sector 2.56%
Value Equity 0.97%
<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 33770
[WRL LOGO] Telephone: (800) 851-9777 [C.A.S.E 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 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 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 Investment Management, Inc. ("WRL Management") 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 ("SAI") 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 January 1, 1997
<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 33770
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 ................................... 14
TAXES ......................................................... 14
PURCHASE AND REDEMPTION OF SHARES ............................. 15
VALUATION OF SHARES ........................................... 15
THE FUND AND ITS SHARES ....................................... 15
PERFORMANCE INFORMATION ....................................... 16
GENERAL INFORMATION ........................................... 17
i
<PAGE>
FINANCIAL HIGHLIGHTS
C.A.S.E. QUALITY GROWTH PORTFOLIO
The information contained in the tables below for a share of capital stock
outstanding of the C.A.S.E. Growth Portfolios for the period May 1, 1995
(commencement of operations) through December 31, 1995, is taken from the
Portfolios' audited financial statements (and for the period January 1, 1996
through June 30, 1996 from the Portfolios' unaudited Semi-Annual Report) as
incorporated by reference in the Statement of Additional Information. The
Annual Report and Semi-Annual Report contain additional information for these
Portfolios. A copy of the Statement of Additional Information, Annual Report
and Semi-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 and the
C.A.S.E. Growth & Income Portfolio. (See "Management of the Fund--The
Investment Adviser," page 11.)
PERIOD FROM PERIOD FROM
1/1/96 TO 5/1/95 TO
6/30/96 12/31/95
----------- -----------
Net Asset Value, Beginning of Period 10.84 $ 10.00
Income From Investment Operations
Net Investment Income .05 .14
Net Gains or Losses on Securities (both realized and
unrealized) .49 1.50
------- -------
Total Income (Loss) From Investment Operations .54 1.64
------- -------
Less Distributions
Dividends (from net investment income) .00 (.14)
------- -------
Distributions (from net realized gains) .00 (.66)
------- -------
Total Distributions .00 (.80)
------- -------
Net Asset Value, End of Period $ 11.38 $ 10.84
======= =======
Total Return* 4.94% 13.61%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $ 1,547 $ 1,150
Ratio of Expenses to Average Net Assets** 1.33% 1.00%
Ratio of Net Investment Income to Average Net Assets .99% 1.28%
Ratio of Commission Paid to Number of Shares 6.05% N/A
Portfolio Turnover Rate 106.15% 119.63%
- ---------------------
* 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
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 5/1/95 TO
6/30/96 12/31/95
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period $11.28 $10.00
Income From Investment Operations
Net Investment Income .10 .21
Net Gains or Losses on Securities (both realized and
unrealized) .81 1.38
---------- ----------
Total Income (Loss) From Investment Operations .91 1.59
---------- ----------
Less Distributions
Dividends (from net investment income) .00 (.21)
---------- ----------
Distributions (from net realized gains) .00 (.10)
---------- ----------
Total Distributions .00 (.31)
---------- ----------
Net Asset Value, End of Period $12.19 $11.28
========== ==========
Total Return* 8.07% 14.80%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $1,768 $1,083
Ratio of Expenses to Average Net Assets** 1.33% 1.00%
Ratio of Net Investment Income to Average Net Assets 1.66% 1.94%
Ratio of Commissions Paid to Number of Shares 6.05% N/A
Portfolio Turnover Rate 93.24% 72.73%
<FN>
- ---------------------
* 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.
</FN>
</TABLE>
2
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
1/1/96 TO 5/1/95 TO
6/30/96 12/31/95
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period $11.66 $ 10.00
Income From Investment Operations
Net Investment Income .05 .12
Net Gains or Losses on Securities (both realized and
unrealized) .74 2.49
----------- -----------
Total Income (Loss) From Investment Operations .79 2.61
----------- -----------
Less Distributions
Dividends (from net investment income) .00 (.12)
----------- -----------
Distributions (from net realized gains) .00 (.83)
----------- -----------
Total Distributions .00 (.95)
----------- -----------
Net Asset Value, End of Period $12.45 $ 11.66
=========== ===========
Total Return* 6.77% 20.65%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $7,347 $ 2,578
Ratio of Expenses to Average Net Assets** 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets .79% 1.02%
Ratio of Commission Paid to Number of Shares 6.03% N/A
Portfolio Turnover Rate 90.07% 121.62%
<FN>
- -----------------------
* 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.
</FN>
</TABLE>
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
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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," below.)
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 total 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 total 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 total 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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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 SAI 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
precisely the future turnover rate of the Portfolios. However, the annual
portfolio turnover rate for the
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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 SAI.
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
Management 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 Management 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 Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, which is wholly-owned by First AUSA
Life Insurance Company, 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 January 1, 1997. Prior to this date, WRL served as investment
adviser to each Portfolio.
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 furnishing 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; 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 each investment portfolio of
the Portfolios, the investment recommendations of the Investment Adviser, and
the investment considerations which have given rise to those recommendations;
to supervise the purchase and sale of securities of the Portfolios as
directed by the appropriate officers of the Fund; and to maintain all books
and records required to be maintained by the Investment Adviser pursuant to
the 1940 Act and the rules and regulations promulgated thereunder with
respect to transactions on behalf of the Fund.
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 previous Investment Adviser
(WRL) 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 &
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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 reimbursement during 1995, the expenses of the C.A.S.E. Quality
Growth Portfolio and C.A.S.E. Growth Income Portfolio would have equaled
5.91% and 6.17%, respectively, of the Portfolios' net assets on an annualized
basis. The Investment Adviser is not obligated to continue any voluntary
expense limitation beyond April 30, 1997.
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant
to the Plan, has entered into a Distribution Agreement with InterSecurities,
Inc. ("ISI"), whose principal office is located at 201 Highland Avenue,
Largo, Florida 33770. ISI is an affiliate of the Investment Adviser, and
serves as principal underwriter for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but are not necessarily limited to, the following: cost of printing
and mailing Fund prospectuses and statements of additional information, and
any supplements thereto to prospective investors; costs relating to
development and preparation of Fund advertisements, sales literature and
brokers' and other promotional materials describing and/or relating to the
Fund; expenses in connection with presentation of seminars and sales meetings
describing the Fund; development of consumer-oriented sales materials
describing the Fund; and expenses attributable to "distribution-related
services" provided to the Fund (e.g., salaries and benefits, office expenses,
equipment expenses (i.e., computers, software, office equipment, etc.),
training expenses, travel costs, printing costs, supply expenses, programming
time and data center expenses, each as they relate to the promotion of the
sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing such
Portfolio's shares, up to a maximum rate of 0.15% on an annualized basis of
the average daily net assets. This fee is measured and accrued daily and paid
monthly.
ISI will submit to the Fund's Board for approval annual distribution
expenses with respect to each Portfolio. ISI allocates to each Portfolio
distribution expenses specifically attributable to the distribution of shares
of such Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the
net asset value of all Portfolios, or such other factors as ISI deems fair
and are approved by the Fund's Board.
ISI has determined it will not seek payment by the Fund of distribution
expenses with respect to any Portfolio during the fiscal year ending Decmeber
31, 1997. Prior to ISI seeking reimbursement, Policy owners will be notified in
advance.
ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund has entered into an Administrative
Services and Transfer Agency Agreement with WRL Investment Services, Inc.
("WRL Services"), an affiliate of WRL Management and WRL, to furnish the Fund
with administrative services to assist the Fund in carrying out certain of
its functions and operations. Under this Agreement, WRL Services shall
furnish to each Portfolio, subject to the overall supervision of the Board,
supervisory, administrative, and transfer agency services, including
recordkeeping and reporting. WRL Services is reimbursed by the Fund monthly
on a cost incurred basis. Prior to January 1, 1997, WRL performed these
services in connection with its serving as the Fund's investment adviser.
12
<PAGE>
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 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.
13
<PAGE>
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 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
14
<PAGE>
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 SAI 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 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
15
<PAGE>
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 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
16
<PAGE>
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 SAI 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.
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
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
WRL Investment Management, Inc.
201 Highland Avenue
Largo, FL 33770
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
TRANSFER AGENT:
WRL Investment Services, Inc.
201 Highland Avenue
Largo, FL 33770
DISTRIBUTOR:
InterSecurities, Inc.
201 Highland Avenue
Largo, FL 33770
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.
WRL00069-01/97
18
<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 33770 or by calling the Fund at (800)
851-9777.
WRL INVESTMENT MANAGEMENT, INC.
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 January 1, 1997.
WRL00073-1/97
<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 20 13
Portfolio Transactions and Brokerage 20 13
Portfolio Turnover 20 10
Placement of Portfolio Brokerage 21 13
Purchase and Redemption of Shares 22 15
Offering of the Shares and Determination of
Offering Price 22 15
Net Asset Valuation 22 15
Investment Experience Information 23 16
Calculation of Performance Related Information 23 16
Total Return 23 16
Yield Quotations 23 16
Taxes 24 14
Capital Stock of the Fund 25 15
Registration Statement 26 N/A
Financial Statements 26 17
Other Information 26 17
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.
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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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<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, 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
10
<PAGE>
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.
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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.
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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
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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
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<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:
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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 Series Fund (September, 1996 - present); former 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). Trustee of IDEX Series
Fund (September, 1996 - present); former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3.
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 (September, 1996 - present), WRL
Investment Management, Inc. (investment adviser), Largo, Florida; Chairman
of the Board of Directors (September, 1996 - present), WRL Investment
Services, Inc., Largo, Florida; 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
- September, 1996) Chairman (December, 1989 - September, 1990 and November,
1990 - September, 1996) and President and Chief Executive Officer (November,
1986 - September, 1990), Idex Fund, Idex II Series Fund and Idex Fund 3
(Investment Companies), and Trustee and Chairman (September, 1996 - present)
of Idex Series Fund, 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; Director
(September, 1996 - present), WRL Investment Management, Inc. (investment
adviser), Largo, Florida; Director (September, 1996 - present), WRL
Investment Services, Inc., Largo, Florida; President and Chief Executive
Officer (September, 1990 - September, 1996), Trustee (June, 1990 - September,
1996) and Executive Vice President (June, 1988 - September, 1990) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies); Trustee,
President and Chief Financial Officer (September, 1996 - present) of IDEX
Series Fund; 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 - September, 1996), IDEX Fund, IDEX II
Series Fund and IDEX Fund 3 (investment companies), and Treasurer
(September, 1996 - present) of IDEX Series Fund, 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 - September, 1996) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3; Secretary, Vice President
and Counsel (September, 1996 - present) of IDEX Series Fund; Attorney
(September, 1992 - August, 1993),
- ---------------
(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>
Hearne, Graziano, Nader & Buhr, P.A.; Legal Writing Instructor (August, 1991 -
June, 1992), Florida State University College of Law.
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; Director (September,
1996 - present), WRL Investment Management, Inc. (investment adviser), Largo,
Florida; Director (September, 1996 - present), WRL Investment Services, Inc.,
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.
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., AND IDEX
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND
- ------------------------ --------------------------- ------------------------------
<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, or IDEX Series Fund to a disinterested Director or
Trustee on a current basis for services rendered as director (IDEX Fund and
IDEX Fund 3 were merged with, and into, the Growth Portfolio of IDEX II
Series Fund on September 20, 1996, at which time IDEX II Series Fund was
renamed IDEX Series Fund). Deferred compensation amounts will accumulate
based on the value of Class A shares of a portfolio of IDEX 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.
WRL Investment Management, Inc. ("WRL Management") serves as the investment
adviser to each Portfolio of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1997 with the Fund. The Investment Adviser is a
direct, wholly-owned subsidiary of WRL, a stock life insurance company which is
wholly-owned by 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.
17
<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 October 3, 1996 and by
the shareholders of each Portfolio of the Fund on December 16, 1996. The
Investment Advisory Agreement provides that it will continue in effect for an
initial term ending January 1, 1999, 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 each 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 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 20.
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. 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. Each Portfolio pays: all
expenses incurred in connection with the formation and organization of a
Portfolio, including the preparation (and filing, when necessay) of the
Portfolio's contracts, plans and documents, conducting meetings of organizers,
directors and shareholders; of preparing and filing the post-effective amendment
to the Fund's registration statement effecting registration of the Portfolio and
its shares under the 1940 Act and the 1933 Act and all other matters relating to
the formation and organization of a Portfolio and the preparation for offering
its shares; expenses in connection with ongoing registration or qualification
requirements under Federal and state securities laws; investment advisory fees;
pricing costs (including the daily calculations of net asset value); brokerage
commissions and all other expenses in connection with execution of portfolio
transactions, including 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; any compensation, fees, or
reimbursements which the Fund pays to its Directors who are not "interested
persons," as that phrase is defined in the 1940 Act, of the Fund or WRL
Management; compensation of the Fund's custodian, administrative and transfer
agent, registrar and dividend disbursing agent; legal, accounting and printing
expenses; other administrative, clerical, recordkeeping and bookkeeping
expenses; auditing fees; certain insurance premiums; services for shareholders
(including allocable telephone and personnel expenses); costs of certificates
and the expenses of delivering such certificates to the purchaser of shares
relating thereto; expenses of local representation in Maryland; fees and/or
expenses payable pursuant to any plan of distribution adopted with respect to
the Fund in accordance with Rule 12b-1 under the 1940 Act; expenses of
shareholders' meeting and of preparing, printing, and distributing notices,
proxy statements 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 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
18
<PAGE>
of 1933; all costs involved in preparing and printing prospectuses of the Fund;
extraordinary expenses; and all other expenses properly payable by the Fund or
the Portfolios.
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
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 was 4.15%. For the
period May 1, 1995 to December 31, 1995, the previous 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.
SERVICE AGREEMENT. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to
assist the Fund in carrying out certain of its functions and operations. The
Service Agreement was approved by the Fund's Board of Directors, including a
majority of Directors who are not "interested persons" of the Fund (as
defined in the 1940 Act) on October 3, 1996. Under this Agreement, WRL
Services shall furnish to each Portfolio, subject to the overall supervision
of the Fund's Board, supervisory, administrative, and transfer agency
services, including recordkeeping and reporting. WRL Services is reimbursed
by the Fund monthly on a cost incurred basis.
DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act, as amended. Pursuant to the Plan, the Fund has entered into a
Distribution Agreement with InterSecurities, Inc. ("ISI"), whose principal
office is located at 201 Highland Avenue, Largo, Florida 33770. The
Distribution Plan and related Agreement were approved by the Fund's Board of
Directors, including a majority of Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act) on October 3, 1996 and the
Distribution Plan was approved and by the shareholders of each Portfolio of
the Fund on December 16, 1996. ISI is an affiliate of the Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on
behalf of the Portfolios, will reimburse ISI after each calendar month for
certain Fund distribution expenses incurred or paid by ISI, provided that
these expenses in the aggregate do not exceed 0.15%, on an annual basis, of
the average daily net asset value of shares of each Portfolio.
Distribution expenses for which ISI may be reimbursed under the Distribution
Plan and Distribution Agreement include, but are not limited to, expenses of
printing and distributing the Fund's prospectus and statement of additional
information to potential investors; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars and sales meetings designed to promote distribution of Fund shares; the
development of consumer-oriented sales materials describing and/or relating to
the Fund; and expenses attributable to "distribution-related services" provided
to the Fund, which include such things as salaries and benefits, office
expenses, equipment expenses, training costs, travel costs, printing costs,
supply expenses, computer programming time, and data center expenses, each as
they relate to the promotion of the sale of Fund shares.
19
<PAGE>
ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all
Portfolios, or such other factors as ISI deems fair and are approved by the
Fund's Board of Directors.
It is anticipated that benefits provided by the Distribution Plan may
include lower fixed costs as a percentage of assets as Fund assets increase
through the growth of the Fund due to enhanced marketing efforts.
ISI has determined that it will not seek payment by the Fund of
distribution expenses with respect to any portfolio during the fiscal year
ending Decmeber 31, 1997. Prior to ISI seeking reimbursement, Policyowners will
be notified in advance.
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 Portfolios pursuant to a Sub-Advisory Agreement dated January 1, 1997
between WRL Management and the Sub-Adviser and on behalf of the Portfolios.
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 October 3, 1996 and by the
shareholders of each Portfolio of the Fund on December 16, 1996. The
Sub-Advisory Agreement provides that it will continue in effect for an
initial term ending January 1, 1999, 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 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.
20
<PAGE>
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 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
21
<PAGE>
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
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.
22
<PAGE>
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 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
23
<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 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:
YIELD = 2 [(a-b
--- + 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
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
24
<PAGE>
(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.
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.
25
<PAGE>
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 & Income Portfolio, C.A.S.E. Growth
Portfolio, International Equity Portfolio, Leisure Portfolio, Janus Balanced
Portfolio, Value Equity Portfolio, Global Sector Portfolio, US Sector
Portfolio, Foreign Sector Portfolio; and U.S. Equity 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; unaudited financial
statements for the Portfolios for the period January 1, 1996 through June 30,
1996 are included in the June, 1996 Semi-Annual Report for the Portfolios,
and are incorporated herein by reference to such reports.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
the tax returns for each of the Portfolios of the Fund.
CUSTODIAN
Investors Bank & Trust Company, located at 89 South Street, Boston,
Massachusetts 02111, serves as the Fund's Custodian and Dividend Disbursing
Agent. IBT provides comprehensive asset administrative services to the Fund and
other members of the financial industry which include: multi-currency
accounting; institutional transfer agency services; domestic and global custody;
performance measures; foreign exchange; and securities lending and mutual fund
administrative services.
26
<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 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
A-1
<PAGE>
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 (/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.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
[MERIDIAN LOGO]
201 Highland Avenue
Largo, Florida 33770
Telephone: (800) 851-9777
[WRL LOGO] [INVESCO 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 Global Sector, US Sector and Foreign
Sector Portfolios of the Fund (collectively, the "Portfolios" and,
individually, a "Portfolio").
The investment objective of 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 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 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 Investment Management, Inc. ("WRL Management"), 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 ("SAI") 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 January 1, 1997
1 Registered service mark of INVESCO PLC.
<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
201 Highland Avenue
Largo, FL 33770
Telephone: (813) 585-6565
(800) 851-9777
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Global Sector Portfolio, US Sector Portfolio
and Foreign Sector Portfolio and the Fund ............................ 2
Management of the Fund ................................................. 7
Dividends and Other Distributions ...................................... 10
Taxes .................................................................. 10
Purchase and Redemption of Shares ...................................... 10
Valuation of Shares .................................................... 10
The Fund and Its Shares ................................................ 10
Performance Information ................................................ 11
General Information .................................................... 12
</TABLE>
i
<PAGE>
FINANCIAL HIGHLIGHTS
The information contained in the tables below for a share of capital stock
outstanding of the Global Sector, US Sector and Foreign Sector Portfolios,
respectively, for the period May 1, 1996 (commencement of operations) through
August 31, 1996, is based on each Portfolio's unaudited financial statements
included in the Statement of Additional Information. A copy of the Statement
of Additional Information and Annual Report may be obtained without charge
upon request.
GLOBAL SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96 TO
8/31/96*
-------------
(UNAUDITED)
<S> <C>
Net asset value, beginning of period ............. $ 10.00
Income From Operations:
Net investment income (loss) .................... .07
Net realized and unrealized gain (loss)
on investments ................................ (.17)
-------------
Total from investment operations ............... (.10)
-------------
Distributions:
Dividends from net investment income ............ (.00)
Distributions from net realized gains
on investments ................................ (.00)
-------------
Total distributions ............................ (.00)
-------------
Net asset value, end of period ................... $ 9.90
=============
Total return ..................................... (1.01%)
Ratios and Supplemental Data:
Net assets at end of period
(in thousands) ................................ $ 3,301
Ratio of expenses to average net assets ........ 1.10%
Ratio of net investment income (loss) to average
net assets .................................... 1.74%
Ratio of commissions paid to number
of shares ..................................... 3.43%
Portfolio Turnover Rate ......................... 10.57%
</TABLE>
<PAGE>
US SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96 TO
8/31/96*
-------------
(UNAUDITED)
<S> <C>
Net asset value, beginning of period ............. $ 10.00
Income From Operations:
Net investment income (loss) .................... .01
Net realized and unrealized gain (loss)
on investments ................................ (.38)
-------------
Total from investment operations ............... (.37)
-------------
Distributions:
Dividends from net investment income ............ (.00)
Distributions from net realized gains
on investments ................................ (.00)
-------------
Total distributions ............................ (.00)
-------------
Net asset value, end of period ................... $ 9.63
=============
Total return ..................................... (3.74%)
Ratios and Supplemental Data:
Net assets at end of period (in thousands) ..... $ 611
Ratio of expenses to average net assets ........ 1.23%
Ratio of net investment income (loss) to average
net assets .................................... .24%
Ratio of commissions paid to number
of shares ..................................... 5.97%
Portfolio Turnover Rate ......................... 37.17%
</TABLE>
FOREIGN SECTOR PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
5/1/96 TO
8/31/96*
-------------
(UNAUDITED)
<S> <C>
Net asset value, beginning of period ............. $10.00
Income From Operations:
Net investment income (loss) .................... .03
Net realized and unrealized gain (loss)
on investments ................................ .09
-------------
Total from investment operations ............... .12
-------------
Distributions:
Dividends from net investment income ............ (.00)
Distributions from net realized gains on
investments ................................... (.00)
-------------
Total distributions ............................ (.00)
-------------
Net asset value, end of period ................... $10.12
=============
Total return ..................................... 1.25%
Ratios and Supplemental Data:
Net assets at end of period (in thousands) ..... $1,053
Ratio of expenses to average net assets ........ 1.28%
Ratio of net investment income (loss) to average
net assets .................................... 0.95%
Ratio of commissions paid to number of shares .. 4.68%
Portfolio Turnover Rate ......................... 2.52%
</TABLE>
* The inception of this Portfolio was May 1, 1996. The total return is not
annualized.
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THE GLOBAL SECTOR PORTFOLIO, US SECTOR PORTFOLIO AND 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 3 and "Risk
Factors," page 6 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 SAI 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
and Techniques," page 3.
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 be attractive relative to other industries. The Portfolio, under
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<PAGE>
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 3. 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 SAI for a description of these
securities.) The Portfolios reserve the right to 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 to other companies in the same
industry or country. The dividend payment records of companies are also
considered.
3
<PAGE>
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 6 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 6 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 SAI.
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 6 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 6 under "Risk Factors" and in the SAI.
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 SAI.
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
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 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
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<PAGE>
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 SAI.
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
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").
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
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<PAGE>
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
SAI.
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
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 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
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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 SAI.
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
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 Management 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
Management and receive no compensation from the Fund. The SAI contains the
names of and general background information regarding each Director and
executive officer of the Fund.
THE INVESTMENT ADVISER
WRL Management, located at 201 Highland Avenue, Largo, Florida 33770-2597,
serves as the Fund's Investment Adviser. The Investment Adviser is a direct,
wholly-owned subsidiary of WRL, a stock life insurance company which is
wholly-owned by First AUSA 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 January 1, 1997. Prior to this date, WRL served as investment
adviser to each Portfolio.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for
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<PAGE>
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 furnishing 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; 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 each investment portfolio of
the Portfolios, the investment recommendations of the Investment Adviser, and
the investment considerations which have given rise to those recommendations;
to supervise the purchase and sale of securities of the Portfolios as
directed by the appropriate officers of the Fund; and to maintain all books
and records required to be maintained by the Investment Adviser pursuant to
the 1940 Act and the rules and regulations promulgated thereunder with
respect to transactions on behalf of the Fund.
DISTRIBUTION PLAN AND DISTRIBUTION AGREEMENT
Effective January 1, 1997, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant
to the Plan, has entered into a Distribution Agreement with InterSecurities,
Inc. ("ISI"), whose principal office is located at 201 Highland Avenue,
Largo, Florida 33770. ISI is an affiliate of the Investment Adviser, and
serves as principal underwriter for the Fund.
The expenses the Fund may pay pursuant to the Distribution Plan shall
include, but not necessarily limited to, the following: cost of printing and
mailing Fund prospectuses and statements of additional information, and any
supplements thereto to prospective investors; costs relating to development
and preparation of Fund adverisements, sales literature and brokers' and
other promotional materials describing and/or relating to the Fund; expenses
in connection with presentation of seminars and sales meetings describing the
Fund; development of consumer-oriented sales materials describing the Fund;
and expenses attributable to "distribution-related services" provided to the
Fund (e.g., salaries and benefits, office expenses, equipment expenses (i.e.,
computers, software, office equipment, etc.), training expenses, travel
costs, printing costs, supply expenses, programming time and data center
expenses, each as they relate to the promotion of the sale of Fund shares).
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing such
Portfolio's shares, up to a maximum rate of 0.15% on an annualized basis of
the average daily net assets. This fee is measured and accrued daily and paid
monthly.
ISI will submit to the Fund's Board for approval annual distribution
expenses with respect to each Portfolio. ISI allocates to each Portfolio
distribution expenses specifically attributable to the distribution of shares
of such Portfolio. Distribution expenses not specifically attributable to the
distribution of shares of a particular Portfolio are allocated among the
Portfolios, based upon the ratio of net asset value of each Portfolio to the
net asset value of all Portfolios, or such other factors as ISI deems fair
and are approved by the Fund's Board.
ISI has determined that it will not seek payment by the Fund of
distribution expenses with respect to any Portfolio during the fiscal year
ending December 31, 1997. Prior to ISI seeking reimbursement, Policyowners
will be notified in advance.
ADMINISTRATIVE AND TRANSFER AGENCY SERVICES
Effective January 1, 1997, the Fund has entered into an Administrative
Services and Transfer Agency Agreement with WRL Investment Services, Inc. ("WRL
Services"), an affiliate of WRL Management and WRL, to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations. Under this Agreement, WRL Services shall furnish to
each Portfolio, subject to the overall supervision of the Board, supervisory,
administrative, and transfer agency services, including recordkeeping and
reporting. WRL Services is reimbursed by the Fund monthly on a cost incurred
basis. Prior to January 1, 1997, WRL performed these services in connection with
its serving as the Fund's 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.
Dr. Craig T. Callahan is Chairman of the Investment Committee and Chief
Investment Officer of Meridian, and directs Meridian's investment research
and analysis. Dr. Callahan obtained his D.B.A. from Kent State University.
Michael Hart is President of Meridian Investment Management and holds an
M.B.A. from the University of Denver. Patrick S. Boyle, a Chartered Financial
Analyst, acts as a Portfolio Manager for several of Meridian's private
accounts.
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<PAGE>
Bryan R. Ritz, also a Chartered Financial Analyst, serves as a Portfolio
Manager for Meridian's private accounts. Mr. Ritz holds a Bachelor of Science
in Business Administration and a M.B.A. from University of Denver. In
performing sub-advisory services Meridian may draw upon additional members of
its research team. These employees are generally specialists within
Meridian's research department. However, the Investment Committee supervises
the members of the research department and remains fully responsible for all
such services.
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
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 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 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
9
<PAGE>
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
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.
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 SAI 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.
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<PAGE>
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
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 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
11
<PAGE>
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 SAI 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
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.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
FOREIGN SECTOR PORTFOLIO
OFFICE OF THE FUND:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, FL 33770
(800) 851-9777
(813) 585-6565
INVESTMENT ADVISER:
WRL Investment Management, Inc.
201 Highland Avenue
Largo, FL 33770
CO-SUB-ADVISERS:
Meridian Investment Management Corporation
12835 East Arapahoe Road
Tower II, 7th Floor
Englewood, CO 80112
INVESCO Global Asset Manageme nt 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
TRANSFER AGENT:
WRL Investment Services, Inc.
201 Highland Avenue
Largo, FL 33770
DISTRIBUTOR:
InterSecurities, Inc.
201 Highland Avenue
Largo, FL 33770
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.
WRL00100-01/97
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<PAGE>
WRL SERIES FUND, INC.
GLOBAL SECTOR PORTFOLIO
US SECTOR PORTFOLIO
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 Global Sector
Portfolio, US Sector Portfolio and 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 33770 or by calling
the Fund at (800) 851-9777.
WRL INVESTMENT MANAGEMENT, INC.
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 January 1,
1997.
WRL00101-1/97
<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 3 5
Convertible Securities 3 4
Mortgage-Backed Securities 4 2
Asset-Backed Securities 4 3
Zero Coupon Bonds 4 3
Restricted/144A Securities 4 5
Futures, Options on Futures and Options on
Securities 5 4
Forward Foreign Currency Contracts 9 4
Swaps and Swap-Related Products 9 4
Repurchase Agreements 10 4
Foreign Exchange Transactions 10 4
Management of the Fund 11 7
Directors and Officers 11 7
The Investment Adviser 12 7
The Co-Sub-Advisers 14 8
Portfolio Transactions and Brokerage 15 8
Portfolio Turnover 15 7
Placement of Portfolio Brokerage 16 8
Purchase and Redemption of Shares 17 9
Determination of Offering Price 17 10
Net Asset Valuation 17 10
Calculation of Performance Related Information 18 11
Total Return 18 11
Yield Quotations 18 12
Taxes 18 10
Capital Stock of the Fund 20 10
Registration Statement 20 N/A
Financial Statements 20 12
Appendix A - Description of
Selected Corporate Bond Ratings A-1 3
Appendix B - Description of
Short-Term Securities B-1 3
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Global Sector Portfolio, US Sector
Portfolio and 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.
7. Invest more than 25% of the value of its total assets in any particular
industry (other than government securities).
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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
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
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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 (H) 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 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
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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."
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.
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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 Global Sector Portfolio, US
Sector Portfolio and 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. 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
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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.
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
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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 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
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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 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
8
<PAGE>
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
Global Sector Portfolio, US Sector Portfolio and 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 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
9
<PAGE>
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 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.
10
<PAGE>
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 Series Fund (September, 1996 - present), former 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); Trustee of IDEX Series
Fund (September, 1996 - present); former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3.
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 (September, 1996 - present) WRL
Investment Management, Inc. (investment adviser), Largo, Florida; Chairman of
the Board of Directors (September, 1996 - present) WRL Investment Services,
Inc., Largo, Florida; 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 -
September, 1996), Chairman (December, 1989 - September, 1990 and November,
1990 - September, 1996) and President and Chief Executive Officer (November,
1986 - September, 1990), IDEX Fund, IDEX II Series Fund and IDEX Fund 3
(investment companies); Trustee and Chairman (September, 1996 - present) of
IDEX Series Fund, 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; Director
(September, 1996 - present), WRL Investment Management, Inc. (investment
adviser), Largo, Florida; Director (September, 1996 -present), WRL
Investment Services, Inc., Largo, Florida; President and Chief Executive
Officer (September, 1990 - September, 1996), Trustee (June, 1990 - September,
1996); and Executive Vice President (June, 1988 - September, 1990) of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies); Trustee,
President and Chief Financial Officer (September, 1996 - present) of IDEX
Series Fund; 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 - September, 1996), IDEX Fund, IDEX II
Series Fund and IDEX Fund 3 (investment companies); and Treasurer
(September, 1996 - present) of IDEX Series Fund, 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.
11
<PAGE>
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 - September, 1996) of
IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies);
Secretary Vice President and Counsel of IDEX Series Fund (September, 1996
- present); Attorney (September, 1992 - August, 1993), Hearne, Graziano, Nader
& Buhr, P.A.; Legal Writing Instructor (August, 1991 - June, 1992), Florida
State University College of Law.
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; Director (September,
1996 - present), WRL Investment Management, Inc. (investment adviser), Largo,
Florida; Director (September, 1996 - present), WRL Investment Services, Inc.,
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.
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
AGGREGATE COMPENSATION WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION FROM WRL SERIES FUND, INC. IDEX SERIES FUND
- ------------------------ -------------------------- -------------------------
<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 or IDEX Series Fund to a disinterested Director or
Trustee on a current basis for services rendered as director (IDEX Fund and
IDEX Fund 3 were merged with, and into, the Growth Portfolio of IDEX II
Series Fund on September 20, 1996, at which time IDEX II Series Fund was
renamed IDEX Series Fund). Deferred compensation amounts will accumulate
based on the value of Class A shares of a portfolio of IDEX 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.
WRL Investment Management, Inc. ("WRL Management") serves as the
investment adviser to each Portfolio of the Fund pursuant to an Investment
Advisory Agreement dated January 1, 1997 with
12
<PAGE>
the Fund. The Investment Adviser is a direct, wholly-owned subsidiary of WRL,
which is wholly-owned by 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 October 3, 1996 and by
the shareholders of each Portfolio of the Fund on December 16, 1996. The
Investment Advisory Agreement provides that it will continue in effect for an
initial term ending January 1, 1999, 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 each 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", p.15.
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. Each Portfolio pays: all
expenses incurred in connection with the formation and organization of a
Portfolio, including the preparation (and filing, when necessary) of the
Portfolio's contracts, plans and documents, conducting meetings of organizers,
directors and shareholders; of preparing and filing the post-effective amendment
to the Fund's registration statement effecting registration of the Portfolio and
its shares under the 1940 Act and the 1933 Act; and all other matters relating
to the formation and organization of a Portfolio and the preparation for
offering its shares; expenses in connection with ongoing registration or
qualification requirements under Federal and state securities laws; investment
advisory fees; pricing costs (including the daily calculations of net asset
value); brokerage commissions and all other expenses in connection with
execution of portfolio transactions, including 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; any
compensation, fees, or reimbusements which the Fund pays to its Directors who
are not "interested person," as that phrase is defined in the 1940 Act, of the
Fund or WRL Management; compensation of the Fund's custodian, administrative and
transfer agent, registrar and dividend disbursing agent; legal, accounting and
printing expenses; other administrative, clerical, recordkeeping and bookkeeping
expenses; auditing fees; certain insurance premiums; services for shareholders
(including allocable telephone and personnel expenses); costs of certificates
and the expenses of delivering such certificates to the purchaser of shares
relating thereto; expenses of local representation in Maryland; fees and/or
expenses payable pursuant to any plan of distribution adopted with respect to
the Fund in accordance with Rule 12b-1 under the 1940 Act; expenses of
shareholders' meetings and of preparing, printing, and distributing notices,
proxy statements and reports to shareholders; expenses of preparing and filing
reports with federal and state regulatory authorities; all costs and expenses,
including fees and
13
<PAGE>
disbursements, of counsel and auditors, filing and renewal fees and printing
costs in connection with the 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 teritories
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 Fund; extraordinary expenses; and all other expenses
properly payable by the Fund or the Portfolios.
SERVICE AGREEMENT. Effective January 1, 1997, the Fund has entered into an
Administrative Services and Transfer Agency Agreement ("Services Agreement")
with WRL Investment Services, Inc. ("WRL Services"), an affiliate of WRL
Management and WRL, to furnish the Fund with administrative services to
assist the Fund in carrying out certain of its functions and operations. The
Service Agreement was approved by the Fund's Board of Directors, including a
majority of Directors who are not "interested persons" of the Fund (as
defined in the 1940 Act) on October 3, 1996. Under this Agreement, WRL
Services shall furnish to each Portfolio, subject to the overall supervision
of the Fund's Board, supervisory, administrative, and transfer agency
services, including recordkeeping and reporting. WRL Services is reimbursed
by the Fund monthly on a cost incurred basis.
DISTRIBUTION AGREEMENT. Effective January 1, 1997, the Fund adopted a
distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended.
Pursuant to the Plan, the Fund has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), whose principal office is located at 210
Highland Avenue, Largo, Florida 33770. The Plan and related Agreement were
approved by the Fund's Board of Directors, including a majority of Directors
who are not "interested persons" of the Fund (as defined in the 1940 Act) on
October 3, 1996 and the Plan was approved by the shareholders of each
Portfolio of the Fund on December 16, 1996. ISI is as affiliate of the
Investment Adviser.
Under the Distribution Plan and Distribution Agreement, the Fund, on
behalf of the Portfolios, will reimburse ISI after each calendar month for
certain Fund distribution expenses incurred or paid by ISI, provided that
these expenses in the aggregate do no exceed 0.15%, on an annual basis, of
the average daily net asset value of shares of each Portfolio.
Distribution expenses for which ISI may be reimbursed under the
Distribution Plan and Distribution Agreement include, but are not limited to,
expenses of printing and distributing the Fund's prospectus and statement of
additional information to potential investors; developing and preparing Fund
advertisements; sales literature and other promotional materials; holding
seminars and sales meetings designed to promote distribution of Fund shares;
the development of consumer-oriented sales materials describing and/or
relating to the Fund; and expenses attributable to "distribution-related
services" provided to the Fund, which include such things as salaries and
benefits, office expenses, equipment expenses, training costs, travel costs,
printing costs, supply expenses, computer programming time, and data center
expenses, each as they relate to the promotion of the sale of Fund shares.
ISI submits to the Directors of the Fund for approval annual distribution
budgets and quarterly reports of distribution expenses with respect to each
Portfolio. ISI allocates to each Portfolio distribution expenses specifically
attributable to the distribution of shares of such Portfolio. Distribution
expenses not specifically attributable to the distribution of shares of a
particular Portfolio are allocated among the Portfolios, based upon the ratio
of net asset value of each Portfolio to the net asset value of all
Portfolios, or such other factors as ISI deems fair and are approved by the
Fund's Board of Directors.
It is anticipated that benefits provided by the Distribution Plan may
include lower fixed costs as a percentage of assets as Fund assets increase
through the growth of the Fund due to enhanced marketing efforts.
ISI has determined that it will not seek payment by the fund of
distribution expenses with respect to any portfolio during the fiscal year
ending December 31, 1997. Prior to ISI seeking reimbursement, Policy owners will
be notified in advance.
14
<PAGE>
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 January 1, 1997,
between Meridian and WRL Management and a Sub-Advisory Agreement dated
January 1, 1997, between INVESCO and WRL Management 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 October 3,
1996. The Sub-Advisory Agreements provide that they will continue in effect
for an initial term ending January 1, 1999, 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 Global Sector Portfolio, US Sector
Portfolio and 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.
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<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 determined by dividing the total
value of the securities and other assets, less liabilities, by the total
17
<PAGE>
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:
YIELD = 2 [( a-b cd + 1)(6)-1]
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 Portfolios did not commence operations until May 1, 1996, no
quotations of standardized or non-standardized performance information are
available.
18
<PAGE>
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
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
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<PAGE>
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 Por tfolio; 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; Global Sector Portfolio; US Sector
Portfolio; Foreign Sector Portfolio; and U.S. Equity Portfolio.
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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
Unaudited financial statements for each of the the Portfolios for the
period from May 1, 1996 (commencement of operations) through August 31, 1996
are included in this Statement of Additional Information.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, located at 1055 Broadway, 10th Floor, Kansas City,
Missouri 64105, serves as the Fund's independent accountants. The Fund has
engaged Price Waterhouse LLP to examine, in accordance with generally accepted
auditing standards, its annual report. In addition, Price Waterhouse LLP signs
the tax returns for each of the Portfolios of the Fund.
CUSTODIAN
Investors Bank & Trust Company, located at 89 South Street, Boston,
Massachusetts 02111, serves as the Fund's Custodian and Dividend Disbursing
Agent. IBT provides comprehensive asset administrative services to the Fund and
other members of the financial industry which include: multi-currency
accounting; institutional transfer agency services; domestic and global custody;
performance measures; foreign exchange; and securities lending and mutual fund
administrative services.
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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 (/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.
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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>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
ASSETS: AUGUST 31, 1996
Investments in securities, at market value
(cost $ 3,088,114)......................$ 3,067,842
Short-term securities, at amortized cost... 0
Cash....................................... 481,096
Receivables:
Fund shares sold........................ 0
Securities sold......................... 0
Interest................................ 12,265
Dividends............................... 1,900
Foreign Receivable...................... 132
Other .................................. 0
---------------
Total assets.......................... 3,563,235
---------------
LIABILITIES:
Fund shares purchased...................... 0
Securities purchased....................... 258,767
Accounts payable and accrued liabilities:
Investment advisory fees................ 2,523
Custody fees............................ 0
Auditing and accounting fees............ 459
Dividends to shareholders............... 0
Deposits for securities on loan......... 0
Other Fees.............................. 0
---------------
Total liabilities..................... 261,749
---------------
Total net assets....................$ 3,301,486
===============
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)$ 3,336
Additional paid-in capital................. 3,311,952
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)......................... 12,736
Accumulated undistributed net realized
gain (loss) on:
Investment transactions............... (6,461)
Foreign currency transactions......... 71
Net unrealized appreciation (depreciation) on:
Investment securities................... (20,272)
Foreign currency transactions........... 124
---------------
Net assets applicable to outstanding
shares of capital.......................$ 3,301,486
===============
Shares outstanding at August 31, 1996...... 333,551
===============
Net asset value per share..................$ 9.90
===============
* The inception of this portfolio was May 1, 1996.
STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*
Interest .................................. $ 16,172
Dividends (Net of foreign tax of $95)...... 4,569
---------------
Total investment income............... 20,741
---------------
EXPENSES:
Investment advisory fees................... 6,773
Printing and shareholder reports........... 192
Custody fees............................... 10,181
Legal fees................................. 17
Auditing and accounting fees............... 1,505
Directors fees............................. 3
Registration fees.......................... 4
Other fees................................. 7
---------------
Total expenses........................ 18,682
Less:
Advisory fee waiver
and expense reimbursement............. 10,677
Fees paid indirectly.................... 0
---------------
Net expenses........................ 8,005
---------------
Net investment income (loss)............... 12,736
---------------
Net realized gain (loss) on:
Investment securities................... (6,461)
Foreign currency transactions........... 71
---------------
Total net realized gain (loss)........ (6,390)
---------------
Change in unrealized appreciation (depreciation) on:
Investment securities................... (20,272)
Foreign currency transactions........... 124
---------------
Total change in unrealized appreciation
(depreciation)...................... (20,148)
---------------
Net gain (loss) on investments............. (26,538)
---------------
Net increase (decrease) in net assets
resulting from operations.............$ (13,802)
===============
The notes to the financial statements are an integral part of this report.
1
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
AUGUST 31, 1996*
OPERATIONS:
<S> <C>
Net investment income (loss)......................................................................................$ 12,736
Net realized gain (loss) on investments and foreign currency transactions......................................... (6,390)
Change in unrealized appreciation (depreciation) on investments and foreign currency transactions................. (20,148)
--------------
Net increase (decrease) in net assets resulting from operations................................................ (13,802)
--------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income............................................................................................. 0
Net realized gains................................................................................................ 0
--------------
Total distributions............................................................................................ 0
--------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares................................................................................. 3,438,371
Dividends and distributions reinvested............................................................................ 0
Cost of shares repurchased........................................................................................ (123,083)
--------------
Increase (decrease) in net assets from capital shares transactions............................................. 3,315,288
--------------
Net increase (decrease) in net assets.......................................................................... 3,301,486
NET ASSETS:
Beginning of period............................................................................................... 0
--------------
End of period.....................................................................................................$ 3,301,486
=============
Undistributed net investment income............................................................................$ 12,736
=============
SHARE ACTIVITY:
Shares outstanding - beginning of period.......................................................................... 0
--------------
Shares issued..................................................................................................... 345,983
Shares issued - reinvestment of dividends and distributions....................................................... 0
Shares redeemed................................................................................................... (12,432)
--------------
Increase (decrease) in shares outstanding......................................................................... 333,551
--------------
Shares outstanding - end of period................................................................................ 333,551
==============
</TABLE>
* The inception of this portfolio was May 1, 1996.
The notes to the financial statements are an integral part of this report.
2
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO GLOBAL SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
1996/dagger/
Net asset value, beginning of period.................$ 10.00
Income from operations:
Net investment income (loss).................... .07
Net realized and unrealized
gain (loss) on investments.................... (.17)
-------
Total income (loss) from operations........... (.10)
-------
Distributions:
Dividends from net investment income............ (.00)
Distributions from net realized gains
on investments................................ .00
-------
Total distributions........................... (.00)
-------
Net asset value, end of period.......................$ 9.90
=======
Total return......................................... -1.01%
Ratios and supplemental data:
Net assets at end of period
(in thousands)..................................$ 3,301
Ratio of expenses to average net assets........... 1.10%
Ratio of net investment income (loss)
to average net assets........................... 1.74%
Ratio of commissions paid to number of shares..... 3.43%
Portfolio turnover rate........................... 10.57%
* The above table illustrates the change for a share outstanding computed
using average shares outstanding through the period. See Note 5.
/dagger/ The inception of this portfolio was May 1, 1996. The total return is
not annualized.
The notes to the financial statements are an integral part of this report.
3
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO US SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
ASSETS: AUGUST 31, 1996
Investments in securities, at market value
(cost $ 530,406)........................$ 524,925
Short-term securities, at amortized cost... 0
Cash....................................... 116,664
Receivables:
Fund shares sold........................ 0
Securities sold......................... 2,781
Interest................................ 434
Dividends............................... 375
Other .................................. 0
---------------
Total assets.......................... 645,179
---------------
LIABILITIES:
Fund shares purchased...................... 0
Securities purchased....................... 33,612
Accounts payable and accrued liabilities:
Investment advisory fees................ 485
Custody and transfer agent fees......... 0
Auditing and accounting fees............ 88
Dividends to shareholders............... 0
Deposits for securities on loan......... 0
Other fees.............................. 0
---------------
Total liabilities..................... 34,185
---------------
Total net assets....................$ 610,994
===============
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized)$ 635
Additional paid-in capital................. 626,988
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)......................... 427
Accumulated undistributed net realized
gain (loss) on:
Investment transactions............... (11,575)
Net unrealized appreciation (depreciation) on:
Investment securities................... (5,481)
---------------
Net assets applicable to outstanding
shares of capital.......................$ 610,994
===============
Shares outstanding at August 31, 1996...... 63,474
===============
Net asset value per share..................$ 9.63
===============
* The inception of this portfolio was May 1, 1996.
STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*
Interest .................................. $ 1,420
Dividends.................................. 1,172
---------------
Total investment income............... 2,592
---------------
EXPENSES:
Investment advisory fees................... 1,832
Printing and shareholder reports........... 0
Custody fees............................... 8,146
Legal fees................................. 0
Auditing and accounting fees............... 1,505
Directors fees............................. 0
Registration fees.......................... 0
Other fees................................. 0
---------------
Total expenses........................ 11,483
Less:
Advisory fee waiver
and expense reimbursement............. 9,318
Fees paid indirectly.................... 0
---------------
Net expenses........................ 2,165
---------------
Net investment income (loss)............... 427
---------------
Net realized gain (loss) on:
Investment securities................... (11,575)
---------------
Total net realized gain (loss)........ (11,575)
---------------
Change in unrealized appreciation (depreciation) on:
Investment securities................... (5,481)
---------------
Total change in unrealized
appreciation (depreciation)......... (5,481)
---------------
Net gain (loss) on investments............. (17,056)
---------------
Net increase (decrease) in net assets
resulting from operations...............$ (16,629)
==============
The notes to the financial statements are an integral part of this report.
4
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO US SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
AUGUST 31, 1996*
OPERATIONS:
<S> <C>
Net investment income (loss)......................................................................................$ 427
Net realized gain (loss) on investments........................................................................... (11,575)
Change in unrealized appreciation (depreciation) on investments................................................... (5,481)
--------------
Net increase (decrease) in net assets resulting from operations................................................ (16,629)
--------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income............................................................................................. 0
Net realized gains................................................................................................ 0
--------------
Total distributions............................................................................................ 0
--------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares................................................................................. 628,953
Dividends and distributions reinvested............................................................................ 0
Cost of shares repurchased........................................................................................ (1,330)
--------------
Increase (decrease) in net assets from capital shares transactions............................................. 627,623
--------------
Net increase (decrease) in net assets.......................................................................... 610,994
NET ASSETS:
Beginning of period............................................................................................... 0
--------------
End of period.....................................................................................................$ 610,994
=============
Undistributed net investment income............................................................................$ 427
=============
SHARE ACTIVITY:
Shares outstanding - beginning of period.......................................................................... 0
--------------
Shares issued..................................................................................................... 63,613
Shares issued - reinvestment of dividends and distributions....................................................... 0
Shares redeemed................................................................................................... (139)
--------------
Increase (decrease) in shares outstanding......................................................................... 63,474
--------------
Shares outstanding - end of period................................................................................ 63,474
==============
</TABLE>
* The inception of this portfolio was May 1, 1996.
The notes to the financial statements are an integral part of this report.
5
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO US SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
1996/dagger/
Net asset value, beginning of period.................$ 10.00
Income from operations:
Net investment income (loss).................... .01
Net realized and unrealized
gain (loss) on investments.................... (.38)
-------
Total income (loss) from operations........... (.37)
-------
Distributions:
Dividends from net investment income............ (.00)
Distributions from net realized gains
on investments................................ .00
-------
Total distributions........................... .00
-------
Net asset value, end of period.......................$ 9.63
=======
Total return......................................... -3.74%
Ratios and supplemental data:
Net assets at end of period
(in thousands)..................................$ 611
Ratio of expenses to average net assets........... 1.23%
Ratio of net investment income (loss)
to average net assets........................... .24%
Ratio of commission paid to number of shares...... 5.97%
Portfolio turnover rate........................... 37.17%
* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.
\dagger\ The inception of this portfolio was May 1, 1996. The total return is
not annualized.
The notes to the financial statements are an integral part of this report.
6
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
ASSETS: AUGUST 31, 1996
Investments in securities, at market value
(cost $1,006,099)...................... $ 1,015,935
Short-term securities, at amortized cost... 0
Cash....................................... 67,949
Receivables:
Fund shares sold........................ 0
Securities sold......................... 0
Interest................................ 128
Dividends............................... 763
Foreign receivable...................... 627
Other .................................. 0
---------------
Total assets.......................... 1,085,402
---------------
LIABILITIES:
Fund shares purchased...................... 0
Securities purchased....................... 31,192
Accounts payable and accrued liabilities:
Investment advisory fees................ 914
Custody and transfer agent fees 0
Auditing and
accounting fees............................ 166
Dividends to shareholders............... 0
Deposits for securities on loan......... 0
Other fees.............................. 0
---------------
Total liabilities..................... 32,272
---------------
Total net assets.................... $ 1,053,130
===============
NET ASSETS:
Capital stock
($ .01 par value 75,000,000 authorized $ 1,040
Additional paid-in capital................. 1,039,929
Accumulated undistributed income:
Accumulated undistributed net investment
income (loss)......................... 3,215
Accumulated undistributed net realized
gain (loss) on:
Investment transactions............... 369
Foreign currency transactions........... (1,288)
Net unrealized appreciation (depreciation) on:
Investment securities................... 9,836
Foreign currency transactions........... 29
---------------
Net assets applicable to outstanding
shares of capital....................... $ 1,053,130
===============
Shares outstanding at August 31, 1996...... 104,020
===============
Net asset value per share.................. $ 10.12
===============
* The inception of this portfolio was May 1, 1996.
STATEMENT OF OPERATIONS
PERIOD ENDED
INVESTMENT INCOME: AUGUST 31, 1996*
Interest .................................. $ 2,590
Dividends(net of foreign tax $728)......... 4,935
---------------
Total investment income............... 7,525
---------------
EXPENSES:
Investment advisory fees................... 3,647
Printing and shareholder reports........... 211
Custody fees............................... 8,054
Legal fees................................. 4
Auditing and accounting fees............... 1,505
Directors fees............................. 0
Registration fees.......................... 1
Other fees................................. 7
---------------
Total expenses........................ 13,429
Less:
Advisory fee waiver
and expense reimbursement............. 9,119
Fees paid indirectly.................... 0
---------------
Net expenses........................ 4,310
---------------
Net investment income (loss)............... 3,215
---------------
Net realized gain (loss) on:
Investment securities................... 369
Foreign currency transactions........... (1,288)
---------------
Total net realized gain (loss)........ (919)
---------------
Change in unrealized appreciation
(depreciation) on:
Investment securities................... 9,836
Foreign currency transactions........... 29
---------------
Total change in unrealized
appreciation (depreciation)......... 9,865
---------------
Net gain (loss) on investments............. 8,946
---------------
Net increase (decrease) in net assets
resulting from operations............... $ 12,161
===============
The notes to the financial statements are an integral part of this report.
7
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED
AUGUST 31, 1996*
OPERATIONS:
<S> <C>
Net investment income (loss)......................................................................................$ 3,215
Net realized gain (loss) on investments and foreign currency transactions......................................... (919)
Change in unrealized appreciation (depreciation) on investments and foreign currency transactions................. 9,865
--------------
Net increase (decrease) in net assets resulting from operations................................................ 12,161
--------------
DISTRIBUTION TO SHAREHOLDERS:
Net investment income............................................................................................. 0
Net realized gains................................................................................................ 0
--------------
Total distributions............................................................................................ 0
--------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares................................................................................. 1,043,695
Dividends and distributions reinvested............................................................................ 0
Cost of shares repurchased........................................................................................ (2,726)
---------------
Increase (decrease) in net assets from capital shares transactions............................................. 1,040,969
--------------
Net increase (decrease) in net assets.......................................................................... 1,053,130
NET ASSETS:
Beginning of period............................................................................................... 0
--------------
End of period.....................................................................................................$ 1,053,130
=============
Undistributed net investment income............................................................................$ 3,215
=============
SHARE ACTIVITY:
Shares outstanding - beginning of period.......................................................................... 0
--------------
Shares issued..................................................................................................... 104,215
Shares issued - reinvestment of dividends and distributions....................................................... 0
Shares redeemed................................................................................................... (195)
---------------
Increase (decrease) in shares outstanding......................................................................... 104,020
--------------
Shares outstanding - end of period................................................................................ 104,020
==============
</TABLE>
* The inception of this portfolio was May 1, 1996.
The notes to the financial statements are an integral part of this report.
8
<PAGE>
WRL SERIES FUND, INC.
MERIDIAN/INVESCO FOREIGN SECTOR PORTFOLIO
(UNAUDITED)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS*
FOR THE PERIOD ENDED
AUGUST 31
---------
1996/dagger/
Net asset value, beginning of period.................$ 10.00
Income from operations:
Net investment income (loss).................... .03
Net realized and unrealized
gain (loss) on investments.................... .09
-------
Total income (loss) from operations........... .12
-------
Distributions:
Dividends from net investment income............ .00
Distributions from net realized gains
on investments................................ .00
-------
Total distributions........................... .00
-------
Net asset value, end of period.......................$ 10.12
=======
Total return......................................... 1.25%
Ratios and supplemental data:
Net assets at end of period
(in thousands)..................................$ 1,053
Ratio of expenses to average net assets........... 1.28%
Ratio of net investment income (loss)
to average net assets........................... 0.95%
Ratio of commissions paid to number of shares..... 4.68%
Portfolio turnover rate........................... 2.52%
* The above table illustrates the change for a share outstanding computed using
average shares outstanding through the period. See Note 5.
\dagger\ The inception of this portfolio was May 1, 1996.
The notes to the financial statements are an integral part of this report.
9
<PAGE>
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
AUGUST 31, 1996
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
Meridian/INVESCO Global Sector Portfolio, the Meridian/INVESCO US Sector
Portfolio and the Meridian/INVESCO Foreign Sector Portfolio (the "Portfolios").
Shares of the Fund are sold 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.
On May 1, 1996, WRL supplied seed capital as follows:
Meridian/INVESCO Global Sector $1,000,000
Meridian/INVESCO US Sector 500,000
Meridian/INVESCO Foreign Sector 1,000,000
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
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 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.
10
<PAGE>
WRL SERIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 (CONTINUED)
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 normally paid by WRL.
NOTE 2 - INVESTMENT ADVISORY AND 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:
PORTFOLIO PERCENT OF ASSETS
Meridian/INVESCO Global Sector 1.10%
Meridian/INVESCO US Sector 1.10%
Meridian/INVESCO Foreign Sector 1.10%
WRL has entered into a sub-advisory agreement with various management
companies. Pursuant to the Meridian/INVESCO Global Sector Portfolio,
Meridian/INVESCO US Sector Portfolio, and Meridian/INVESCO Foreign Sector
Portfolio agreements, Meridian Investment Management Corporation 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 Global Asset Management Limited
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.
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 contract holders 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.
11
<PAGE>
WRL SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITY TRANSACTIONS
<TABLE>
<CAPTION>
Securities transactions are summarized as follows:
MERIDIAN/ MERIDIAN/ MERIDIAN/
INVESCO INVESCO INVESCO
GLOBAL US FOREIGN
SECTOR SECTOR SECTOR
PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- ----------
For the period ended August 31, 1996: Purchases of securities:
<S> <C> <C> <C>
Long-term excluding U.S. Government..................... $2,634,192 $710,711 $1,030,632
U.S. Government securities.............................. 630,462 0 0
Proceeds from maturities and sales of securities:
Long-term excluding U.S. Government..................... 33,625 168,730 24,901
U.S. Government securities.............................. 136,763 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, if applicable, are treated as ordinary income for Federal
income tax purposes pursuant to Section 988 of the Internal Revenue Code.
Each portfolio has and will continue to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies, and
accordingly, has made or intends to make sufficient distributions of net
investment income and net realized gains, if any, to relieve it from all federal
and state income taxes and federal excise taxes.
The aggregate cost of investments and composition of unrealized
appreciation and depreciation for federal income tax purposes as of August 31,
1996 are as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
PORTFOLIO COST BASIS APPRECIATION DEPRECIATION (DEPRECIATION)
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Meridian/INVESCO Global Sector..................... $ 3,088,114 $ 75,119 $ 95,391 $ (20,272)
Meridian/INVESCO US Sector......................... 530,406 22,596 28,077 5,481
Meridian/INVESCO Foreign Sector.................... 1,006,099 58,865 49,029 9,836
</TABLE>
NOTE 5 - FINANCIAL HIGHLIGHTS
The Financial Highlights for each Portfolio is for the period from
inception, which is less than one year; therefore the total return shown is not
annualized.
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 deduction under the applicable
annuity contracts.
The ratio of expenses to average net assets in the financial highlights is
net of advisory fee waiver (see Note 2). The August 31, 1996 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:
Meridian/INVESCO Global Sector 2.56%
Meridian/INVESCO US Sector 6.53%
Meridian/INVESCO Foreign Sector 2.70%
12
<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
Reports for the Fund are incorporated by reference into the
Statements of Additional Information for the Growth, Bond, Money
Market, Global, Short-to-Intermediate Government, Balanced, Emerging
Growth, Equity-Income, Utility, Aggressive Growth, Tactical Asset
Allocation, C.A.S.E. Growth, C.A.S.E. Growth & Income, and C.A.S.E.
Quality Growth Portfolios. (Part B)
2. The unaudited Financial Statements of the Fund in the Fund's 1996
Semi-Annual Report are incorporated by reference into the Statement
of Additional Information for the Growth, Bond, Money Market,
Global, Short-to-Intermediate Government, Balanced, Emerging Growth,
Equity-Income, utility, Aggressive Growth, Tactical Asset
Allocation, C.A.S.E. Growth, C.A.S.E. Growth & Income and C.A.S.E.
Quality Growth Portfolios. (Part B)
3. Unaudited Financial Statements dated August 31, 1996 for the Global
Sector Portfolio, Foreign Sector Portfolio, US Sector Portfolio and
the Value Equity Portfolio are included in the Statements of
Additional Information. (Part B.)
4. The Financial Statements of the International Equity Portfolio and
U.S. Equity Portfolios will be included in a future amendment.
5. Audited Per Share Income and Capital Changes are included in the
Prospectus for the Portfolios. (Part A)
6. Audited Per Share Income and Capital Changes for the International
Equity Portfolio, the Global Sector Portfolio, the US Sector
Portfolio, the Foreign Sector Portfolio, the Value Equity Portfolio
and the U.S. Equity Portfolio will be included in a future
Amendment.
7. Unaudited Per Share Income and Capital Changes for the Global Sector
Portfolio, the US Sector Portfolio, the Foreign Sector Portfolio,
and the Value Equity Portfolio are included in the Prospectus for
the Portfolios. (Part A).
(b) Exhibits
1. (A) Articles of Incorporation of WRL Series Fund, Inc. (4)
(B) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(C) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(D) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(E) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(F) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(G) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc. (4)
(H) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc.
(I) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc.
2. Bylaws of WRL Series Fund, Inc. (4)
3. Not applicable.
4. Not applicable.
5. (i) Investment Advisory Agreement on behalf of the Portfolios of
the WRL Series Fund, Inc. with WRL Investment Management, Inc.
(ii) Form of Sub-Advisory Agreement on behalf of the Growth, Bond
and Global Portfolios of the Fund. (4)
(iii) Form of Sub-Advisory Agreement on behalf of the Money Market
Portfolio of the Fund. (4)
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<PAGE>
(iv) Form of Sub-Advisory Agreement on behalf of the Balanced and
the Short-to-Intermediate Government Portfolios of the Fund. (4)
(v) Form of Sub-Advisory Agreement on behalf of the Emerging
Growth Portfolio of the Fund.(4)
(vi) Form of Sub-Advisory Agreement on behalf of the Equity-Income
Portfolio of the Fund. (4)
(vii) Form of Sub-Advisory Agreement on behalf of the Utility
Portfolio of the Fund. (4)
(viii) Form of Sub-Advisory Agreement on behalf of the Aggressive
Growth Portfolio of the Fund. (4)
(ix) Form of Sub-Advisory Agreement on behalf of the Tactical Asset
Allocation Portfolio of the Fund. (4)
(x) Form of Sub-Advisory Agreement 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. (4)
(xi) Form of Co-Sub-Advisory Agreements on behalf of the
International Equity Portfolio of the Fund. (4)
(xii) Form of Co-Sub-Advisory Agreements on behalf of the US Sector,
Global Sector and Foreign Sector Portfolios of the Fund. (4)
(xiii) Form of Sub-Advisory Agreement on behalf of the Value Equity
Portfolio of the Fund. (4)
(xiv) Form of Sub-Advisory Agreement on behalf of the U.S. Equity
Portfolio of the Fund. (4)
(xv) Service Agreement dated 4-30-96 between INVESCO Global Asset
Management Limited and INVESCO Trust Company, Inc. (4)
(xvi) Service Agreement dated 4-30-96 between INVESCO Global Asset
Management Limited and INVESCO Asset Management Limited. (4)
6. Distribution Agreement.
7. Directors' Deferred Compensation Plan. (3)
8. Custodian Agreement.
9. Administrative Services and Transfer Agency Agreement.
10. Opinion and consent of Thomas E. Pierpan, Esq. as to legality of the
securities being registered. (2)
11. Consent of Price Waterhouse LLP.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Plan of Distribution.
16. Schedules for Computations of Performance Quotations. (1)
17. Financial Data Schedules. (4)
18. Powers of Attorney. (2)
- ---------------------
(1) Previously filed with Post-Effective Amendment No. 11
to Form N-1A dated February 26, 1993 and incorporated herein by reference.
(2) Previously filed with Post-Effective Amendment No. 19 to Form N-1A dated
April 21, 1995 and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 23 to Form N-1A dated
April 19, 1996 and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 25 to Form N-1A dated
October 17, 1996.
C-2
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Shares of the Registrant are sold 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 Government, 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.
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF DECEMBER 10, 1996
-------------- -------------------------
Growth Portfolio
Common Stock ($.01 par value) 4
Bond Portfolio
Common Stock ($.01 par value) 3
Money Market Portfolio
Common Stock ($.01 par value) 3
Global Portfolio
Common Stock ($.01 par value) 3
Short-to-Intermediate Government Portfolio
Common Stock ($.01 par value) 3
Emerging Growth Portfolio
Common Stock ($.01 par value) 3
Equity-Income Portfolio
Common Stock ($.01 par value) 3
Balanced Portfolio
Common Stock ($.01 par value) 3
Utility Portfolio
Common Stock ($.01 par value) 3
Aggressive Growth Portfolio
Common Stock ($.01 par value) 3
Tactical Asset Allocation Portfolio
Common Stock ($.01 par value) 3
C.A.S.E. Growth Portfolio
Common Stock ($.01 par value) 2
C.A.S.E. Growth & Income Portfolio
Common Stock ($.01 par value) 1
C.A.S.E. Quality Growth Portfolio
Common Stock ($.01 par value) 1
International Equity Portfolio
Common Stock ($.01 par value) 0
Global Sector Portfolio
Common Stock ($.01 par value) 2
US Sector Portfolio
Common Stock ($.01 par value) 1
Foreign Sector Portfolio
Common Stock ($.01 par value) 1
Value Equity Portfolio
Common Stock ($.01 par value) 2
U.S. Equity Portfolio
Common Stock ($.01 par value) 0
C-3
<PAGE>
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, 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. WRL INVESTMENT MANAGEMENT, INC.
WRL Investment Management, Inc. ("WRL Management") is
principally engaged in offering investment advisory services.
The only business, professions, vocations or employments of a
substantial nature of Messrs. Kenney, Hurley and Yaeger, directors
of WRL Management, are described in the Statement of Additional
Information under the section entitled "Management of the Fund."
Additionally, the following describes the principal occupations of
other persons who serve as executive officers of WRL Management:
Kenneth P. Beil, President and Treasurer, is Assistant Vice
President and Principal Accounting Officer of the WRL Series Fund,
Inc. and is Vice President and Assistant Treasurer of Western
Reserve Life Assurance Co. of Ohio; and Thomas E. Pierpan, Esq.,
Vice President and Secretary, is Vice President
C-4
<PAGE>
and Assistant Secretary of the WRL Series Fund, Inc. and Vice
President, Counsel and Assistant Secretary of Western Reserve Life
Assurance Co. of Ohio.
B. GROWTH, BOND, AND GLOBAL PORTFOLIOS: SUB-ADVISER - JANUS CAPITAL
CORPORATION
Janus Capital Corporation, the Sub-Adviser to the Growth, Bond,
and Global 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 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).
C-5
<PAGE>
D. SHORT-TO-INTERMEDIATE GOVERNMENT AND BALANCED PORTFOLIOS:
SUB-ADVISER - AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AEGON Management"), the
Sub-Adviser to the Short-to-Intermediate Government and Balanced
Portfolios, is an Iowa corporation which was incorporated on April
12, 1989. AEGON Management 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 Management is a wholly-owned subsidiary of
First AUSA Holding Company which is a wholly-owned subsidiary of
AEGON USA, Inc.
AEGON Management also serves as sub-adviser to IDEX Series Fund
High Yield Portfolio and Tax-Exempt Portfolio. Patrick E. Falconio
is President and Director of AEGON Management 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 ("Bankers
United"), First AUSA Life Insurance Company ("First AUSA"), Life
Investors Insurance Company of America ("LIICA"), Monumental
General Casualty Company ("Monumental General"), Monumental Life
Insurance Company ("Monumental Life"), PFL Life Insurance Company
("PFL Life") 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 Investment Officer and
Senior Vice President of AUSA Life Insurance Company, Inc. ("AUSA
Life") and Western Reserve Life Assurance Co. of Ohio ("Western
Reserve") and Senior Vice President and Chief Financial Officer of
Southwest Equity Life Insurance Company; Brenda K. Clancy,
Director of AEGON Management, Director and Vice President of First
AUSA, LIICA, Monumental Life 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,
Investors Warranty of America, Inc., Money Services, Inc., PFL
Life and Western Reserve and Treasurer of Zahorik Company, Inc.;
Craig D. Vermie, Director and Secretary of AEGON Management, AEGON
USA Charitable Foundation, Inc., AMCORP, Inc., AUSA Financial
Markets, Inc., AUSA Institutional Marketing Group, Inc., CADET
Holding Corp., First AUSA, Massachusetts Fidelity Trust Company,
and Transunion Casualty Company, Director, Secretary, Vice
President and Corporate Counsel of Bankers United, LIICA, and PFL
Life, Director, Secretary and Vice President of Investors Warranty
of America, Inc., Director, Vice President, Corporate Counsel and
Assistant Secretary of Monumental Life, Director, Vice President
and Assistant Secretary of Monumental General 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,
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, International Life
Investors Insurance Company, Tele-Quote Corporation and Universal
Benefits Corporation, Assistant Secretary of AEGON USA Realty
Advisors Inc., Bankers Life, 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
Management, and President of AEGON USA Managed Portfolios, Inc.
and Vice President of AUSA Life, Bankers United, First AUSA,
International Life Investors Insurance Company, LIICA, Money
Services, Inc., Monumental General, Monumental Life, PFL Life, and
Western Reserve; Donald W. Chamberlain is an Executive Vice
President of AEGON Management, and Vice President of AUSA Life,
Bankers United, First AUSA, LIICA, Monumental General, Monumental
Life, PFL Life, and Western Reserve; James D. Ross is Vice
President of LIICA, Monumental Life, PFL Life, and Western Reserve
Life; Clifford A. Sheets is Senior Vice President of AEGON
Management, and Vice President of Bankers United, LIICA,
Monumental Life and PFL Life; Ralph M. O'Brien is a Senior Vice
President
C-6
<PAGE>
of AEGON Management, Vice President of AEGON USA Managed
Portfolios, Inc., AUSA Life, Bankers United, First AUSA, LIICA,
Monumental General, Monumental Life, PFL Life, and Western
Reserve, and Trust Officer of Massachusetts Fidelity Trust
Company; Michael Van Meter is a Senior Vice President of AEGON
Management; David R. Halfpap is Assistant Secretary and Vice
President of AEGON USA Managed Portfolios, Inc., and Vice
President of AEGON Management, AUSA Life, Bankers United, First
AUSA, LIICA, Monumental General, Monumental Life, PFL Life, and
Western Reserve; Gregory W. Theobald is Secretary and Vice
President of AEGON Management, Secretary of AEGON USA Managed
Portfolios, Inc., and Vice President and Assistant Secretary of
AUSA Life, Bankers United, First AUSA, International Life
Investors Insurance Company, LIICA, Monumental General, Monumental
Life, PFL Life, and Western Reserve, and Vice President of Money
Services, Inc.; Lewis O. Funkhouser is a Vice President of AEGON
Management; Jon D. Kettering is Vice President and Treasurer of
AEGON Management and Vice President of AUSA Life, Bankers United,
First AUSA, International Life Investors Insurance Company, LIICA,
Monumental General, Monumental Life, PFL Life, and Western
Reserve; Michael N. Meese is a Vice President of AEGON Management,
and Portfolio Manager of AUSA Life, and International Life
Investor Insurance Company; Robert L. Hansen is Vice President of
AEGON Management, AUSA Life, Bankers United, First AUSA, LIICA,
Monumental Life, PFL Life, and Western Reserve; Frederick A.
Sabetta is Vice President of AEGON Management, Bankers United,
First AUSA, LIICA, Monumental General, Monumental Life, PFL Life,
and Western Reserve; 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 Management; James E.
Fine, Thomas E. Myers, Bradley J. Beman and Mary T. Pech are each
an Assistant Vice President of AEGON Management.
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 an indirect
wholly-owned subsidiary of VK/AC Holding, Inc. ("VK/AC Holding").
VK/AC Holding is a wholly-owned subsidiary of MSAM Holdings II,
Inc., which in turn, is a wholly-owned subsidiary of Morgan
Stanley Group, Inc.
Don G. Powell, Chairman, CEO and Director of the Van Kampen
American Capital Asset Management, Inc. ("Sub-Adviser") and
President, CEO and Director of Van Kampen American Capital, Inc.
("VKAC"), has no business, profession, vocation or employment of a
substantial nature other than his positions with the Sub-Adviser,
its subsidiaries and affiliates. Dennis J. McDonnel, Director,
President, and Chief Operating Officer of the Sub-Adviser ,
Chairman, COO and Director of Van Kampen American Capital
Investment Advisory Corp. ("VK Advisor") and is Executive Vice
President of VKAC; Ronald A. Nyberg, Director of the Sub-Adviser,
and Executive Vice President and General Counsel of VKAC; William
R. Rybak, Director of Sub-Adviser and Executive Vice President and
CFO of VKAC; Robert C. Peck, Jr., Director of Sub-Adviser and
Executive Vice President of Van Kampen; Alan R. Sachtleben,
Director of Sub-Adviser and Executive Vice President of Van
Kampen; and Peter W. Hegel, Director of Sub-Adviser and Executive
Vice President of VK Advisor.
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, 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.
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.
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<PAGE>
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. 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"), the Sub-Adviser
to the Aggressive Growth Portfolio, 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.
C-8
<PAGE>
I. TACTICAL ASSET ALLOCATION PORTFOLIO: SUB-ADVISER - DEAN
INVESTMENT ASSOCIATES
Dean Investment Associates ("Dean"), the Sub-Adviser to the
Tactical Asset Allocation Portfolio, 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 (THE "PORTFOLIOS"):
SUB-ADVISER - C.A.S.E. MANAGEMENT, INC.
C.A.S.E. Management, Inc. ("C.A.S.E."), the Sub-Adviser to the
Portfolios, 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.
K. INTERNATIONAL EQUITY PORTFOLIO: CO-SUB-ADVISERS - SCOTTISH
EQUITABLE INVESTMENT MANAGEMENT LIMITED AND GE
INVESTMENT MANAGEMENT INCORPORATED
Scottish Equitable Investment Management Limited ("Scottish
Equitable") serves as a Co-Sub-Adviser to the International Equity
Portfolio. See "Management of the Fund - The Co-Sub-Advisers" in
the Prospectus and Statement of Additional Information for
regarding the business of Scottish Equitable.
The directors and officers of Scottish Equitable 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.
C-9
<PAGE>
GE Investment Management Incorporated ("GEIM") also serves as a
Co-Sub-Adviser for the International Equity Portfolio. GEIM is a
wholly-owned subsidiary of General Electric Company ("GE"). GEIM's
principal officers and directors serve in similar capacities with
respect to General Electric Investment Corporation ("GEIC," and,
together with GEIM, collectively referred to as "GE Investments"),
which like GEIM is a wholly-owned subsidiary of GE. GEIC serves as
investment adviser to various GE pension and benefit plans and
certain employee mutual funds. The directors and officers of GEIC
are: Dale F. Frey, Chairman, Director and CEO; Michael J.
Cosgrove, Executive Vice President, Alan M. Lewis, Executive Vice
President and General Counsel; John H. Myers, Executive Vice
President; Eugene K. Bolton, Executive Vice President; Donald W.
Torey, Executive Vice President and Ralph R. Layman, Executive
Vice President. All of these officers and/or directors have no
substantial business, profession, vocation or employment other
than their positions with GEIM and/or its subsidiaries and
affiliates.
L. GLOBAL SECTOR, US SECTOR AND FOREIGN SECTOR PORTFOLIOS
("PORTFOLIOS"): CO-SUB-ADVISERS - MERIDIAN INVESTMENT
MANAGEMENT CORPORATION AND INVESCO GLOBAL ASSET MANAGEMENT LIMITED
Meridian Investment Management Corporation and INVESCO Global
Asset Management Limited serve as the Co-Sub-Advisers for the
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 ("IGAM") 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 IGAM are listed below. Unless
otherwise indicated, each director and officer has a principal
business address of 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.
IGAM has entered into agreements with its 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
information regarding INVESCO Asset Management Limited and 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 that 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 and Portfolio
Manager (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,
C-10
<PAGE>
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; Barry Kurokawa, Senior Vice
President and Portfolio Manager (formerly, Vice President from
January 1993 to January 1994); Charles P. Mayer, Senior Vice
President (since January 1994) and Portfolio Manager (formerly,
Vice President from March 1993 to January 1994); Timothy J.
Miller, Senior Vice President (since April 1995) and Portfolio
Manager (formerly, Vice President from January 1993 to April
1995); Robert R. Schoonbeck, Senior Trust Officer (also President
and a Director of INVESCO Retirement Plan Services, Inc., 1355
Peachtree Street, N.E., Atlanta, Georgia 30309); Donovan 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); Gregg J. Smolenski, Vice President -
Marketing; E. E. Frye, Jr., Vice President; Douglas N. Pratt, Vice
President and Portfolio Manager; Paul J. Rasplicka, Vice President
(formerly, Vice President of Chase Investment Counsel Corp., 300
Preston Avenue, Suite 403, Charlottesville, Virginia 22902 from
October 1992 to January 1994); Brian F. Kelly, Vice President
(since April 1994) and Portfolio Manager; John R. Schroer, Vice
President (since January 1995) and Portfolio Manager; Ritis S.
Skinner, Assistant Vice President and Senior Trust Officer (also
Senior Vice President and Senior Trust Officer of INVESCO
Retirement Plan Services, Inc.); Jeraldine E. Kraus, Assistant
Secretary (also Assistant Secretary and Director of Office
Services Administration of INVESCO Funds Group, Inc.); 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 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.)
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, Principal
Executive Officer and Chairman; Jeffrey C. Attfield, 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. Gillan, 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.
M. 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;
C-11
<PAGE>
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.
N. U.S. EQUITY PORTFOLIO: SUB-ADVISER - GE INVESTMENT MANAGEMENT
INCORPORATED
GE Investment Management Incorporated ("GEIM") serves as the
Sub-Adviser for the U.S. Equity Portfolio. GEIM is a wholly-owned
subsidiary of General Electric Company ("GE"). GEIM's principal
officers and directors serve in similar capacities with respect to
General Electric Investment Corporation ("GEIC," and, together
with GEIM, collectively referred to as "GE Investments") which
like GEIM is a wholly-owned subsidiary of GE. GEIC serves as
investment adviser to various GE pension and benefit plans and
certain employee mutual funds. The directors and officers of GEIC
are: Dale F. Frey, Chairman, Director and CEO; Michael J.
Cosgrove, Executive Vice President, Alan M. Lewis, Executive Vice
President and General Counsel; John H. Myers, Executive Vice
President; Eugene K. Bolton, Executive Vice President; Donald W.
Torey, Executive Vice President and Ralph R. Layman, Executive
Vice President. All of these officers and/or directors have no
substantial business, profession, vocation or employment other
than their positions with GEIM and/or its subsidiaries and
affiliates.
Item 29. PRINCIPAL UNDERWRITERS.
(a) The Registrant has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), whose address is P.O. Box 9053,
Clearwater, FL 34618-9053, to act as the principal underwriter of
Fund Shares. ISI also serves as an investment adviser and
principal underwriter to the Idex Series Fund and as principal
underwriter to the WRL Series Life Account and the WRL Series
Annuity Account.
(b) Directors and Officers of Principal Underwriter:
<TABLE>
<CAPTION>
(1) (2) (3)
NAME AND PRINCIPAL BUSINESS POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
ADDRESS UNDERWRITER REGISTRANT
--------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
John R. Kenney* Chairman and Director Chairman and President
G. John Hurley* Director, President and CEO Director and Executive
Vice President
Rebecca A. Ferrell* Assistant Vice President, Secretary, Vice President
Counsel and Assistant and Counsel
Secretary
William H. Geiger* Director and Secretary Vice President and
Assistant Secretary
Richard B. Franz II* Treasurer Treasurer and Principal
J. Will Paull Director N/A
17199 Laurel Park Dr. N. #100
Livonia, MI 48152
Thomas R. Moriarty* Senior Vice President N/A
Christopher G. Roetzer* Assistant Vice President N/A
Cynthia L. Remley* Vice President, Counsel and N/A
Assistant Secretary
Terry L. Garvin* Vice President N/A
C-12
<PAGE>
Gordon E. Hippner* Vice President N/A
Gerald P. Kirk* Vice President N/A
Leslie E. Martin, III* Vice President N/A
Stanley R. Orr* Vice President N/A
William G. Cummings* Vice President N/A
Pamela C. Dils* Assistant Vice President and N/A
Assistant Secretary
Kristy L. Dowd* Assistant Vice President N/A
Diane Rogers* Assistant Vice President N/A
Ronald J. Klimas* Assistant Vice President N/A
Russell W. Crooks* Assistant Vice President N/A
Gregory Limardi* Assistant Vice President N/A
Laura Schneider* Assistant Secretary N/A
Stuart Walsky* Assistant Vice President N/A
Ronald L. Hall* Vice President, Sales and N/A
Marketing
Christine M. Goodwin* Assistant Vice President N/A
- ---------------
*201 Highland Avenue, Largo, Florida 33770
</TABLE>
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 WRL Investment Management, Inc. and WRL
Investment Services, Inc. at their offices at 201 Highland Avenue,
Largo, Florida 33770, 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 International Equity
Portfolio and the U.S. Equity Portfolio of the 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 delivered with a copy of the Registrant's latest
Annual Report to shareholders, Policyowners or Contract Owners
upon request and without charge.
C-13
<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., has duly caused this Post Effective Amendment No. 26 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 23rd day of
December, 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. 26 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE
- ------------------- ----
/s/ JOHN R. KENNEY December 23, 1996
- --------------------------------
Chairman of the Board and President
John R. Kenney
/s/ G. JOHN HURLEY December 23, 1996
- --------------------------------
Executive Vice President and Director
G. John Hurley
/s/ PETER R. BROWN December 23, 1996
- --------------------------------
Director - Peter R. Brown *
/s/ CHARLES C. HARRIS December 23, 1996
- --------------------------------
Director - Charles C. Harris*
/s/ RUSSELL A. KIMBALL, JR. December 23, 1996
- --------------------------------
Director - Russell A. Kimball, Jr. *
<PAGE>
/s/ RICHARD B. FRANZ, II December 23, 1996
- --------------------------------
Treasurer and Principal Financial Officer
Richard B. Franz, II
/s/ KENNETH P. BEIL December 23, 1996
- --------------------------------
Vice President and
Principal Accounting Officer
Kenneth P. Beil
/s/ THOMAS E. PIERPAN December 23, 1996
- --------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS FILED WITH
POST-EFFECTIVE AMENDMENT NO. 26 TO
REGISTRATION STATEMENT
ON FORM N-1A
WRL SERIES FUND, INC.
REGISTRATION NO. 33-507
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
1. (H) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc.
1. (I) Articles Supplementary to Articles of Incorporation of WRL Series
Fund, Inc.
5. (i) Investment Advisory Agreement on behalf of the Portfolios of the WRL
Series Fund, Inc. with WRL Investment Management, Inc.
6. Distribution Agreement
8. Custodian Agreement
9. Administrative Services and Transfer Agency Agreement
11. Consent of Price Waterhouse LLP
15. Plan of Distribution
EXHIBIT 99.B1
EXHIBIT 1(H)
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
OF WRL SERIES FUND, INC.
<PAGE>
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
WRL SERIES FUND, INC.
WRL SERIES FUND, INC., a Maryland corporation ("Corporation"), on
behalf of its Board of Directors ("Directors"), hereby certifies to the Maryland
Department of Assessments and Taxation as follows:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: Pursuant to Article V, Paragraph 1 of the Corporation's
Articles of Incorporation, the Corporation is authorized to issue One Billion
(1,000,000,000) shares of Common Stock having a par value of one cent ($0.01)
per share and the aggregate par value of $10,000,000 ("Shares") which are
classified in the Corporation's Articles of Incorporation as follows: Three
Hundred Million (300,000,000) of the Shares are designated as Money Market
Portfolio Common Stock; Twenty-Five Million (25,000,000) of the Shares are
designated as Bond Portfolio Common Stock; and Six Hundred Seventy-five Million
(675,000,000) of the Shares are designated as Growth Portfolio Common Stock.
THIRD: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on November 25, 1992, the Shares were reclassified as
follows: Three Hundred Million (300,000,000) of the Shares are designated as
Money Market Portfolio Common Stock; Twenty-Five Million (25,000,000) of the
Shares are designated as Bond Portfolio Common Stock; and Two Hundred
Seventy-five Million (275,000,000) of the Shares are designated as Growth
Portfolio Common Stock; One Hundred Million (100,000,000) of the Shares are
designated as Global Portfolio Common Stock; One Hundred Million (100,000,000)
of the Shares are designated as Short-to-Intermediate Government Portfolio
Common Stock; One Hundred Million (100,000,000) of the Shares are designated as
Emerging Growth Portfolio Common Stock; and One Hundred Million (100,000,000) of
the Shares are designated as Equity-Income Portfolio Common Stock.
FOURTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on March 1, 1994, Shares were reclassified as
follows: One Hundred Fifty Million (150,000,000) of the authorized but unissued
Shares of the Growth Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Balanced Portfolio
Common Stock; and Seventy-five Million (75,000,000) were designated as Utility
Portfolio Common Stock. Seventy-five Million (75,000,000) of the authorized but
unissued Shares of the Money Market Portfolio Common Stock were reclassified and
designated as Aggressive Growth Portfolio Common Stock
FIFTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on September 2, 1994, Shares were reclassified as
follows: Seventy-five Million (75,000,000) of the
<PAGE>
authorized but unissued Shares of the Money Market Portfolio Common Stock were
reclassified and designated as follows: Seventy-five Million (75,000,000) were
designated as Tactical Asset Allocation Portfolio Common Stock.
SIXTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on April 6, 1995, the Corporation increased the aggregate
number of shares of capital (common) stock which the Fund has authority to issue
from One Billion (1,000,000,000) Shares of the par value of one cent ($0.01) per
share and the aggregate par value of $10,000,000, to Two Billion (2,000,000,000)
Shares of the par value of one cent ($0.01) per share and the aggregate par
value of $20,000,000. Of the One Billion (1,000,000,000) shares newly authorized
by the Corporation, the Shares were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Quality Growth Portfolio
Common Stock; Seventy-five Million (75,000,000) of the Shares were designated as
C.A.S.E. Growth & Income Portfolio Common Stock; and Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Growth Portfolio Common
Stock.
SEVENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on July 14, 1995, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as T. Rowe Price-WRL Equity Income
Portfolio Common Stock; Seventy-five Million (75,000,000) of the Shares were
designated as Leisure Portfolio Common Stock; Seventy-five Million (75,000,000)
of the Shares were designated as International Equity Portfolio Common Stock;
and Seventy-five Million (75,000,000) of the Shares were designated as Janus
Balanced Portfolio Common Stock.
EIGHTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on January 4, 1996, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as Value Equity Portfolio Common
Stock; Seventy-five Million (75,000,000) of the Shares were designated as
Meridian/INVESCO Global Sector Portfolio Common Stock; Seventy-five Million
(75,000,000) of the Shares were designated as Meridian/INVESCO US Sector
Portfolio Common Stock; and Seventy-five Million (75,000,000) of the Shares were
designated as Meridian/INVESCO Foreign Sector Portfolio Common Stock.
NINTH: The Board of Directors of the Corporation, at a meeting duly
convened and held on October 3, 1996, adopted resolutions classifying Shares of
the authorized but unissued capital (common) stock as follows: Seventy-five
Million (75,000,000) of the Shares are designated as U.S. Equity Portfolio
Common Stock.
TENTH: The Shares of Common Stock as so authorized and classified by
the Directors of the Corporation shall have the powers, preferences, and rights,
and qualifications, restrictions and limitations, specified in Article V,
Paragraph 4 of the Articles of Incorporation of the Corporation and shall be
subject to all its provisions relating to the stock of the Corporation.
<PAGE>
ELEVENTH: The aforesaid Shares of Common Stock have been duly
authorized and classified by the Directors pursuant to authority and power
contained in the Articles of Incorporation of the Corporation and in accordance
with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned Chairman of the Board of Directors
of WRL Series Fund, Inc., hereby executes these Articles Supplementary on behalf
of the Corporation, acknowledges that these Articles Supplementary are the act
of the Corporation, and certifies that, to the best of his knowledge,
information and belief, all matters and facts set forth herein are true in all
material respects, under the penalties of perjury.
Date: October 23, 1996
WRL SERIES FUND, INC.
/s/ JOHN R. KENNEY
-------------------------------
John R. Kenney
Chairman of the Board of Directors
ATTEST: and President
/s/ PRISCILLA I. HECHLER
- -----------------------------
Priscilla I. Hechler
Assistant Vice President
and Assistant Secretary
<PAGE>
EXHIBIT 1(I)
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
OF WRL SERIES FUND, INC.
<PAGE>
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
WRL SERIES FUND, INC.
WRL SERIES FUND, INC., a Maryland corporation ("Corporation"), on
behalf of its Board of Directors ("Directors"), hereby certifies to the Maryland
Department of Assessments and Taxation as follows:
FIRST: The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940, as amended.
SECOND: Pursuant to Article V, Paragraph 1 of the Corporation's
Articles of Incorporation, the Corporation is authorized to issue One Billion
(1,000,000,000) shares of Common Stock having a par value of one cent ($0.01)
per share and the aggregate par value of $10,000,000 ("Shares") which are
classified in the Corporation's Articles of Incorporation as follows: Three
Hundred Million (300,000,000) of the Shares are designated as Money Market
Portfolio Common Stock; Twenty-Five Million (25,000,000) of the Shares are
designated as Bond Portfolio Common Stock; and Six Hundred Seventy-five Million
(675,000,000) of the Shares are designated as Growth Portfolio Common Stock.
THIRD: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on November 25, 1992, the Shares were reclassified as
follows: Three Hundred Million (300,000,000) of the Shares are designated as
Money Market Portfolio Common Stock; Twenty-Five Million (25,000,000) of the
Shares are designated as Bond Portfolio Common Stock; and Two Hundred
Seventy-five Million (275,000,000) of the Shares are designated as Growth
Portfolio Common Stock; One Hundred Million (100,000,000) of the Shares are
designated as Global Portfolio Common Stock; One Hundred Million (100,000,000)
of the Shares are designated as Short-to-Intermediate Government Portfolio
Common Stock; One Hundred Million (100,000,000) of the Shares are designated as
Emerging Growth Portfolio Common Stock; and One Hundred Million (100,000,000) of
the Shares are designated as Equity-Income Portfolio Common Stock .
FOURTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on March 1, 1994, Shares were reclassified as
follows: One Hundred Fifty Million (150,000,000) of the authorized but unissued
Shares of the Growth Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Balanced Portfolio
Common Stock; and Seventy-five Million (75,000,000) were designated as Utility
Portfolio Common Stock. Seventy-five Million (75,000,000) of the authorized but
unissued Shares of the Money Market Portfolio Common Stock were reclassified and
designated as Aggressive Growth Portfolio Common Stock
<PAGE>
FIFTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on September 2, 1994, Shares were reclassified as
follows: Seventy-five Million (75,000,000) of the authorized but unissued Shares
of the Money Market Portfolio Common Stock were reclassified and designated as
follows: Seventy-five Million (75,000,000) were designated as Tactical Asset
Allocation Portfolio Common Stock.
SIXTH: Pursuant to the Corporation's Articles Supplementary to Articles
of Incorporation filed on April 6, 1995, the Corporation increased the aggregate
number of shares of capital (common) stock which the Fund has authority to issue
from One Billion (1,000,000,000) Shares of the par value of one cent ($0.01) per
share and the aggregate par value of $10,000,000, to Two Billion (2,000,000,000)
Shares of the par value of one cent ($0.01) per share and the aggregate par
value of $20,000,000. Of the One Billion (1,000,000,000) shares newly authorized
by the Corporation, the Shares were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Quality Growth Portfolio
Common Stock; Seventy-five Million (75,000,000) of the Shares were designated as
C.A.S.E. Growth & Income Portfolio Common Stock; and Seventy-five Million
(75,000,000) of the Shares were designated as C.A.S.E. Growth Portfolio Common
Stock.
SEVENTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on July 14, 1995, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as T. Rowe Price-WRL Equity Income
Portfolio Common Stock; Seventy-five Million (75,000,000) of the Shares were
designated as Leisure Portfolio Common Stock; Seventy-five Million (75,000,000)
of the Shares were designated as International Equity Portfolio Common Stock;
and Seventy-five Million (75,000,000) of the Shares were designated as Janus
Balanced Portfolio Common Stock.
EIGHTH: Pursuant to the Corporation's Articles Supplementary to
Articles of Incorporation filed on January 4, 1996, shares of the authorized
capital (common) stock were classified as follows: Seventy-five Million
(75,000,000) of the Shares were designated as Value Equity Portfolio Common
Stock; Seventy-five Million (75,000,000) of the Shares were designated as
Meridian/INVESCO Global Sector Portfolio Common Stock; Seventy-five Million
(75,000,000) of the Shares were designated as Meridian/INVESCO US Sector
Portfolio Common Stock; and Seventy-five Million (75,000,000) of the Shares were
designated as Meridian/INVESCO Foreign Sector Portfolio Common Stock.
NINTH: The Board of Directors of the Corporation, at a meeting duly
convened and held on October 3, 1996, adopted resolutions classifying Shares of
the authorized but unissued capital (common) stock as follows: Seventy-five
Million (75,000,000) of the Shares are designated as U.S. Equity Portfolio
Common Stock.
<PAGE>
TENTH: The Board of Directors of the Corporation, at a meeting duly
convened and held on December 2, 1996, adopted resolutions reclassifying the
authorized but unissued shares of the Meridian/INVESCO Global Sector Portfolio
Common Stock to be designated as Global Sector Portfolio Common Stock; the
authorized but unissued shares of the Meridian/INVESCO US Sector Portfolio to be
designated as US Sector Portfolio Common Stock; and the authorized but unissued
shares of the Meridian/INVESCO Foreign Sector Portfolio Common Stock to be
designated Foreign Sector Common Stock.
ELEVENTH: The Shares of Common Stock as so authorized and classified by
the Directors of the Corporation shall have the powers, preferences, and rights,
and qualifications, restrictions and limitations, specified in Article V,
Paragraph 4 of the Articles of Incorporation of the Corporation and shall be
subject to all its provisions relating to the stock of the Corporation.
TWELFTH: The aforesaid Shares of Common Stock have been duly authorized
and classified by the Directors pursuant to authority and power contained in the
Articles of Incorporation of the Corporation and in accordance with Section
2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned Chairman of the Board of Directors
of WRL Series Fund, Inc., hereby executes these Articles Supplementary on behalf
of the Corporation, acknowledges that these Articles Supplementary are the act
of the Corporation, and certifies that, to the best of his knowledge,
information and belief, all matters and facts set forth herein are true in all
material respects, under the penalties of perjury.
Date: December 9, 1996
WRL SERIES FUND, INC.
/s/ JOHN R. KENNEY
-----------------------------
John R. Kenney
Chairman of the Board of Directors
ATTEST: and President
/s/ PRISCILLA I. HECHLER
- ------------------------
Priscilla I. Hechler
Assistant Vice President
and Assistant Secretary
EXHIBIT 99.B5
5(I)
INVESTMENT ADVISORY AGREEMENT ON BEHALF OF
THE PORTFOLIOS OF THE WRL SERIES FUND, INC.
WITH WRL INVESTMENT MANAGEMENT, INC.
<PAGE>
WRL SERIES FUND, INC.
INVESTMENT ADVISORY AGREEMENT
This Agreement, entered into as of January 1, 1997, is between WRL
Series Fund, Inc., a Maryland corporation (referred to herein as the "Fund"),
and WRL Investment Management, Inc., a Florida corporation (referred to herein
as "WRL Management"), to provide certain investment advisory services with
respect to the series of shares of common stock of the Fund.
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 (the "Portfolios"). In managing its Portfolios,
the Fund wishes to have the benefit of the investment advisory services of WRL
Management and its assistance in performing certain management functions. WRL
Management desires to furnish such services to the Fund 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 Fund, WRL Management 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 each investment portfolio of
the Portfolios, the investment recommendations of WRL Management,
and the investment considerations which have given rise to those
recommendations;
(c) to supervise the purchase and sale of securities of the
Portfolios as directed by the appropriate officers of the Fund; and
(d) to maintain all books and records required to be maintained by
the Investment Adviser pursuant to the 1940 Act and the rules and
regulations promulgated thereunder with respect to transactions on
behalf of the Fund. In compliance with the requirements of Rule
31a-3 under the 1940 Act, WRL Management hereby agrees: (i) that all
records that it maintains for the Fund are the property of the Fund,
(ii) to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any records that it maintains for the Fund and that are
required to be maintained by Rule 31a-1 under the 1940 Act and (iii)
agrees to surrender promptly to the Fund any records that it
maintains for the Fund upon request by the Fund; provided, however,
WRL Management may retain copies of such records.
WRL Management shall pay all expenses incurred in connection with the
performance of its responsibilities under this Agreement. It is understood and
agreed that WRL Management may, and intends to, enter into Sub-Advisory
Agreements with duly registered investment advisers (the "Sub-Advisers") for
each Portfolio, under which each Sub-Adviser will, under the supervision of WRL
Management, furnish investment information and advice with respect to one or
more Portfolios to assist WRL Management in carrying out its responsibilities
under this Section 1. The compensation to be paid to each 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
between WRL Management and each Sub-Adviser; provided, however, that such
Agreement shall be approved by the Board of Directors and by the holders of the
outstanding voting securities of each Portfolio in accordance
<PAGE>
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. OBLIGATIONS OF THE FUND. The Fund shall have the following
obligations under this Agreement:
(a) to keep WRL Management 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 Management 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 Management with any further materials or
information which WRL Management may reasonably request to enable it
to perform its functions under this Agreement; and
(d) to compensate WRL Management for its services in accordance with
the provisions of Section 3 hereof.
3. COMPENSATION. For its services under this Agreement, WRL Management
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, as
set forth on Schedule A attached to this Agreement, as it may be amended from
time to time in accordance with Section 11 below. 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.
4. EXPENSES PAID BY EACH PORTFOLIO. Nothing in this Agreement shall be
construed to impose upon WRL Management the obligation to incur, pay, or
reimburse a Portfolio for any expenses. A Portfolio shall pay all of its
expenses including, but not limited to:
(a) all costs and expenses, including legal and accounting fees,
incurred in connection with the formation and organization of a
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 a Portfolio and the
preparation for offering its shares. The organization of a 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) investment advisory fees;
(d) 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 the Fund or WRL
Management;
<PAGE>
(e) compensation of the Fund's custodian, administrator, registar
and dividend disbursing agent;
(f) legal, accounting and printing expenses;
(g) other administrative, clerical, recordkeeping and bookkeeping
expenses;
(h) pricing costs, including the daily calculation of net asset
value;
(i) auditing;
(j) insurance premiums, including Fidelity Bond Coverage, Error &
Omissions Coverage and Directors and Officers Coverage, in
accordance with the provisions of the 1940 Act and the rules
thereunder;
(k) services for shareholders, including allocable telephone and
personnel expenses;
(l) brokerage commissions and all other expenses in connection with
execution of portfolio transactions, including interest:
(m) 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;
(n) costs of certificates and the expenses of delivering such
certificates to the purchasers of shares relating thereto;
(o) expenses of local representation in Maryland;
(p) fees and/or expenses payable pursuant to any plan of
distribution adopted with respect to the Fund in accordance with
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder;
(q) expenses of shareholders' meetings and of preparing, printing
and distributing notices, proxy statements and reports to
shareholders;
(r) expenses of preparing and filing reports with federal and state
regulatory authorities;
(s) all costs and expenses, including fees and disbursements, of
counsel and auditors, filing and renewal fees and printing costs in
connection with the 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;
(t) all costs involved in preparing and printing prospectuses of the
Fund;
(u) extraordinary expenses; and
(v) all other expenses properly payable by the Fund or the
Portfolios.
5. TREATMENT OF INVESTMENT ADVICE. With respect to the Portfolios, the
Fund shall treat the investment advice and recommendations of WRL Management 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
<PAGE>
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.
6. BROKERAGE COMMISSIONS. For purposes of this Agreement, brokerage
commissions paid by each 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 Management is authorized and directed to place
each Portfolio's securities transactions, or to delegate to the Sub-Adviser of
that Portfolio 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 price and at reasonable commission
rates (best price and execution); provided, however, that WRL Management 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 Management 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 Management or the
Sub-Adviser. WRL Management and the Sub-Adviser are also authorized to consider
sales of individual and group life insurance policies and/or variable annuity
contract issued by Western Reserve Life Assurance Co. of Ohio 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 Management 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 Management
and the Sub-Advisers in placing securities transactions for each Portfolio
pursuant to the foregoing provisions. WRL Management shall report on the
placement of portfolio transactions each quarter to the Directors of the Fund.
7. LIMITATION ON EXPENSES OF THE PORTFOLIOS. If the insurance or
securities 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 Management will pay on behalf of the Portfolios 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 Management, 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 Management 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 Management 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 Management to the Portfolios or from the
Portfolios to WRL Management, shall be made as soon as reasonably practicable
after the end of the fiscal year.
8. TERMINATION. This Agreement may be terminated at any time, without
penalty, by the Directors of the Fund or by the shareholders of each 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 Management at
its principal place
<PAGE>
of business. This Agreement may be terminated by WRL Management at any time by
giving 60 days' written notice of termination to the Fund, addressed to its
principal place of business.
9. 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.
10. TERM. This Agreement shall continue in effect, unless sooner
terminated in accordance with its terms, for an initial term ending January 1,
1999 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 each
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act).
11. AMENDMENTS. This Agreement may be amended only with the approval of
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 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.
12. 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.
ATTEST: WRL SERIES FUND, INC.
/s/ PRISCILLA I. HECHLER By: /s/ JOHN R. KENNEY
- ------------------------- -----------------------------
Assistant Vice President Chairman of the Board and President
and Assistant Secretary
ATTEST: WRL INVESTMENT MANAGEMENT, INC.
/s/ PRISCILLA I. HECHLER By: /s/ KENNETH P. BEIL
- ------------------------- ----------------------------
Assistant Vice President President and Treasurer
and Assistant Secretary
<PAGE>
Schedule A
PERCENTAGE OF MONTHLY
PORTFOLIO AVERAGE DAILY NET ASSETS
- --------- ------------------------
Growth 0.80%
Bond 0.50%
Global 0.80%
Money Market 0.40%
Short-to-Intermediate Government 0.60%
Emerging Growth 0.80%
Equity-Income 0.80%
Balanced 0.80%
Aggressive Growth 0.80%
Utility 0.75%
Tactical Asset Allocation 0.80%
Value Equity 0.80%
C.A.S.E. Growth 0.80%
C.A.S.E. Growth & Income 0.80%
C.A.S.E. Quality Growth 0.80%
Global Sector 1.10%
US Sector 1.10%
Foreign Sector 1.10%
International Equity 1.00%
U.S. Equity 0.80%
EXHIBIT 99.B6
EXHIBIT 6
DISTRIBUTION AGREEMENT
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of January, 1997, between WRL Series Fund,
Inc., a Maryland corporation (the "Fund"), and InterSecurities, Inc., a Delaware
corporation (the "Distributor"), each with offices at 201 Highland Avenue,
Largo, Florida 33770.
WHEREAS, the Fund is a registered open-end management investment
company, which currently offers shares of its common stock in twenty series,
each as set forth on Schedule A hereto (the "Current Portfolios"), and the Fund
may offer shares of one or more additional Portfolios in the future;
WHEREAS, the Fund was originally organized to act as the funding
vehicle for certain individual variable life insurance policies and individual
and group variable annuity contracts offered by Western Reserve Life Assurance
Co. of Ohio ("Western Reserve") or life insurance companies affiliated with
Western Reserve through separate accounts of such life insurance companies; and
WHEREAS, in the future, the Fund may also offer its shares to life
insurance companies unaffiliated with Western Reserve (together with Western
Reserve and its affiliated life insurance companies, the "Life Companies") as a
funding vehicle for variable life insurance policies and variable annuity
contracts (together with the variable life insurance policies and variable
annuity contracts offered by Western Reserve and its affiliated life insurance
companies, the "Policies"), and/or to qualified pension and retirement plans
(the "Qualified Plans"); and
WHEREAS, from time to time, the Fund may enter into sales agreements
with Life Companies that have or will establish one or more separate accounts to
offer Policies, pursuant to which one or more Portfolios of the Fund serves as
the underlying funding vehicle for such Policies; and, under certain
circumstances, may enter into sales agreements with the Qualified Plans; and
WHEREAS, it is contemplated that, in addition to entering into sales
agreements with Life Companies and/or Qualified Plans, the Distributor shall
engage in certain promotional and sales efforts on behalf of the Fund, as
described in the Distribution Plan pursuant to Rule 12b-1 adopted by the Fund
concurrent with the effective date of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
1. (a) The Fund proposes to issue and sell shares of common stock of
the Fund (the "Shares") to separate accounts of Life Companies and to the
Qualified Plans as may be permitted by applicable law and subject to the Fund's
obtaining any necessary regulatory approvals. The Fund hereby appoints the
Distributor as agent to sell the Shares and the Distributor hereby accepts such
appointment. The Shares will be distributed under such terms as are set by the
Fund and will be sold to the separate accounts and the Qualified Plans permitted
to buy the Shares as specified by the Fund's Board of Directors.
(b) In the event that the Fund from time to time designates one or
more Portfolios in addition to the Current Portfolios ("Additional Portfolios"),
it shall notify the Distributor. If the Distributor is willing to perform
services hereunder to the Additional Portfolios, it shall so notify the Fund.
Thereafter, the Fund and the Distributor shall mutually agree to amend Schedule
A to this Agreement in writing to add the Additional Portfolios and the
Additional Portfolios shall be subject to this Agreement, subject to the
approval of the Board of Directors as set forth in Section 7.(a) below.
<PAGE>
2. (a) The Distributor agrees that (i) all Shares sold by the
Distributor shall be sold at the net asset value thereof as described in the
Fund's prospectus, and (ii) the Fund shall receive 100% of such net asset value.
(b) The Shares will be sold in accordance with any sales agreements
between the Fund and Life Companies and, where applicable, the Fund and
Qualified Plans. The Current Portfolios and all Additional Portfolios subject to
this Agreement are referred to collectively as "Portfolios."
3. (a) All sales literature and advertisements used by the Distributor
in connection with sales of Shares shall be subject to approval by the Fund. The
Fund authorizes the Distributor, in connection with the sales or arranging for
the sale of Shares, to provide only such information and to make only such
statements or representations as are contained in the Fund's then-current
Prospectus or in sales literature or advertisements approved by the Fund or in
such financial and other statements which are furnished to the Distributor
pursuant to the next paragraph. The Fund shall not be responsible in any way for
any information provided or statements or representations made by the
Distributor or its representatives or agents other than the information,
statements and representations described in the preceding sentence. The
Distributor shall review all materials submitted to it by Life Companies and
Qualified Plans that describe the Fund, the Shares or the Fund's investment
adviser. The Distributor shall not be responsible for any information provided
or statements or representations made by Life Companies or Qualified Plans,
representatives or agents of Life Companies or Qualified Plans, or any other
persons or entities other than the Distributor's representatives or agents.
(b) The Fund shall keep the Distributor fully informed with regard
to its affairs, shall furnish the Distributor with a certified copy of all
financial statements and a signed copy of each report prepared by its
independent certified public accountants, and shall cooperate fully in the
efforts of the Distributor to sell the Shares and in the performance by the
Distributor of all its duties under this Agreement.
4. (a) The Fund will pay or cause to be paid:
(i) registration fees for registering its shares under the
Securities Act of 1933 (the "1933 Act");
(ii) the expenses, including counsel fees, of preparing
registration statements and such other documents as the Fund
believes are necessary for registering the Shares with the
Securities and Exchange Commission (the "SEC") and such states
as are deemed necessary or appropriate;
(iii) expenses incident to preparing amendments to
registration statements of the Fund under the 1933 Act and the
Investment Company Act of 1940, as amended (the "1940 Act");
(iv) expenses for preparing and setting in type all
prospectuses and the expense of supplying them to the then
existing shareholders or beneficial owners of Shares
(including owners of Policies whose contracts use one or more
Portfolios as their funding vehicle);
(v) expenses incident to the issuance of its Shares such as
the cost of stock certificates, if any, taxes and fees of the
transfer agent for establishing shareholder record accounts
and confirmations; and
-2-
<PAGE>
(vi) expenses for administrative and transfer agency services,
pursuant to and in accordance with the Administrative Services
and Transfer Agency Agreement between the Fund and WRL
Investment Services, Inc. dated January 1, 1997, as it may be
amended from time to time in accordance with its terms.
(b) The Distributor shall pay all of its own costs and expenses
connected with the offer and sale of Shares ("Distribution Expenses"), except
that certain Distribution Expenses may be reimbursed to the Distributor as
provided in Section 5 hereof.
5. (a) Pursuant to a Distribution Plan (the "Plan") adopted by the
Board of Directors of the Fund in accordance with Section 12(b) of the 1940 Act,
Rule 12b-1 and the other rules and regulations promulgated thereunder, as the
same may be, from time to time, issued or amended, the Fund, on behalf of a
Portfolio that has approved the Plan pursuant to Section 3 thereof, may
reimburse the Distributor, as direct payment for expenses incurred in connection
with the distribution of a Portfolio's shares, amounts equal to actual expenses
associated with distributing such Portfolio's shares, up to a maximum rate of
0.15%, on an annualized basis of a Portfolio's average daily net assets.
Reimbursements shall be measured and accrued daily, and remitted to the
Distributor monthly. Such reimbursement may be made only for the period
commencing on the date hereof and ending December 31, 1997, and for each twelve
month period (or portion thereof) thereafter, in which the Plan is in effect for
that Portfolio.
(b) Distribution Expenses reimbursable hereunder shall include,
but not necessarily be limited to, the following:
(i) the cost for printing and mailing of Fund prospectuses and
statements of additional information, and any supplements
thereto, to potential investors;
(ii) the costs relating to the development and preparation of
Fund advertisements and sales literature and brokers' and other
promotional materials describing and/or relating to the Fund;
(iii) expenses incurred in connection with the presentation of
seminars and sales meetings describing the Fund attended by
sales personnel and potential investors;
(iv) the development of consumer-oriented sales materials
describing and/or relating to the Fund; and
(v) expenses attributable to "distribution-related" services
provided to the Fund. "Distribution-related services" include,
but are not limited to: salaries and benefits; office expenses;
equipment expenses (I.E., computers, software, office
equipment, etc.); training costs; travel costs; printing costs;
supply expenses; computer programming time; and data center
expenses, each as they relate to the promotion of the sale of
Fund shares.
(c) The Distributor shall submit annual reimbursable Distribution
Expense budgets to the Board of Directors of the Fund. As soon as practicable
after the end of each calendar quarter, the Distributor shall submit to the
Board of Directors reports requesting ratification of reimbursement of
Distribution Expenses as to each Portfolio for that quarter. The Distributor
will allocate to each Portfolio reimbursable Distribution Expenses not
specifically attributable to the distribution of shares of a particular
Portfolio, based upon the ratio of the net asset value of each Portfolio at the
end of each calendar month to the net asset value of all Portfolios on that same
date. The Board of Directors will consider each request at its next regular
meeting after such request is submitted, and the Distributor shall only retain
-3-
<PAGE>
reimbursements by the Fund on behalf of a Portfolio for those reimbursable
Distribution Expenses that are approved by the Board of Directors, including a
majority of the "Disinterested Directors" (as that term is defined in Section 7
hereof).
6. (a) The Fund shall maintain a currently effective Registration
Statement on Form N-1A and shall file with the SEC such reports and other
documents as may be required under the 1933 Act and the 1940 Act or by the rule
and regulations of the SEC thereunder.
(b) The Fund represents and warrants that its Registration
Statement, post-effective amendments, Prospectus and Statement of Additional
Information (excluding statements based upon written information furnished by
the Distributor expressly for inclusion therein) shall not contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that all statements or information furnished to the Distributor, pursuant to
Section 3(b) hereof, shall be true and correct in all material respects.
7. (a) This Agreement shall take effect on the date hereof after it has
been approved by a vote of the majority of Directors of the Fund and those
Directors of the Fund who are not "interested persons" of the Fund and who have
no direct or indirect financial interest in the operation of the Plan or this
Agreement (the "Disinterested Directors"), cast in person at a meeting called
for the purpose of voting on this Agreement. This Agreement shall remain in full
force and effect until December 31, 1997, and may be continued for twelve month
periods (or portions thereof) thereafter; provided that such continuance shall
be specifically approved annually by the Board of Directors of the Fund or by a
majority of the outstanding voting securities of each Portfolio of the Fund as
it applies to that Portfolio, and in either case, also by a majority of the
Disinterested Directors. This Agreement may be amended, with respect to any
Portfolio, with the approval of the Board of Directors or of a majority of the
outstanding voting securities of each Portfolio of the Fund as it applies to
that Portfolio, provided, that in either case, such amendment shall also be
approved by a majority of the Disinterested Directors.
(b) This Agreement, with respect to any Portfolio, may be
terminated, at any time without payment of any penalty, by vote of a majority of
the Disinterested Directors or by vote of a majority of the outstanding voting
securities of that Portfolio, or may be terminated by the Distributor, in either
case on not more than 60 days' written notice delivered personally or mailed by
registered mail, postage prepaid, to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment.
(d) The terms "interested persons," "assignment" and "vote of a
majority of the outstanding voting securities" as used herein shall have the
meanings given to them in the 1940 Act.
8. In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties ("disabling conduct") hereunder
on the part of the Distributor (and its officers, directors, agents, employees,
controlling persons, shareholders and any other person or entity affiliated with
the Distributor or retained by it to perform or assist in the performance of its
obligations under this Agreement) the Distributor shall not be subject to
liability to the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder, of law or for
any loss suffered by any of them in connection with the matters to which this
Agreement relates.
9. This Agreement is made by the Fund, on behalf of each Portfolio,
pursuant to authority granted by the Board of Directors, and the obligations
created hereby are not binding on any of the Directors or shareholders of the
Fund individually, but bind only the property of the Fund.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed by their duly authorized officers and under their respective
seals on the day and year first above written.
WRL SERIES FUND, INC.
Attest:
/s/ PRISCILLA I. HECHLER By /s/ JOHN R. KENNEY
- ------------------------ -----------------------
Secretary(assistant) John R. Kenney
Chairman of the Board and President
Attest: INTERSECURITIES, INC.
/s/ WILLIAM H. GEIGER By /s/ G. JOHN HURLEY
- ------------------------- --------------------------
Secretary G. John Hurley
President
-5-
<PAGE>
SCHEDULE A
As of January 1, 1997, the Distributor shall act as distributor for shares of
the following Portfolios of WRL Series Fund, Inc.:
Growth Portfolio
Bond Portfolio
Global Portfolio
Money Market Portfolio
Short-to-Intermediate Government Portfolio
Balanced Portfolio
Emerging Growth Portfolio
Equity-Income Portfolio
Aggressive Growth Portfolio
Utility Portfolio
Tactical Asset Allocation Portfolio
C.A.S.E. Growth Portfolio
C.A.S.E. Growth & Income Portfolio
C.A.S.E. Quality Growth Portfolio
Value Equity Portfolio
International Equity Portfolio
Global Sector Portfolio
US Sector Portfolio
Foreign Sector Portfolio
U.S. Equity Portfolio
-6-
EXHIBIT 99,B8
EXHIBIT 8
CUSTODIAN AGREEMENT
<PAGE>
(01/97)
Custody & Fund Accounting
CUSTODIAN AGREEMENT
Between
WRL SERIES FUND, INC.
and
INVESTORS BANK & TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Bank Appointed Custodian .............................................1
2. Definitions.......................................................... 1
2.1 Authorized Person.............................................. 1
2.2 Security....................................................... 1
2.3 Portfolio Security............................................. 1
2.4 Officers' Certificate.......................................... 1
2.5 Book-Entry System.............................................. 1
2.6 Depository..................................................... 1
2.7 Proper Instructions............................................ 2
3. Separate Accounts.....................................................2
4. Certification as to Authorized Persons............................... 2
5. Custody of Cash.......................................................2
5.1 Purchase of Securities......................................... 2
5.2 Redemptions.................................................... 3
5.3 Distributions and Expenses of Fund............................. 3
5.4 Payment in Respect of Securities............................... 3
5.5 Repayment of Loans............................................. 3
5.6 Repayment of Cash.............................................. 3
5.7 Foreign Exchange Transactions.................................. 3
5.8 Other Authorized Payments...................................... 3
5.9 Termination.................................................... 3
6. Securities............................................................3
6.1 Segregation and Registration................................... 3
6.2 Voting and Proxies............................................. 4
6.3 Book-Entry System.............................................. 4
6.4 Use of a Depository............................................ 5
6.5 Use of Book-Entry System for Commercial Paper........... 6
6.6 Use of Immobilization Programs................................. 6
6.7 Eurodollar CDs................................................. 6
6.8 Options and Futures Transactions............................... 7
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter........................... 7
(b) Puts, Calls, and Futures Traded
on Commodities Exchanges.............................. 7
6.9 Segregated Account............................................. 7
6.10 Interest Bearing Call or Time Deposits......................... 8
6.11 Transfer of Securities......................................... 9
7. Redemptions...........................................................10
8. Merger, Dissolution, etc. of Fund.................................... 10
<PAGE>
9. Actions of Bank Without Prior Authorization.......................... 10
10. Collections and Defaults............................................. 11
11. Maintenance of Records and Accounting Services....................... 11
12. Fund Evaluation...................................................... 11
13. Concerning the Bank.................................................. 12
13.1 Performance of Duties and
Standard of Care .......................................... 12
13.2 Agents and Subcustodians with Respect to Property
of the Fund Held in the United States...................... 12
13.3 Duties of the Bank with Respect to Property of the Fund
Held Outside of the United States.......................... 13
13.4 Insurance..................................................... 15
13.5 Fees and Expenses of Bank.................................... 15
13.6 Advances by Bank............................................. 15
14. Termination.......................................................... 16
15. Confidentiality...................................................... 16
16. Notices.............................................................. 16
17. Amendments........................................................... 17
18. Parties.............................................................. 17
19. Governing Law........................................................ 17
20. Counterparts......................................................... 17
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of this 1st day of January, 1997, between WRL SERIES
FUND INC., a Maryland corporation (the "Fund") and INVESTORS BANK & TRUST
COMPANY (the "Bank").
The Fund, an open-end management investment company, desires to place and
maintain all of its portfolio securities and cash in the custody of the Bank.
The Bank has at least the minimum qualifications required by Section 17(f)(1) of
the Investment Company Act of 1940 (the "1940 Act") to act as custodian of the
portfolio securities and cash of the Fund, and has indicated its willingness to
so act, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. BANK APPOINTED CUSTODIAN. The Fund hereby appoints the Bank as
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. DEFINITIONS. Whenever used herein, the terms listed below will have
the following meaning:
2.1 AUTHORIZED PERSON. Authorized Person will mean any of the
persons duly authorized to give Proper Instructions or otherwise act on behalf
of the Fund by appropriate resolution of its Board of Directors (the "Board"),
and set forth in a certificate as required by Section 4 hereof.
2.2 SECURITY. The term security as used herein will have the same
meaning as when such term is used in the Securities Act of 1933, as amended,
including, without limitation, any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit
sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
a foreign currency, or, in general, any interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to, or option contract to purchase or sell any of the foregoing, and
futures, forward contracts and options thereon.
2.3 PORTFOLIO SECURITY. Portfolio Security will mean any security
owned by the Fund.
2.4 OFFICERS' CERTIFICATE. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.5 BOOK-ENTRY SYSTEM. Book-Entry System shall mean the Federal
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank, its
successor or successors and its nominee or nominees.
2.6 DEPOSITORY. Depository shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 ("Exchange
Act"), its successor or successors and its nominee or nominees. The term
"Depository" shall further mean and include any other person authorized to act
as a depository under the 1940 Act, its successor or successors and its nominee
or nominees, specifically identified in a certified copy of a resolution of the
Board.
<PAGE>
2.7 PROPER INSTRUCTIONS. Proper Instructions shall mean (i)
instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person
as shall have been designated in an Officers' Certificate, such instructions to
be given in such form and manner as the Bank and the Fund shall agree upon from
time to time, and (ii) instructions (which may be continuing instructions)
regarding other matters signed or initialed by such one or more persons from
time to time designated in an Officers' Certificate as having been authorized by
the Board. Oral instructions will be considered Proper Instructions if the Bank
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be promptly confirmed in writing. The Bank shall act upon
and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up or
confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to report
such discrepancy to the Fund. The Fund shall be responsible, at the Fund's
expense, for taking any action, including any reprocessing, necessary to correct
any such discrepancy or error, and to the extent such action requires the Bank
to act the Fund shall give the Bank specific Proper Instructions as to the
action required. Upon receipt of an Officers' Certificate as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Fund, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank are satisfied that such procedures afford adequate safeguards
for the Fund's assets.
3. SEPARATE ACCOUNTS. If the Fund has more than one series or portfolio,
the Bank will segregate the assets of each series or portfolio to which this
Agreement relates into a separate account for each such series or portfolio
containing the assets of such series or portfolio (and all investment earnings
thereon).
4. CERTIFICATION AS TO AUTHORIZED PERSONS. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
Board, it being understood that upon the occurrence of any change in the
information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund, will sign a new or amended certification setting forth
the change and the new, additional or omitted names or signatures. The Bank will
be entitled to rely and act upon any Officers' Certificate given to it by the
Fund which has been signed by Authorized Persons named in the most recent
certification.
5. CUSTODY OF CASH. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Section 13.2 hereof, including borrowed funds, delivered
to the Bank, subject only to draft or order by the Bank acting pursuant to the
terms of this Agreement. Upon receipt by the Bank of Proper Instructions (which
may be continuing instructions) or in the case of payments for redemptions and
repurchases of outstanding shares of common stock of the Fund, notification from
WRL Investment Management, Inc. ("WRL Management"), requesting such payment,
designating the payee or the account or accounts to which the Bank will release
funds for deposit, and stating that it is for a purpose permitted under the
terms of this Section 5, specifying the applicable subsection, the Bank will
make payments of cash held for the accounts of the Fund, insofar as funds are
available for that purpose, only as permitted in subsections 5.1-5.9 below.
5.1 PURCHASE OF SECURITIES. Upon the purchase of securities for the
Fund, against contemporaneous receipt of such securities by the Bank or, against
delivery of such securities to the Bank in accordance with generally accepted
settlement practices and customs in the jurisdiction or market in which the
transaction occurs, registered in the name of the Fund or in the name of, or
properly endorsed and in form for transfer to, the Bank, or a nominee of the
Bank, or receipt for the account of the Bank pursuant to the provisions of
Section 6 below, each such payment to be made at the purchase price shown on a
broker's confirmation (or transaction report in the case of Book Entry Paper) of
purchase of
<PAGE>
the securities received by the Bank before such payment is made, as
confirmed in the Proper Instructions received by the Bank before such payment is
made.
5.2 REDEMPTIONS. In such amount as may be necessary for the
repurchase or redemption of common shares of the Fund offered for repurchase or
redemption in accordance with Section 7 of this Agreement.
5.3 DISTRIBUTIONS AND EXPENSES OF FUND. For the payment on the
account of the Fund of dividends or other distributions to shareholders as may
from time to time be declared by the Board, interest, taxes, management or
supervisory fees, distribution fees, fees of the Bank for its services hereunder
and reimbursement of the expenses and liabilities of the Bank as provided
hereunder, fees for legal, accounting, and auditing services, or other operating
expenses of the Fund.
5.4 PAYMENT IN RESPECT OF SECURITIES. For payments in connection
with the conversion, exchange or surrender of Portfolio Securities or securities
subscribed to by the Fund held by or to be delivered to the Bank.
5.5 REPAYMENT OF LOANS. To repay loans of money made to the Fund,
but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan.
5.6 REPAYMENT OF CASH. To repay the cash delivered to the Fund for
the purpose of collateralizing the obligation to return to the Fund certificates
borrowed from the Fund representing Portfolio Securities, but only upon
redelivery to the Bank of such borrowed certificates.
5.7 FOREIGN EXCHANGE TRANSACTIONS. For payments in connection with
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery which may be entered into by the Bank on behalf of
the Fund upon the receipt of Proper Instructions, such Proper Instructions to
specify the currency broker or banking institution (which may be the Bank, or
any other subcustodian or agent hereunder, acting as principal) with which the
contract or option is made, and the Bank shall have no duty with respect to the
selection of such currency brokers or banking institutions with which the Fund
deals or for their failure to comply with the terms of any contract or option.
5.8 OTHER AUTHORIZED PAYMENTS. For other authorized transactions of
the Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made, setting
forth the purpose for which such obligation was incurred and declaring such
purpose to be a proper corporate purpose.
5.9 TERMINATION: upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
6. SECURITIES.
6.1 SEGREGATION AND REGISTRATION. Except as otherwise provided
herein, and except for securities to be delivered to any subcustodian appointed
pursuant to Section 13.2 hereof, the Bank as custodian, will receive and hold
pursuant to the provisions hereof, in a separate account or accounts and
physically segregated at all times from those of other persons, any and all
Portfolio Securities which may now or hereafter be delivered to it by or for the
account of the Fund. All such Portfolio Securities will be held or disposed of
by the Bank for, and subject at all times to, the instructions of the Fund
pursuant to the terms of this Agreement. Subject to the specific provisions
herein relating to Portfolio Securities that are not physically held by the
Bank, the Bank will register all Portfolio Securities (unless otherwise directed
by Proper Instructions or an Officers' Certificate), in the name of a registered
nominee of the Bank as defined in the Internal Revenue Code and any Regulations
of the Treasury Department issued
<PAGE>
thereunder, and will execute and deliver all such certificates in connection
therewith as may be required by such laws or regulations or under the laws of
any state.
The Fund will from time to time furnish to the Bank appropriate
instruments to enable it to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any Portfolio Securities which
may from time to time be registered in the name of the Fund.
6.2 VOTING AND PROXIES. Neither the Bank nor any nominee of the
Bank will vote any of the Portfolio Securities held hereunder, except in
accordance with Proper Instructions or an Officers' Certificate. The Bank will
execute and deliver, or cause to be executed and delivered, to the Fund all
notices, proxies and proxy soliciting materials with respect to such Securities,
such proxies to be executed by the registered holder of such Securities (if
registered otherwise than in the name of the Fund), but without indicating the
manner in which such proxies are to be voted.
6.3 BOOK-ENTRY SYSTEM. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits of
Fund assets in the Book-Entry System, and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the Book-Entry
System provided that such Portfolio Securities are represented in an account
("Account") of the Bank (or its agent) in such System which shall not include
any assets of the Bank (or such agent) other than assets held as a fiduciary,
custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent) with
respect to the Fund's participation in the Book-Entry System through the Bank
(or any such agent) will identify by book entry Portfolio Securities which are
included with other securities deposited in the Account and shall at all times
during the regular business hours of the Bank (or such agent) be open for
inspection by duly authorized officers, employees or agents of the Fund. Where
securities are transferred to the Fund's account, the Bank shall also, by book
entry or otherwise, identify as belonging to the Fund a quantity of securities
in fungible bulk of securities (i) registered in the name of the Bank or its
nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve
Bank;
(c) The Bank (or its agent) shall pay for securities
purchased for the account of the Fund or shall pay cash collateral against the
return of Portfolio Securities loaned by the Fund upon (i) receipt of advice
from the Book-Entry System that such Securities have been transferred to the
Account, and (ii) the making of an entry on the records of the Bank (or its
agent) to reflect such payment and transfer for the account of the Fund. The
Bank (or its agent) shall transfer securities sold or loaned for the account of
the Fund upon:
(i) receipt of advice from the Book-Entry System that
payment for securities sold or payment of the initial cash collateral against
the delivery of securities loaned by the Fund has been transferred to the
Account; and
(ii) the making of an entry on the records of the
Bank (or its agent) to reflect such transfer and payment for the account of the
Fund. Copies of all advices from the Book-Entry System of transfers of
securities for the account of the Fund shall identify the Fund, be maintained
for the Fund by the Bank and shall be provided to the Fund at its request. The
Bank shall send the Fund a confirmation, as defined by Rule 17f-4 of the 1940
Act, of any transfers to or from the account of the Fund.
(d) The Bank will promptly provide the Fund with any report
obtained by the Bank or its agent on the Book-Entry System's accounting system,
internal accounting control and procedures for safeguarding securities deposited
in the Book-Entry System; and
<PAGE>
(e) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Book-Entry System by reason of any
negligence, willful misfeasance or bad faith of the Bank or any of its agents or
of any of its or their employees or from any reckless disregard by the Bank or
any such agent of its duty to use its best efforts to enforce such rights as it
may have against the Book-Entry System; at the election of the Fund, it shall be
entitled to be subrogated for the Bank in any claim against the Book-Entry
System or any other person which the Bank or its agent may have as a consequence
of any such loss or damage if and to the extent that the Fund has not been made
whole for any loss or damage.
6.4 USE OF A DEPOSITORY. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits in
DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold, receive,
exchange, release, lend, deliver and otherwise deal with Portfolio Securities
including stock dividends, rights and other items of like nature, and to receive
and remit to the Bank on behalf of the Fund all income and other payments
thereon and to take all steps necessary and proper in connection with the
collection thereof;
(b) Registration of Portfolio Securities may be made in the
name of any nominee or nominees used by such Depository;
(c) Payment for securities purchased and sold may be made
through the clearing medium employed by such Depository for transactions of
participants acting through it. Upon any purchase of Portfolio Securities,
payment will be made only upon delivery of the securities to or for the account
of the Fund and the Fund shall pay cash collateral against the return of
Portfolio Securities loaned by the Fund only upon delivery of the Securities to
or for the account of the Fund; and upon any sale of Portfolio Securities,
delivery of the Securities will be made only against payment thereof or, in the
event Portfolio Securities are loaned, delivery of Securities will be made only
against receipt of the initial cash collateral to or for the account of the
Fund; and
(d) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of a Depository by reason of any
negligence, willful misfeasance or bad faith of the Bank or its employees or
from any reckless disregard by the Bank of its duty to use its best efforts to
enforce such rights as it may have against a Depository. In this connection, the
Bank shall use its best efforts to ensure that:
(i) The Depository obtains replacement of any
certificated Portfolio Security deposited with it in the event such Security is
lost, destroyed, wrongfully taken or otherwise not available to be returned to
the Bank upon its request;
(ii) Any proxy materials received by a Depository
with respect to Portfolio Securities deposited with such Depository are
forwarded immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the
Bank confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the
Bank such records with respect to the performance of the Bank's obligations and
duties hereunder as may be necessary for the Fund to comply with the
recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31a-1
thereunder; and
<PAGE>
(v) Such Depository delivers to the Bank and the Fund
all internal accounting control reports, whether or not audited by an
independent public accountant, as well as such other reports as the Fund may
reasonably request in order to verify the Portfolio Securities held by such
Depository.
6.5 USE OF BOOK-ENTRY SYSTEM FOR COMMERCIAL PAPER. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year
following such approval the Board has received and approved the arrangements,
upon receipt of Proper Instructions and upon receipt of confirmation from an
Issuer (as defined below) that the Fund has purchased such Issuer's Book-entry
Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund,
commercial paper issued by issuers with whom the Bank has entered into a
book-entry agreement (the "Issuers"). In maintaining its Book-entry Paper
System, the Bank agrees that:
(a) the Bank will maintain all Book-entry paper held by the
fund in an account of the bank that includes only assets held by it for
customers;
(b) the records of the Bank with respect to the Fund's
purchase of Book-entry Paper through the Bank will identify, by book-entry,
Commercial Paper belonging to the Fund which is included in the Book-entry Paper
System and shall at all times during the regular business hours of the Bank be
open for inspection by duly authorized officers, employees or agents of the
Fund;
(c) the Bank shall pay for Book-Entry Paper purchased for
the account of the Fund upon contemporaneous (i) receipt of advice from the
Issuer that such sale of Book-Entry Paper has been effected, and (ii) the making
of an entry on the records of the Bank to reflect such payment and transfer for
the account of the Fund;
(d) the Bank shall cancel such Book-Entry Paper obligation
upon the maturity thereof upon contemporaneous (i) receipt of advice that
payment for such Book-Entry Paper has been transferred to the Fund, and (ii) the
making of an entry on the records of the Bank to reflect such payment for the
account of the Fund;
(e) the Bank shall transmit to the Fund a transaction
journal confirming each transaction in Book-Entry Paper for the account of the
Fund on the next business day following the transaction; and
(f) the Bank will send to the Fund such reports on its
system of internal accounting control with respect to the Book-Entry Paper
System as the Fund may reasonably request from time to time.
6.6 USE OF IMMOBILIZATION PROGRAMS. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
the maintenance of Portfolio Securities in an immobilization program operated by
a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and
(ii) for each year following such approval the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval, the Bank shall enter into
such immobilization program with such bank acting as a subcustodian hereunder.
6.7 EURODOLLAR CDS. Any Portfolio Securities which are Eurodollar
CDs may be physically held by the European branch of the U.S. banking
institution that is the issuer of such Eurodollar CD (a "European Branch")
pursuant to Proper Instructions, provided that such Securities are identified on
the books of the Bank as belonging to the Fund and that the books of the Bank
identify the European Branch holding such Securities. Notwithstanding any other
provision of this Agreement to the contrary, except as stated in the first
sentence of this subsection 6.7, the Bank shall be under no other duty with
respect to such Eurodollar CDs belonging to the Fund, and shall have no
liability to the Fund or its shareholders with respect to the actions, in
action's, whether negligent or otherwise of such European Branch in connection
with such Eurodollar CDs, except for any loss or damage to the Fund resulting
from the Bank's own negligence, willful misfeasance or bad faith in the
performance of its duties hereunder.
<PAGE>
6.8 OPTIONS AND FUTURES TRANSACTIONS.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or
Over-the-Counter.
1. The Bank shall take action as to put options
("puts") and call options ("calls") purchased or sold (written) by the Fund
regarding escrow or other arrangements (i) in accordance with the provisions of
any agreement entered into upon receipt of Proper Instructions between the Bank,
any broker-dealer registered under the Exchange Act and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), and, if necessary, the
Fund relating to the compliance with the rules of the Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations.
2. Unless another agreement requires it to do so, the
Bank shall be under no duty or obligation to see that the Fund has deposited or
is maintaining adequate margin, if required, with any broker in connection with
any option, nor shall the Bank be under duty or obligation to present such
option to the broker for exercise unless it receives Proper Instructions from
the Fund. The Bank shall have no responsibility for the legality of any put or
call purchased or sold on behalf of the Fund, the propriety of any such purchase
or sale, or the adequacy of any collateral delivered to a broker in connection
with an option or deposited to or withdrawn from a Segregated Account (as
defined in subsection 6.9 below). The Bank specifically, but not by way of
limitation, shall not be under any duty or obligation to: (i) periodically check
or notify the Fund that the amount of such collateral held by a broker or held
in a Segregated Account is sufficient to protect such broker of the Fund against
any loss; (ii) effect the return of any collateral delivered to a broker; or
(iii) advise the Fund that any option it holds, has or is about to expire. Such
duties or obligations shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges.
1. The Bank shall take action as to puts, calls and
futures contracts ("Futures") purchased or sold by the Fund in accordance with
the provisions of any agreement among the Fund, the Bank and a Futures
Commission Merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations, regarding account
deposits in connection with transactions by the Fund.
2. The responsibilities and liabilities of the Bank
as to futures, puts and calls traded on commodities exchanges, any Futures
Commission Merchant account and the Segregated Account shall be limited as set
forth in subparagraph (a)(2) of this Section 6.8 as if such subparagraph
referred to Futures Commission Merchants rather than brokers, and Futures and
puts and calls thereon instead of options.
6.9 SEGREGATED ACCOUNT. The Bank shall upon receipt of Proper
Instructions establish and maintain a Segregated Account or Accounts for and on
behalf of the Fund, into which Account or Accounts may be transferred upon
receipt of Proper Instructions cash and/or Portfolio Securities:
(a) in accordance with the provisions of any agreement among
the Fund, the Bank and a broker-dealer registered under the Exchange Act and a
member of the NASD or any Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange or the
Commodity Futures Trading Commission or any registered Contract Market, or of
any similar organizations regarding escrow or other arrangements in connection
with transactions by the Fund;
(b) for the purpose of segregating cash or securities in
connection with options purchased or written by the Fund or commodity futures
purchased or written by the Fund;
<PAGE>
(c) for the deposit of liquid assets, such as cash, U.S.
Government securities or other high grade debt obligations, having a market
value (marked to market on a daily basis) at all times equal to not less than
the aggregate purchase price due on the settlement dates of all the Fund's then
outstanding forward commitment or "when-issued" agreements relating to the
purchase of Portfolio Securities and all the Fund's then outstanding commitments
under reverse repurchase agreements entered into with broker-dealer firms;
(d) for the deposit of any Portfolio Securities which the
Fund has agreed to sell on a forward commitment basis, all in accordance with
Investment Company Act Release No. 10666;
(e) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies;
(f) for other proper corporate purposes, BUT ONLY, in the
case of this clause (f), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board, or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such Segregated Account and
declaring such purposes to be proper corporate purposes; and
(g) Assets may be withdrawn from the Segregated Account
pursuant to Proper Instructions only:
(i) in accordance with the provisions of any
agreements referenced in (a) or (b) above;
(ii) for sale or delivery to meet the Fund's
obligations under outstanding firm commitment or when-issued
agreements for the purchase of Portfolio Securities and under
reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal
or greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding
forward commitment or when-issued agreements for the purchase
of portfolio securities or reverse repurchase agreements are
sold to other parties or the Fund's obligations thereunder
are met from assets of the Fund other than those in the
Segregated Account; or
(v) for delivery upon settlement of a forward
commitment agreement for the sale of Portfolio Securities.
6.10 INTEREST BEARING CALL OR TIME DEPOSITS. The Bank shall, upon
receipt of Proper Instructions relating to the purchase by the Fund of
interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect to
the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the deposit,
if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall
be deemed Portfolio Securities of the Fund and the responsibility of the Bank
therefore shall be the same as and no greater than the Bank's responsibility in
respect of other Portfolio Securities of the Fund.
<PAGE>
6.11 TRANSFER OF SECURITIES. The Bank will transfer, exchange,
deliver or release Portfolio Securities held by it hereunder, insofar as such
Securities are available for such purpose, provided that before making any
transfer, exchange, delivery or release under this Section the Bank will receive
Proper Instructions requesting such transfer, exchange or delivery stating that
it is for a purpose permitted under the terms of this Section 6.11, specifying
the applicable subsection, or describing the purpose of the transaction with
sufficient particularity to permit the Bank to ascertain the applicable
subsection, only:
(a) upon sales of Portfolio Securities for the account of the Fund,
against contemporaneous receipt by the Bank of payment therefor in full, or,
against payment to the Bank in accordance with generally accepted settlement
practices and customs in the jurisdiction or market in which the transaction
occurs, each such payment to be in the amount of the sale price shown in a
broker's confirmation of sale of the Portfolio Securities received by the Bank
before such payment is made, as confirmed in the Proper Instructions received by
the Bank before such payment is made;
(b) in exchange for or upon conversion into other securities alone
or other securities and cash pursuant to any plan of merger, consolidation,
reorganization, share split-up, change in par value, recapitalization or
readjustment or otherwise, upon exercise of subscription, purchase or sale or
other similar rights represented by such Portfolio Securities, or for the
purpose of tendering shares in the event of a tender offer therefor, provided
however that in the event of an offer of exchange, tender offer, or other
exercise of rights requiring the physical tender or delivery of Portfolio
Securities, the Bank shall have no liability for failure to so tender in a
timely manner unless such Proper Instructions are received by the Bank at least
two business days prior to the date required for tender, and unless the Bank (or
its agent or subcustodian hereunder) has actual possession of such Security at
least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities pursuant to their terms
into other securities;
(d) for the purpose of redeeming in kind shares of the Fund upon
authorization from the Fund;
(e) in the case of option contracts owned by the Fund, for
presentation to the endorsing broker;
(f) when such Portfolio Securities are called, redeemed or retired
or otherwise become payable provided that, in any such case, the cash or other
such consideration is to be delivered to the Bank;
(g) for the purpose of effectuating the pledge of Portfolio
Securities held by the Bank in order to collateralize loans made to the Fund by
any bank, including the Bank; provided, however, that such Portfolio Securities
will be released only upon payment to the Bank for the account of the Fund of
the moneys borrowed, except that in cases where additional collateral is
required to secure a borrowing already made, and such fact is made to appear in
the Proper Instructions, further Portfolio Securities may be released for that
purpose without any such payment. In the event that any such pledged Portfolio
Securities are held by the Bank, they will be so held for the account of the
lender, and after notice to the Fund from the lender in accordance with the
normal procedures of the lender, that an event of deficiency or default on the
loan has occurred, the Bank may deliver such pledged Portfolio Securities to or
for the account of the lender;
(h) for the purpose of releasing certificates representing
Portfolio Securities, against contemporaneous receipt by the Bank of the fair
market value of such security, as set forth in the Proper Instructions received
by the Bank before such payment is made;
(i) for the purpose of delivering securities lent by the Fund to a
bank or broker dealer, but only against receipt in accordance with street
delivery custom except as otherwise provided herein, of adequate collateral as
agreed upon from time to time by the Fund and the Bank, and upon receipt of
payment in connection with any repurchase agreement relating to such securities
entered into by the Fund;
<PAGE>
(j) for other authorized transactions of the Fund or for other
proper corporate purposes; provided that before making such transfer, the Bank
will also receive a certified copy of resolutions of the Board, signed by an
authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary, specifying
the Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to be
an authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made; and
(k) upon termination of this Agreement as hereinafter set forth
pursuant to Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. REDEMPTIONS. In the case of payment of assets of the Fund held by
the Bank in connection with redemptions and repurchases by the Fund of
outstanding common shares, the Bank will rely on notification by WRL Management
of receipt of a request for redemption and certificates, if issued, in proper
form for redemption before such payment is made. Payment shall be made in
accordance with the Articles and By-laws of the Fund, from assets available for
said purpose.
MERGER, DISSOLUTION, ETC. OF FUND. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company where
the Fund is not the surviving entity, the sale by the Fund of all, or
substantially all, of its assets to another investment company, or the
liquidation or dissolution of the Fund and distribution of its assets, the Bank
will deliver the Portfolio Securities held by it under this Agreement and
disburse cash only upon the order of the Fund set forth in an Officers'
Certificate, accompanied by a certified copy of a resolution of the Board
authorizing any of the foregoing transactions. Upon completion of such delivery
and disbursement and the payment of the fees, disbursements and expenses of the
Bank, this Agreement will terminate.
9. ACTIONS OF BANK WITHOUT PRIOR AUTHORIZATION. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, it will without prior authorization or instruction
of the Fund or the transfer agent:
9.1 Endorse for collection and collect on behalf of and in the name
of the Fund all checks, drafts, or other negotiable or transferable instruments
or other orders for the payment of money received by it for the account of the
Fund and hold for the account of the Fund all income, dividends, interest and
other payments or distribution of cash with respect to the Portfolio Securities
held thereunder;
9.2 Present for payment all coupons and other income items held by
it for the account of the Fund which call for payment upon presentation and hold
the cash received by it upon such payment for the account of the Fund;
9.3 Receive and hold for the account of the Fund all securities
received as a distribution on Portfolio Securities as a result of a stock
dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder;
9.4 Execute as agent on behalf of the Fund all necessary ownership
and other certificates and affidavits required by the Internal Revenue Code or
the regulations of the Treasury Department issued thereunder, or by the laws of
any state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any state;
<PAGE>
9.5 Present for payment all Portfolio Securities which are called,
redeemed, retired or otherwise become payable, and hold cash received by it upon
payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for
definitive securities.
10. COLLECTIONS AND DEFAULTS. The Bank will use all reasonable efforts
to collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including dividends, interest and other income, and to
transmit to the Fund notice actually received by it of any call for redemption,
offer of exchange, right of subscription, reorganization or other proceedings
affecting such Securities. If Portfolio Securities upon which such income is
payable are in default or payment is refused after due demand or presentation,
the Bank will notify the Fund in writing of any default or refusal to pay within
two business days from the day on which it receives knowledge of such default or
refusal. In addition, the Bank will send the Fund a written report once each
month showing any income on any Portfolio Security held by it which is more than
ten days overdue on the date of such report and which has not previously been
reported.
11. MAINTENANCE OF RECORDS AND ACCOUNTING SERVICES. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms and conditions of this Agreement, and in compliance with
the applicable rules and regulations of the 1940 Act and will furnish the Fund
daily with a statement of condition of the Fund. The Bank will furnish to the
Fund at the end of every month, and at the close of each quarter of the Fund's
fiscal year, a list of the Portfolio Securities and the aggregate amount of cash
held by it for the Fund. The books and records of the Bank pertaining to its
actions under this Agreement and reports by the Bank or its independent
accountants concerning its accounting system, procedures for safeguarding
securities and internal accounting controls will be open to inspection and audit
at reasonable times by officers of or auditors employed by the Fund and will be
preserved by the Bank in the manner and in accordance with the applicable rules
and regulations under the 1940 Act.
The Bank shall keep the books of account and render statements or
copies from time to time as reasonably requested by the Treasurer or any
executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
12. FUND EVALUATION. The Bank shall compute and, unless otherwise
directed by the Board, determine as of the close of business on the New York
Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other hours, if any, as may be authorized by the Board
the net asset value and the public offering price of a share of capital stock of
the Fund, such determination to be made in accordance with the provisions of the
Articles and By-laws of the Fund and Prospectus and Statement of Additional
Information relating to the Fund, as they may from time to time be amended, and
any applicable resolutions of the Board at the time in force and applicable; and
promptly to notify the Fund, the proper exchange and the NASD or such other
persons as the Fund may request of the results of such computation and
determination. In computing the net asset value hereunder, the Bank may rely in
good faith upon information furnished to it by any Authorized Person in respect
of (i) the manner of accrual of the liabilities of the Fund and in respect of
liabilities of the Fund not appearing on its books of account kept by the Bank,
(ii) reserves, if any, authorized by the Board or that no such reserves have
been authorized, (iii) the source of the quotations to be used in computing the
net asset value, (iv) the value to be assigned to any security for which no
price quotations are available, and (v) the method of computation of the public
offering price on the basis of the net asset value of the shares, and the Bank
shall not be responsible for any loss occasioned by such reliance or for any
good faith reliance on any quotations received from a source pursuant to (iii)
above.
<PAGE>
13. CONCERNING THE BANK.
13.1 PERFORMANCE OF DUTIES AND STANDARD OF CARE. In performing its
duties hereunder and any other duties listed on any Schedule hereto, if any, the
Bank will be entitled to receive and act upon the advice of independent counsel
of its own selection, which may be counsel for the Fund, and will be without
liability for any action taken or thing done or omitted to be done in accordance
with this Agreement in good faith in conformity with such advice. In the
performance of its duties hereunder, the Bank will be protected and not be
liable, and will be indemnified and held harmless for any action taken or
omitted to be taken by it in good faith reliance upon the terms of this
Agreement, any Officers' Certificate, Proper Instructions, resolution of the
Board, telegram, notice, request, certificate or other instrument reasonably
believed by the Bank to be genuine and for any other loss to the Fund except in
the case of its negligence, willful misfeasance or bad faith in the performance
of its duties or reckless disregard of its obligations and duties hereunder.
The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by
or for the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common shares of
the Fund or the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares of
the Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the
Fund or the legality of the distribution of any Portfolio Securities as payment
in kind of such dividend; and
(f) any property or moneys of the Fund unless and until
received by it, and any such property or moneys delivered or paid by it pursuant
to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to
ascertain whether any Portfolio Securities at any time delivered to or held by
it for the account of the Fund are such as may properly be held by the Fund
under the provisions of its Articles, By-laws, any federal or state statutes or
any rule or regulation of any governmental agency. Notwithstanding anything in
this Agreement to the contrary, in no event shall the Bank be liable hereunder
or to any third party:
(a) for any losses or damages of any kind resulting from
acts of God, earthquakes, fires, floods, storms or other disturbances of nature,
epidemics, strikes, riots, nationalization, expropriation, currency
restrictions, acts of war, civil war or terrorism, insurrection, nuclear fusion,
fission or radiation, the interruption, loss or malfunction of utilities,
transportation, the unavailability of energy sources and other similar
happenings or events except as results from the Bank's own gross negligence; or
(b) for special, punitive or consequential damages arising
from the provision of services hereunder, even if the Bank has been advised of
the possibility of such damages.
13.2 AGENTS AND SUBCUSTODIANS WITH RESPECT TO PROPERTY OF THE FUND
HELD IN THE UNITED STATES. The Bank may employ agents in the performance of its
duties hereunder and shall be responsible for the acts and omissions of such
agents as if performed by the Bank hereunder.
<PAGE>
Upon receipt of Proper Instructions, the Bank may employ certain
subcustodians, provided that any such subcustodian meets at least the minimum
qualifications required by Section 17(f)(1) of the 1940 Act to act as a
custodian of the Fund's assets with respect to property of the Fund held in the
United States. The Bank shall have no liability to the Fund or any other person
by reason of any act or omission of any such subcustodian and the Fund shall
indemnify the Bank and hold it harmless from and against any and all actions,
suits and claims, arising directly or indirectly out of the performance of any
such subcustodian. Upon request of the Bank, the Fund shall assume the entire
defense of any action, suit, or claim subject to the foregoing indemnity. The
Fund shall pay all fees and expenses of any such subcustodian.
13.3 DUTIES OF THE BANK WITH RESPECT TO PROPERTY OF THE FUND HELD
OUTSIDE OF THE UNITED STATES.
(a) APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby
authorizes and instructs the Bank to employ as sub-custodians for the Fund's
Portfolio Securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated on
the Schedule attached hereto (each, a "Selected Foreign Sub-Custodian"). Upon
receipt of Proper Instructions, together with a certified resolution of the
Fund's Board of Trustees, the Bank and the Fund may agree to designate
additional foreign banking institutions and foreign securities depositories to
act as Selected Foreign Sub-Custodians hereunder. Upon receipt of Proper
Instructions, the Fund may instruct the Bank to cease the employment of any one
or more such Selected Foreign Sub-Custodians for maintaining custody of the
Fund's assets, and the Bank shall so cease to employ such sub-custodian as soon
as alternate custodial arrangements have been implemented.
(b) FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise
be agreed upon in writing by the Bank and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Selected Foreign
Sub-Custodians pursuant to the terms hereof. Where possible, such arrangements
shall include entry into agreements containing the provisions set forth in
subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise
be agreed upon in writing by the Bank and the Fund, the Fund authorizes the
deposit in Euroclear, the securities clearance and depository facilities
operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of
Foreign Portfolio Securities eligible for deposit therein and to utilize such
securities depository in connection with settlements of purchases and sales of
securities and deliveries and returns of securities, until notified to the
contrary pursuant to subparagraph (a) hereunder.
(c) SEGREGATION OF SECURITIES. The Bank shall identify on
its books as belonging to the Fund the Foreign Portfolio Securities held by each
Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank
employs a foreign banking institution shall require that such institution
establish a custody account for the Bank and hold in that account, Foreign
Portfolio Securities and other assets of the Fund, and, in the event that such
institution deposits Foreign Portfolio Securities in a foreign securities
depository, that it shall identify on its books as belonging to the Bank the
securities so deposited.
(d) AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each of
the agreements pursuant to which a foreign banking institution holds assets of
the Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially in
the form previously made available to the Fund and shall provide that: (a) the
Fund's assets will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration (including, without limitation, any fees or taxes payable upon
transfers or reregistration of securities); (b) beneficial ownership of the
Fund's assets will be freely transferable without the payment of money or value
other than for custody or administration (including, without limitation, any
fees or taxes payable upon transfers or reregistration of securities); (c)
adequate records will be maintained identifying the assets as belonging to Bank;
(d) officers of or auditors employed by, or other representatives of the Bank,
including to the extent permitted under applicable law, the independent public
accountants for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its agreement with the
Bank; and (e) assets of the Fund held by the Selected Foreign Sub-Custodian will
be subject only to the instructions of the Bank or its agents.
<PAGE>
(e) ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon
request of the Fund, the Bank will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a Selected Foreign
Sub-Custodian insofar as such books and records relate to the performance of
such foreign banking institution under its Foreign Sub-Custodian Agreement.
(f) REPORTS BY BANK. The Bank will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by Selected Foreign Sub-Custodians, including
but not limited to an identification of entities having possession of the
Foreign Portfolio Securities and other assets of the Fund.
(g) TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. Transactions
with respect to the assets of the Fund held by a Selected Foreign Sub-Custodian
shall be effected pursuant to Proper Instructions from the Fund to the Bank and
shall be effected in accordance with the applicable Foreign Sub-Custodian
Agreement. If at any time any Foreign Portfolio Securities shall be registered
in the name of the nominee of the Selected Foreign Sub-Custodian, the Fund
agrees to hold any such nominee harmless from any liability by reason of the
registration of such securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for Foreign Portfolio Securities received for
the account of the Fund and delivery of Foreign Portfolio Securities maintained
for the account of the Fund may be effected in accordance with the customary
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer.
In connection with any action to be taken with respect to
the Foreign Portfolio Securities held hereunder, including, without limitation,
the exercise of any voting rights, subscription rights, redemption rights,
exchange rights, conversion rights or tender rights, or any other action in
connection with any other right, interest or privilege with respect to such
Securities (collectively, the "Rights"), the Bank shall promptly transmit to the
Fund such information in connection therewith as is made available to the Bank
by the Foreign Sub-Custodian, and shall promptly forward to the applicable
Foreign Sub-Custodian any instructions, forms or certifications with respect to
such Rights, and any instructions relating to the actions to be taken in
connection therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further duty
or obligation with respect to such Rights, including, without limitation, the
determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) LIABILITY OF SELECTED FOREIGN SUB-CUSTODIANS. Each
Foreign Sub-Custodian Agreement with a foreign banking institution shall require
the institution to exercise reasonable care in the performance of its duties and
to indemnify, and hold harmless, the Bank and each Fund from and against certain
losses, damages, costs, expenses, liabilities or claims arising out of or in
connection with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges
that the Bank, as a participant in Euroclear, is subject to the Terms and
Conditions Governing the Euroclear System, a copy of which has been made
available to the Fund. The Fund acknowledges that pursuant to such Terms and
Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or
assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euroclear in connection with the Fund's securities and
other assets.
<PAGE>
(i) LIABILITY OF BANK. The Bank shall have no more or less
responsibility or liability on account of the acts or omissions of any Selected
Foreign Sub-Custodian employed hereunder than any such Selected Foreign
Sub-Custodian has to the Bank and, without limiting the foregoing, the Bank
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or acts of
war or terrorism, political risk (including, but not limited to, exchange
control restrictions, confiscation, insurrection, civil strife or armed
hostilities) other losses due to Acts of God, nuclear incident or any loss where
the Selected Foreign Sub-Custodian has otherwise exercised reasonable care.
(j) MONITORING RESPONSIBILITIES. The Bank shall furnish
annually to the Fund, information concerning the Selected Foreign Sub-Custodians
employed hereunder for use by the Fund in evaluating such Selected Foreign
Sub-Custodians to ensure compliance with the requirements of Rule 17f-5 of the
Act. In addition, the Bank will promptly inform the Fund in the event that the
Bank is notified by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles) or any other capital adequacy
test applicable to it by exemptive order, or if the Bank has actual knowledge of
any material loss of the assets of the Fund held by a Foreign Sub-Custodian.
(k) TAX LAW. The Bank shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the Bank
as custodian of the Fund by the tax laws of any jurisdiction, and it shall be
the responsibility of the Fund to notify the Bank of the obligations imposed on
the Fund or the Bank as the custodian of the Fund by the tax law of any non-U.S.
jurisdiction, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
13.4 INSURANCE. The Bank shall use the same care with respect to
the safekeeping of Portfolio Securities and cash of the Fund held by it as it
uses in respect of its own similar property but it need not maintain any special
insurance for the benefit of the Fund.
13.5. FEES AND EXPENSES OF BANK. The Fund will pay or reimburse the
Bank from time to time for any transfer taxes payable upon transfer of Portfolio
Securities made hereunder, and for all necessary proper disbursements, expenses
and charges made or incurred by the Bank in the performance of this Agreement
(including any duties listed on any Schedule hereto, if any) including any
indemnities for any loss, liabilities or expense to the Bank as provided above.
For the services rendered by the Bank hereunder, the Fund will pay to the Bank
such compensation or fees at such rate and at such times as shall be agreed upon
in writing by the parties from time to time. The Bank will also be entitled to
reimbursement by the Fund for all reasonable expenses incurred in conjunction
with termination of this Agreement by the Fund.
13.6 ADVANCES BY BANK. The Bank may, in its sole discretion,
advance funds on behalf of the Fund to make any payment permitted by this
Agreement upon receipt of any proper authorization required by this Agreement
for such payments by the Fund. Should such a payment or payments, with advanced
funds, result in an overdraft (due to insufficiencies of the Fund's account with
the Bank, or for any other reason) this Agreement deems any such overdraft or
related indebtedness, a loan made by the Bank to the Fund payable on demand and
bearing interest at the current rate charged by the Bank for such loans unless
the Fund shall provide the Bank with agreed upon compensating balances. The Fund
agrees that the Bank shall have a continuing lien and security interest to the
extent of any overdraft or indebtedness, in and to any property at any time held
by it for the Fund's benefit or in which the Fund has an interest and which is
then in the Bank's possession or control (or in the possession or control of any
third party acting on the Bank's behalf). The Fund authorizes the Bank, in its
sole discretion, at any time to charge any overdraft or indebtedness, together
with interest due thereon against any balance of account standing to the credit
of the Fund on the Bank's books.
<PAGE>
14. TERMINATION.
14.1 This Agreement may be terminated at any time without penalty
upon sixty days written notice delivered by either party to the other by means
of registered mail, and upon the expiration of such sixty days this Agreement
will terminate; provided, however, that the effective date of such termination
may be postponed to a date not more than ninety days from the date of delivery
of such notice (i) by the Bank in order to prepare for the transfer by the Bank
of all of the assets of the Fund held hereunder, and (ii) by the Fund in order
to give the Fund an opportunity to make suitable arrangements for a successor
custodian. At any time after the termination of this Agreement, the Fund will,
at its request, have access to the records of the Bank relating to the
performance of its duties as custodian.
14.2 In the event of the termination of this Agreement, the Bank
will immediately upon receipt or transmittal, as the case may be, of notice of
termination, commence and prosecute diligently to completion the transfer of all
cash and the delivery of all Portfolio Securities duly endorsed and all records
maintained under Section 11 to the successor custodian when appointed by the
Fund. The obligation of the Bank to deliver and transfer over the assets of the
Fund held by it directly to such successor custodian will commence as soon as
such successor is appointed and will continue until completed as aforesaid. If
the Fund does not select a successor custodian within ninety (90) days from the
date of delivery of notice of termination the Bank may, subject to the
provisions of subsection (14.3), deliver the Portfolio Securities and cash of
the Fund held by the Bank to a bank or trust company of its own selection which
meets the requirements of Section 17(f)(1) of the 1940 Act and has a reported
capital, surplus and undivided profits aggregating not less than $2,000,000, to
be held as the property of the Fund under terms similar to those on which they
were held by the Bank, whereupon such bank or trust company so selected by the
Bank will become the successor custodian of such assets of the Fund with the
same effect as though selected by the Board.
14.3 Prior to the expiration of ninety (90) days after notice of
termination has been given, the Fund may furnish the Bank with an order of the
Fund advising that a successor custodian cannot be found willing and able to act
upon reasonable and customary terms and that there has been submitted to the
shareholders of the Fund the question of whether the Fund will be liquidated or
will function without a custodian for the assets of the Fund held by the Bank.
In that event the Bank will deliver the Portfolio Securities and cash of the
Fund held by it, subject as aforesaid, in accordance with one of such
alternatives which may be approved by the requisite vote of shareholders, upon
receipt by the Bank of a copy of the minutes of the meeting of shareholders at
which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank.
15. CONFIDENTIALITY. Both parties hereto agree than any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other party,
except as may be required by applicable law or at the request of a governmental
agency. The parties further agree that a breach of this provision would
irreparably damage the other party and accordingly agree that each of them is
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of this provision.
16. NOTICES. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; NAMELY:
(a) In the case of notices sent to the Fund to:
WRL Series Fund, Inc. if hand-delivered:
AEGON Insurance Group 201 Highland Avenue
P. O. Box 5068 Largo, FL 33770
Clearwater, FL 34618-5068
Attention: Ken Beil
<PAGE>
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: Richard Boorman
or at such other place as such party may from time to time designate
in writing.
17. AMENDMENTS. This Agreement may not be altered or amended, except by
an instrument in writing, executed by both parties, and in the case of the Fund,
such alteration or amendment will be authorized and approved by its Board.
18. PARTIES. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 14 hereof will not be deemed to
be an assignment within the meaning of this provision.
19. GOVERNING LAW. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts.
20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first written above.
ATTEST: WRL SERIES FUND, INC.
/s/ PRISCILLA I. HECHLER By: /s/ KENNETH P. BEIL
------------------------- ---------------------------
Priscilla I. Hechler Name: Kenneth P. Beil
Assistant Secretary Title: Vice President
ATTEST: Investors Bank & Trust Company
/s/ STEVEN K. KREKORIAN By: /s/ KEVIN J. SHEEHAN
------------------------- ---------------------------
Name: Steven K. Krekorian Name: Kevin J. Sheehan
Title: Director, Client Title: President
Management
EXHIBIT 99.B9
EXHIBIT 9
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
<PAGE>
WRL SERIES FUND, INC.
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
This Agreement is entered into as of January 1, 1997 by WRL Series
Fund, Inc. (the "Fund"), a Maryland corporation, and WRL Investment Services,
Inc. ("WRL Services"), a Florida corporation.
WHEREAS, the Fund is a diversified, open-end management investment
company consisting of separate series or investment portfolios (the "Portfolios"
or "Portfolio"); and
WHEREAS, WRL Services is an administrative services company located at
201 Highland Avenue, Largo, Florida, 33770, which is or will be registered as a
transfer agent under Section 17A(c)(1) of the Securities Act of 1934, as
amended, and is a wholly-owned subsidiary of WRL Investment Management, Inc., a
registered investment adviser; and
WHEREAS, the Fund seeks to engage WRL Services to furnish the Fund with
administrative services to assist the Fund in carrying out certain of its
functions and operations.
WHEREAS, WRL Services desires to provide administrative services to the
Fund, in accordance with the terms of this Agreement.
WHEREAS, it is the purpose of this Agreement to express the mutual
agreement of the parties hereto with respect to the services to be provided by
WRL Services to the Fund 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. ADMINISTRATIVE SERVICES PROVIDED. WRL Services shall provide
supervisory, administrative, and transfer agency services to each
Portfolio of the Fund. Subject to the overall supervision of the
Board of Directors of the Fund, WRL Services shall furnish to each
Portfolio:
/Bullet/ The services of personnel to supervise and perform all
administrative, clerical, recordkeeping and bookkeeping
services for the Fund, including acting as registrar for the
Fund and recording the ownership of Fund shares and changes
in or transfers of such ownership;
/Bullet/ To the extent agreed upon by the parties hereto from time to
time, monitor and verify Investors Bank & Trust Company's
daily calculation of net asset values;
/Bullet/ Preparation and filing of all returns and reports in
connection with federal, state and local taxes;
/Bullet/ Shareholder relations functions, including preparation of
notices to shareholders;
/Bullet/ Regulatory reporting and compliance, including preparation of
any required amendments, supplements or renewals of
registration statements, 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;
/Bullet/ All other matters relating to the operation of the
Portfolios, other than investment management and distribution
functions;
/Bullet/ Supervise and coordinate the Fund's custodian and its
dividend disbursing agent and monitor their services to each
Portfolio;
/Bullet/ Assist each Portfolio in preparing reports to shareholders;
and
<PAGE>
/Bullet/ Provide office space, telephones and other office equipment
as necessary in order for WRL Services to perform
administrative services to the Fund as described herein.
2. OBLIGATIONS OF EACH PORTFOLIO OF THE FUND. Each Portfolio shall
have the following obligations under this Agreement:
(a) to provide WRL Services with access to all information,
documents and records of and about each Portfolio that are
necessary for WRL Services to carry out the performance of
its duties under this Agreement;
(b) to furnish WRL Services with a certified copy of any
financial statement or report prepared for any Portfolio by
certified or independent public accountants, and with copies
of any financial statements or reports made by such Portfolio
to its shareholders or to any governmental body or securities
exchange; and
(c) to reimburse WRL Services for the services performed by
WRL Services pursuant to Section 1 of this Agreement during
its term, on a costs incurred basis. WRL Services shall be
responsible for providing all personnel, materials, and other
resources necessary in order for WRL Services to perform its
obligations under Section 1 of this Agreement. The Fund will
in turn reimburse WRL Services for the expense of such
personnel, materials, and other resources by paying to WRL
Services an amount equal to the cost of such personnel,
materials and other resources, as incurred by WRL Services in
a calendar month, within fifteen calendar days following the
end of such calendar month. In the event that this Agreement
shall be effective for only part of a calendar month, the
amount to be paid by the Fund to WRL Services with respect to
such calendar month will be based on costs incurred during
the term of effectiveness. Expenses reimbursed by the Fund
pursuant to this Section 2(c) shall be paid by each Portfolio
in relative proportion to the accumulation value or cash
value of the variable contracts held by owners of variable
life insurance and variable annuities allocated to the
investment options funded by such Portfolio.
3. INVESTMENT COMPANY ACT COMPLIANCE. In performing services
hereunder, WRL Services shall at all times comply with applicable
provisions of the Investment Company Act of 1940, as amended (the
"1940 Act") and any other federal or state securities laws. In
addition, and without limiting the foregoing, this Agreement is
subject to the 1940 Act and rules thereunder; to the extent that
any provision of this Agreement would require a party to take any
action prohibited by the 1940 Act and rules thereunder, or would
preclude a party from taking any action required by the 1940 Act
and rules thereunder, then it is the intention of the parties
hereto that such provision shall be enforced only to the extent
permitted under the 1940 Act and rules thereunder; and that all
other provisions of this Agreement shall remain valid and
enforceable as if the provision at issue had never been a part
hereof.
4. RECORDS. WRL Services recognizes and agrees that, pursuant to
Rule 31a-3 under the 1940 Act, records required to be maintained by
the Fund pursuant to Rule 31a-1 and/or Rule 31a-2 under the 1940
Act that are maintained by WRL Services, for and on behalf of the
Fund, are the property of the Fund; shall be maintained, updated,
preserved, and made available in accordance with the 1940 Act and
rules thereunder; and will be surrendered promptly to the Fund upon
request.
5. TERM AND TERMINATION.
(a) This Agreement shall continue in effect until terminated
pursuant to provisions hereof.
<PAGE>
(b) This Agreement may be terminated at any time, without
penalty, by the Fund by giving 60 days' written notice of
such termination to WRL Services at its principal place of
business; or may be terminated at any time by WRL Services by
giving 60 days' written notice of such termination to the
Fund at its principal place of business.
6. AMENDMENTS. This Agreement may be amended only by written
instrument signed by the parties hereto.
7. 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.
Attest: WRL SERIES FUND, INC.
/s/ PRISCILLA I. HECHLER By: /s/ JOHN R. KENNEY
- ----------------------------- -----------------------------
Priscilla I. Hechler John R. Kenney, Chairman of the Board
Assistant Vice President and President
and Assistant Secretary
Attest: WRL INVESTMENT SERVICES, INC.
/s/ THOMAS E. PIERPAN By: /s/ KENNETH P. BEIL
- ---------------------------- ----------------------------
Thomas E. Pierpan Kenneth P. Beil, President
Secretary, Vice President and and Treasurer
General Counsel
EXHIBIT 99.B11
EXHIBIT 11
CONSENT OF PRICE WATERHOUSE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information of the WRL Series Fund, Inc. constituting
part of this Post-Effective Amendment No.26 to the registration statement on
Form N-1A (the "Registratin Statement") of our reports 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. and the December
31, 1995 Annual Report of the C.A.S.E. portfolios of the WRL Series Fund, Inc.
(three portfolios of the WRL Series Fund, Inc.), which are also incorporated by
reference into the Registration Statement. We also consent to the incorporation
by reference in the Prospectus and Statement of Additional Information of the
C.A.S.E. 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. We also consent to the references to us under the heading
"Independent Accountants" in each Prospectus and Statement of Additional
Information constituting part of the Registration Statement.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Price Waterhouse LLP
Kansas City, Missouri
December 26, 1996
EXHIBIT 99.B15
EXHIBIT 15
PLAN OF DISTRIBUTION
<PAGE>
WRL SERIES FUND, INC.
PLAN OF DISTRIBUTION PURSUANT TO
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940
WHEREAS, WRL Series Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") as an open-end
management investment company; and
WHEREAS, the Fund currently offers its shares of the Portfolios of the
Fund (the `Portfolios") for sale to separate accounts established by insurance
companies to fund the benefits under certain individual variable life insurance
policies and individual and group variable annuity contracts (collectively, the
"Separate Accounts"), and may distribute its shares to other offerees in the
future. The Separate Accounts may or may not be registered with the Securities
and Exchange Commission; and
WHEREAS, the Fund desires to adopt a Plan of Distribution (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act applicable to the shares of the
Portfolios during the continuous offering of such shares; and
WHEREAS, the Fund's board of directors (the "Board") has, pursuant to
and in accordance with Rule 12b-1, exercised reasonable business judgment and
observed its fiduciary duties under state law and under Section 36(a) and (b) of
the 1940 Act in determining that there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders;
NOW THEREFORE, the Fund hereby adopts this Plan in accordance with Rule
12b-1 under the 1940 Act with respect to the shares of the Portfolios.
1. For the period commencing with the date on which this Plan shall first become
effective and ending on December 31 of that year and for each twelve month
period (or portion thereof) thereafter in which this Plan shall continue in
effect, the Fund on behalf of the Portfolios, as listed on Schedule A of this
Agreement, is authorized to pay to various service providers, as direct payment
for expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing such
Portfolio's shares, up to a maximum rate of 0.15% on an annualized basis of the
average daily net assets. Such fee shall be measured and accrued daily and paid
monthly.
2. Expenses permitted to be paid pursuant to this Plan shall include, but not
necessarily be limited to, the following:
(a) the cost for printing and mailing of Fund prospectuses and
statements of additional information, and any supplements thereto
to potential investors;
(b) the costs relating to the development and preparation of Fund
advertisements, sales literature, and brokers' and other
promotional materials describing and/or relating to the Fund;
(c) expenses incurred in connection with the presentation of seminars
and sales meetings describing the Fund attended by sales personnel
and potential investors;
(d) the development of consumer-oriented sales materials describing
and/or relating to the Fund; and
(e) expenses attributable to "distribution-related services" provided
to the Fund. "Distribution-related services" includes, but are not
limited to: salaries and benefits; office expenses; equipment
expenses (I.E., computers, software, office equipment, etc.);
training costs; travel costs; printing costs; supply expenses;
computer programming time; and data center expenses, each as they
relate to the promotion of the sale of Fund shares.
<PAGE>
3. This Plan shall not take effect with respect to shares of a Portfolio until
it has been approved by a vote of at least a majority of the outstanding voting
securities (as defined in the 1940 Act) of such Portfolio.
4. This Plan, together with any related agreements, shall not take effect until
they have been approved, by a vote of the majority of the Fund's Board,
including a majority of those members of the Board who are not "interested
persons" of the Fund (as defined in the 1940 Act), and who have no direct or
indirect financial interest in the operation of this Plan or in any agreements
related to the Plan (the "Independent Directors"), cast in person at a meeting
called for the purpose of voting on this Plan and such agreements.
5. This Plan shall continue in effect for as long as such continuance is
specifically approved at least annually by the Board and Independent Directors
in the manner provided in paragraph 4.
6. Any person authorized to direct the disposition of monies paid or payable by
the Fund pursuant to this Plan or any related agreement shall provide to the
Fund's Board, and the Board shall review, at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made, and shall furnish the Board with such other information as the Board may
reasonably request in connection with such payments in order to enable the Board
to make an informed determination as to whether the Plan should be continued.
7. This Plan may be terminated at any time with respect to a Portfolio by vote
of a majority of the Independent Directors, or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of such Portfolio.
8. Any agreement related to the Plan, including its implementation, shall be in
writing and shall provide:
(a) that such agreement, with respect to a Portfolio, may be terminated
at any time, without payment of any penalty, by vote of a majority
of the Independent Directors or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of such
Portfolio, on not more than 60 days' written notice to the other
party/parties to such agreement; and
(b) that such agreement shall terminate automatically in the event of
its assignment.
9. This Plan may not be amended to increase materially the amount of
distribution expenses permitted to be paid by a Portfolio pursuant to paragraphs
1 and 2 without the approval of the shareholders of such Portfolio, and any
material amendment to the Plan must be approved by the Board and Independent
Directors in the manner provided in paragraph 4.
10. As long as the Plan is in effect, the selection and nomination of those
members of the Board who are not interested persons (as defined in the 1940 Act)
of the Fund shall be committed to the discretion of such disinterested directors
then in office.
11. The Fund will preserve copies of this Plan, and any related agreements and
reports, for a period of not less than six years from the date of those
documents, the first two years in an easily accessible place.
12. Any provision of this Plan that is invalid, illegal, or unenforceable in any
jurisdiction will, as to that jurisdiction, be ineffective to the extent of such
invalidity, illegality, or unenforceability, without affecting in any way the
remaining provisions of this Plan in such jurisdiction, or without rendering
that or any other provisions of this Plan invalid, illegal, or unenforceable in
any other jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the Fund has executed this Plan on the day and year
set forth below in Largo, Florida.
Dated as of: January 1, 1997
ATTEST: WRL SERIES FUND, INC.
/s/ PRISCILLA I.HECHLER By: /s/ JOHN R. KENNEY
- ----------------------------- --------------------------
Priscilla I. Hechler John R. Kenney
Assistant Vice President Chairman of the Board and
and Assistant Secretary President
<PAGE>
Schedule A
PARTICIPATING PORTFOLIOS AS OF JANUARY 1, 1997
Growth
Bond
Global
Money Market
Short-to-Intermediate Government
Emerging Growth
Equity-Income
Balanced
Aggressive Growth
Utility
Tactical Asset Allocation
Value Equity
C.A.S.E. Growth
C.A.S.E. Growth & Income
C.A.S.E. Quality Growth
Global Sector
US Sector
Foreign Sector
International Equity
U.S. Equity Portfolio
