As filed with the Securities and Exchange Commission on February 28, 1997
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. 27 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 28 [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.
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485.
[X] on MAY 1, 1997, 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 21, 1997, for the fiscal year ended
December 31, 1996.
<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>
WRL SERIES FUND, INC.
Cross Reference Sheet (Continued)
LOCATION IN
STATEMENT OF
FORM N-1A ADDITIONAL
ITEM NUMBER INFORMATION
- ----------- -----------
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)
ii
<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 Portfolio, Growth Portfolio, C.A.S.E.
Growth Portfolio, U.S. Equity Portfolio, Value Equity Portfolio, Global Sector
Portfolio, Tactical Asset Allocation Portfolio, Strategic Total Return (formerly
named Equity-Income) Portfolio, Select Equity-Income (formerly named 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 9.
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 May 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 ................................................. 14
MANAGEMENT OF THE FUND ................................................... 39
OTHER INFORMATION ........................................................ 48
DISTRIBUTIONS AND TAXES .................................................. 50
APPENDIX A - Brief Explanation of Rating Categories....................... A-1
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 tables provide information for one share of capital stock outstanding during
the respective Portfolio's fiscal periods ended on December 31 of each year.
Ratios of expenses to average net assets and net investment income to average
net assets 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. (No information is
included for the International Equity Portfolio and the U.S. Equity Portfolio
because they had not yet commenced operations December 31, 1996.)
GROWTH PORTFOLIO
----------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ..... $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26
Income From
INVESTMENT OPERATIONS
NET INVESTMENT INCOME .34 .26 .22 .28 .36
Net Gains (Losses) on
Securities (both
realized
and unrealized) ...... 5.35 10.97 (2.41) .79 .52
---------- ---------- -------- -------- --------
Total Income (Loss)
From Investment
Operations .......... 5.69 11.23 (2.19) 1.07 .88
---------- ---------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net
investment income) .... (.35) (.24) (.22) (.28) (.36)
Dividends (in excess of
net investment income) (.01) .00 .00 .00 .00
Distributions (from
capital gains) ........ (1.99) (3.14) .00 (.37) (.95)
Distributions in excess
of capital gains ...... .00 .00 (.03) .00 .00
---------- ---------- -------- -------- --------
Total Distributions ..... 2.35 (3.38) (.25) (.65) (1.31)
---------- ---------- -------- -------- --------
Net Asset Value,
End of Period .......... $ 35.00 $ 31.66 $ 23.81 $ 26.25 $ 25.83
========== ========== ======== ======== ========
Total Return* ............ 17.96% 47.12% (8.31%) 3.97% 2.35%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted).......... $1,527,409 $1,195,174 $814,383 $934,810 $711,422
Ratio of Expenses to
Average Net Assets** .. .88% .86% .84% .87% .86%
Ratio of Net Investment
Income to Average
Net Assets ............ .98% .90% .88% 1.07% 1.44%
Ratio of Commissions
paid to number
of shares ............. 4.93% N/A N/A N/A N/A
Portfolio Turnover Rate.. 45.21% 130.48% 107.33% 77.91% 77.70%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ....... $ 17.48 $ 17.85 $ 12.97 $ 11.14 $ 10.14
Income From
INVESTMENT OPERATIONS
NET INVESTMENT INCOME . .27 .30 .19 .31 .21
Net Gains (Losses) on
Securities (both
realized
and unrealized) ........ 10.75 (.33) 6.29 1.83 1.00
-------- -------- -------- -------- --------
Total Income (Loss)
From Investment
Operations ............ 11.02 (.03) 6.48 2.14 1.21
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ...... (.27) (.30) (.19) (.31) (.21)
Dividends (in excess of
net investment income) .. .00 .00 .00 .00 .00
Distributions (from
capital gains) .......... (1.97) (.04) (1.41) .00 .00
Distributions in excess
of capital gains ........ .00 .00 .00 .00 .00
-------- -------- -------- -------- --------
Total Distributions ....... (2.24) (.34) (1.60) (.31) (.21)
-------- -------- -------- -------- --------
Net Asset Value,
End of Period ............ $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14
======== ======== ======== ======== ========
Total Return* .............. 59.79% (.22%) 47.04% 18.62% 10.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ........... $393,511 $129,057 $ 74,680 $ 28,497 $ 15,815
Ratio of Expenses to
Average Net Assets** .... .90% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment
Income to Average
Net Assets .............. 1.21% 2.06% 1.18% 2.50% 1.84%
Ratio of Commissions
paid to number
of shares ............... N/A N/A N/A N/A N/A
Portfolio Turnover Rate ... 7.27% 157.01% 123.80% 76.27% 222.13%
<FN>
* 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 NET OF ADVISORY FEE WAIVER FOR THE PERIODS ENDED DECEMBER 31, 1987,
1988 AND 1989, FOR WHICH PERIODS THE RATIO OF EXPENSES TO AVERAGE NET ASSETS
WOULD HAVE BEEN 1.90%, 1.49% AND 1.13%, RESPECTIVELY, ABSENT THE ADVISORY FEE
WAIVER BY WESTERN RESERVE LIFE.
</FN>
</TABLE>
1
<PAGE>
BOND PORTFOLIO
--------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ....... $ 11.35 $ 9.80 $ 11.24 $ 11.18 $ 11.18
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .. 0.64 .69 .63 .72 .75
Net Gains (Losses) on
Securities (both realized
and unrealized) ......... (0.64) 1.55 (1.44) .95 .32
-------- -------- -------- -------- --------
Total Income (Loss) From
Investment Operations .. .00 2.24 (.81) 1.67 1.07
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ....... (.64) (.69) (.63) (.72) (.75)
Dividends/in excess of net
investment income) ....... .00 .00 .00 .00 .00
Distributions (from
capital gains) ........... .00 .00 .00 (.89) (.32)
Distributions (in excess of
capital gains) ........... .00 .00 .00 .00 .00
Total Distributions ...... (.64) (.69) (.63) (1.61) (1.07)
-------- -------- -------- -------- --------
Net Asset Value,
End of Period ............. $ 16.71 $ 11.35 $ 9.80 $ 11.24 $ 11.18
======== ======== ======== ======== ========
Total Return* ............... 0.14% 22.99% (6.94%) 13.38% 6.79%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ............ $ 95,759 $ 96,972 $ 71,064 $ 90,715 $ 56,820
Ratio of Expenses to
Average Net Assets** ..... .64% .61% .59% .64% .70%
Ratio of Net Investment
Income to Average Net
Assets ................... 5.96% 6.45% 5.94% 5.94% 6.49%
Ratio of Commissions paid to
number of shares ......... N/A N/A N/A N/A N/A
Portfolio Turnover Rate .... 187.72% 120.54% 131.73% 149.02% 80.73%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1991 1990 1989 1988 1987
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ....... $ 9.91 $ 10.07 $ 9.29 $ 9.22 $10.28
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .. .86 .79 .75 .90 .25
Net Gains (Losses) on
Securities (both realized
and unrealized) ......... 1.30 (.16) .78 .07 (.89)
------- ------- ------ ------ ------
Total Income (Loss) From
Investment Operations . 2.16 .63 1.53 .97 (.64)
------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ....... (.86) (.79) (.75) (.90) (.38)
Dividends/in excess of net
investment income) ....... .00 .00 .00 .00 .00
Distributions (from
capital gains) ........... (.03) .00 .00 .00 .04
Distributions (in excess of
capital gains) ........... .00 .00 .00 .00 .00
Total Distributions ...... (.89) (.79) (.75) (.90) (.42)
------- ------- ------ ------ ------
Net Asset Value,
End of Period ............. $ 11.18 $ 9.91 $10.07 $ 9.29 $ 9.22
======= ======= ====== ====== ======
Total Return* ............... 18.85% 6.21% 14.65% 7.73% (5.66%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) ............ $22,291 $10,143 $7,025 $3,372 $1,400
Ratio of Expenses to
Average Net Assets** ..... .70% .69% .70% .70% .86%
Ratio of Net Investment
Income to Average Net
Assets ................... 8.02% 8.82% 8.60% 8.96% 7.17%
Ratio of Commissions paid to
number of shares ......... N/A N/A N/A N/A N/A
Portfolio Turnover Rate .... 33.47% 18.09% 23.26% 21.54% 134.76%
</TABLE>
GLOBAL PORTFOLIO
----------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------------------------- 12/3/92 TO
1996 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) ............................. 0.08 .10 .10 .04 (.02)
Net Gains on Securities (both realized and unrealized) ... 4.20 2.91 .10 3.72 .18
-------- -------- -------- ------- ------
Total Income From Investment Operations ................. 4.28 3.01 .20 3.76 .16
-------- -------- -------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net investment income) .................... (0.04) .00 (.10) (.04) .00
Dividends in excess of net investment income .............. (.17) .00 (.01) .00 .00
Distributions (from capital gains) ........................ (1.47) (.61) (.56) (.26) .00
Distributions in excess of capital gains .................. .00 (.00) (.03) .00 .00
-------- -------- -------- ------- ------
Total Distributions ..................................... (1.68) (.61) (.70) (.30) .00
-------- -------- -------- ------- ------
Net Asset Value, End of Period ............................. $ 18.12 $ 15.52 $ 13.12 $ 13.62 $10.16
======== ======== ======== ======= ======
Total Return*** ............................................ 27.74% 23.06% .25% 35.05% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ................... $534,820 $289,506 $261,778 $99,094 $ 508
Ratio of Expenses to Average Net Assets**** ............... .99% .99% 1.01% 1.09% 2.48%
Ratio of Net Investment Income to Average Net Assets ...... .46% .75% .73% .30% (2.23%)
Ratio of Commissions paid to number of shares ............. 1.54% N/A N/A N/A N/A
Portfolio Turnover Rate ................................... 88.31% 130.60% 192.06% 79.93% .00%
<FN>
* 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 NET OF ADVISORY FEE WAIVER FOR THE PERIODS ENDED DECEMBER 31,
1987,1988, 1989 AND 1991, FOR WHICH PERIODS THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 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.
</FN>
</TABLE>
2
<PAGE>
MONEY MARKET PORTFOLIO
----------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .......... .05 .05 .04 .02 .03
Net Gains on
Securities (both realized
and unrealized) ............... .00 .00 .00 .00 .00
-------- ------- ------- ------- -------
Total Income From
Investment Operations ........ .05 .05 .04 .02 .03
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income) ............. (.05) (.05) (.04) (.02) (.03)
Distributions (from capital gains) .00 .00 .00 .00 .00
-------- ------- ------- ------- -------
Total Distributions ........... (.05) (.05) (.04) (.02) .(03)
-------- ------- ------- ------- -------
Net Asset Value,
End of Period ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= =======
Total Return* ..................... 5.03% 5.40% 3.44% 2.45% 3.03%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) .................. $122,114 $80,544 $93,081 $45,782 $45,600
Ratio of Expenses to
Average Net Assets** ........... .52% .56% .60% .66% .70%
Ratio of Net Investment
Income to Average Net Assets ... 5.03% 5.30% 3.59% 2.41% 2.99%
Ratio of Commissions paid
to number of shares ............ N/A N/A N/A N/A N/A
Portfolio Turnover Rate .......... N/A N/A N/A N/A N/A
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1991 1990 1989 1988 1987
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income ........ .05 .07 .07 .05 .04
Net Gains on
Securities (both realized
and unrealized) ............... .00 .00 .00 .00 .00
------- ------- ------ ------ -----
Total Income From
Investment Operations ........ .05 .07 .07 .05 .04
------- ------- ------ ------ -----
LESS DISTRIBUTIONS
Dividends (from net
investment income) ............. (.05) (.07) (.07) (.05) (.04)
Distributions (from capital gains) .00 .00 .00 .00 .00
------- ------- ------ ------ -----
Total Distributions ........... (.05) (.07) (.07) (.05) (.04)
------- ------- ------ ------ -----
Net Asset Value,
End of Period ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
======= ======= ====== ====== =====
Total Return* ..................... 5.25% 7.09% 8.09% 5.77% 4.56%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000 omitted) .................. $33,695 $24,931 $6,233 $5,114 $ 582
Ratio of Expenses to
Average Net Assets** ........... .70% .66% .70% .70% .89%
Ratio of Net Investment
Income to Average Net Assets ... 5.07% 7.09% 7.82% 6.26% 4.83%
Ratio of Commissions paid
to number of shares ............ N/A N/A N/A N/A N/A
Portfolio Turnover Rate .......... N/A N/A N/A N/A N/A
</TABLE>
SHORT-TO-INTERMEDIATE GOVERNMENT PORTFOLIO
------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------------- 12/3/92 TO
1996 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) .................................. .56 .60 .50 .36 .02
Net Gains (Losses) on Securities (both realized and unrealized) (.21) .70 (.58) .29 .02
------- ------- ------- ------- ------
Total Income (Loss) From Investment Operations ............... .35 1.30 (.08) .65 .04
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net investment income) ......................... (.53) (.60) (.50) (.35) (.02)
Distributions (from capital gains) ............................. .00 .00 .00 (.02) .00
------- ------- ------- ------- ------
Total Distributions .......................................... (.53) (.60) (.50) (.37) (.02)
------- ------- ------- ------- ------
Net Asset Value, End of Period .................................. $ 10.24 $ 10.42 $ 9.72 $ 10.30 $10.02
======= ======= ======= ======= ======
Total Return*** ................................................. 3.48% 13.54% (.43%) 4.58% .45%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ........................ $26,098 $23,588 $20,356 $24,864 $2,509
Ratio of Expenses to Average Net Assets**** .................... .76% .78% 0.81% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets ........... 5.43% 5.84% 4.95% 3.44% 3.24%
Ratio of Commissions paid to number of shares .................. N/A N/A N/A N/A N/A
Portfolio Turnover Rate ........................................ 58.15% 51.82% 93.70% 28.64% .00%
<FN>
* 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 NET OF ADVISORY FEE WAIVER FOR THE PERIODS ENDED DECEMBER 31,
1987, 1988, AND 1989, FOR WHICH PERIODS THE RATIO OF EXPENSES TO AVERAGE
NET ASSETS WOULD HAVE BEEN 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.
</FN>
</TABLE>
3
<PAGE>
BALANCED PORTFOLIO
------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------- 3/1/94 TO
1996 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 ................................................... .34 .44 .34
Net Gains (Losses) on Securities (both realized and unrealized) ......... .80 1.38 (.76)
------- ------- -------
Total Income (Loss) From Investment Operations ......................... 1.14 1.82 (.42)
------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) .................................. (.28) (.43) (.34)
Distributions (from capital gains) ...................................... (.10) .00 .00
------- ------- -------
Total Distributions ..................................................... (.38) (.43) (.34)
------- ------- -------
Net Asset Value, End of Period ........................................... $ 11.39 $ 10.63 $ 9.24
======= ======= =======
Total Return* ............................................................ 10.72% 19.80% (5.73%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ................................. $49,331 $31,114 $19,422
Ratio of Expenses to Average Net Assets** ............................... .97% .97% 1.00%
Ratio of Net Investment Income to Average Net Assets .................... 3.14% 4.38% 4.27%
Ratio of Commissions paid to number of shares ........................... .24% N/A N/A
Portfolio Turnover Rate ................................................. 76.90% 98.55% 57.73%
</TABLE>
EMERGING GROWTH PORTFOLIO
-------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
-------------------------------------- 3/31/93 TO
1996 1995 1994 12/31/93
-------- -------- -------- -----------
<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) .................................. (.04) .01 .01 (.04)
Net Gains (Losses) on Securities (both realized and unrealized) 3.10 5.42 (.92) 2.51
-------- -------- -------- --------
Total Income (Loss) From Investment Operations ............... 3.06 5.43 (.91) 2.47
-------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net investment income) ........................ .00 .00 (.01) .00
Distributions (from capital gains) ............................ (.85) (.73) .00 .00
-------- -------- -------- --------
Total Distributions .......................................... (.85) (.73) (.01) .00
-------- -------- -------- --------
Net Asset Value, End of Period ................................. $ 18.46 $ 16.25 $ 11.55 $ 12.47
======== ======== ======== ========
Total Return*** ................................................ 18.88% 46.79% (7.36%) 24.71%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ....................... $431,454 $288,519 $182,650 $102,472
Ratio of Expenses to Average Net Assets**** ................... .94% .91% .92% 1.00%
Ratio of Net Investment Income to Average Net Assets .......... (.24%) .03% .06% (.30%)
Ratio of Commissions paid to number of shares ................. 5.65% N/A N/A N/A
Portfolio Turnover Rate ....................................... 80.02% 124.13% 72.62% 12.79%
<FN>
* 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
WESTERN RESERVE LIFE.
</FN>
</TABLE>
4
<PAGE>
STRATEGIC TOTAL RETURN PORTFOLIO/DAGGER/
----------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
-------------------------------------- 3/1/93 TO
1996 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 .............................. .37 .37 .31 .19
Net Gains or (Losses) on
Securities (both realized and unrealized) ........ 1.56 2.33 (.33) 1.33
-------- -------- -------- -------
Total Income (Loss) From Investment Operations .... 1.93 2.70 (.02) 1.52
-------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) ............. (.32) (.37) (.31) (.19)
Distributions (from capital gains) ................. (.50) (.37) .00 (.10)
-------- -------- -------- -------
Total Distributions ............................... (.82) (.74) (.31) (.29)
-------- -------- -------- -------
Net Asset Value, End of Period ...................... $ 13.97 $ 12.86 $ 10.90 $ 11.23
======== ======== ======== =======
Total Return* ....................................... 15.00% 24.66% (.53%) 13.49%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ............ $390,141 $256,806 $183,867 $90,560
Ratio of Expenses to Average Net Assets** .......... .91% .87% .89% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.72% 3.07% 2.78% 1.70%
Ratio of Commissions paid to number of shares ...... 5.82% N/A N/A N/A
Portfolio Turnover Rate ............................ 49.32% 52.59% 53.50% 27.41%
</TABLE>
AGGRESSIVE GROWTH PORTFOLIO
---------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------ 3/1/94 TO
1996 1995 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) ........ 1.38 3.96 (.14)
-------- -------- -------
Total Income (Loss) From Investment Operations .... 1.37 3.90 (.12)
-------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) ............. .00 .00 (.02)
Dividends (in excess of net investment income) ..... (.19) .00 .00
Distributions (from capital gains) ................. (.25) (.51) .00
-------- -------- -------
Total Distributions ............................... (.44) (.51) (.02)
-------- -------- -------
Net Asset Value, End of Period ...................... $ 14.18 $ 13.25 $ 9.86
======== ======== =======
Total Return*** ..................................... 10.45% 38.02% (1.26%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ............ $220,552 $158,534 $38,826
Ratio of Expenses to Average Net Assets**** ........ .98% 1.07% 1.00%
Ratio of Net Investment Income to Average Net Assets (.10%) (.48%) 0.20%
Ratio of Commissions paid to number of shares ...... 7.08% N/A N/A
Portfolio Turnover Rate ............................ 101.28% 108.04% 89.73%
<FN>
* 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.
*** 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.
/dagger/ PRIOR TO MAY 1, 1997, THIS PORTFOLIO WAS NAMED THE EQUITY-INCOME
PORTFOLIO.
</FN>
</TABLE>
5
<PAGE>
TACTICAL ASSET ALLOCATION PORTFOLIO
-----------------------------------
YEAR ENDED PERIOD FROM
DECEMBER 31 1/3/95 TO
1996 12/31/95
----------- -----------
Net Asset Value, Beginning of Period ................ $ 11.49 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .............................. .33 .41
Net Gains (Losses) on Securities
(both realized and unrealized) ................... 1.33 1.93
-------- --------
Total Income From Investment Operations ......... 1.66 2.34
-------- --------
LESS DISTRIBUTIONS
Dividends (from net investment income) ............. (.30) (.41)
Distributions (from capital gains) ................. (.24) (.44)
-------- --------
Total Distributions ............................... (.54) (.85)
-------- --------
Net Asset Value, End of Period ...................... $ 12.61 $ 11.49
======== ========
Total Return* ....................................... 14.42% 20.09%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ............ $206,172 $120,531
Ratio of Expenses to Average Net Assets ............ .90% .93%
Ratio of Net Investment Income to Average Net Assets 2.78% 3.76%
Ratio of Commissions paid to number of shares ...... .50% N/A
Portfolio Turnover Rate ............................ 98.97% 38.68%
SELECT EQUITY-INCOME PORTFOLIO/DAGGER/
--------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- 3/1/94 TO
1996 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 .............................. .42 .46 .43
Net Gains (Losses) on Securities
(both realized and unrealized) ................... .87 1.93 (.70)
------- ------- -------
Total Income (Loss) From
Investment Operations ........................... 1.29 2.39 (.27)
------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) ............. (.33) (.46) (.43)
Distributions (from capital gains) ................. (.32) (.11) .00
------- ------- -------
Total Distributions ............................... (.65) (.57) (.43)
------- ------- -------
Net Asset Value, End of Perid ....................... $ 11.76 $ 11.12 $ 9.30
======= ======= =======
Total Return** ...................................... 11.64% 25.25% (4.58%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ............ $38,115 $24,607 $10,482
Ratio of Expenses to Average Net Assets*** ......... 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets 3.73% 4.56% 5.36%
Ratio of Commissions paid to number of shares ...... 4.33% N/A N/A
Portfolio Turnover Rate ............................ 68.53% 78.34% 36.13%
<FN>
* 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.
/dagger/ PRIOR TO MAY 1, 1997, THIS PORTFOLIO WAS NAMED THE UTILITY PORTFOLIO.
</FN>
</TABLE>
6
<PAGE>
C.A.S.E. GROWTH PORTFOLIO
-------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, 5/1/95 TO
1996 12/31/95
------------ -----------
<S> <C> <C>
Net Asset Value, Beginning of Period ........................... $ 11.66 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ......................................... .12 .12
Net Gains (Losses) on Securities (both realized and unrealized) 1.92 2.49
------- -------
Total Income (Loss) From Investment Operations ............... 2.04 2.61
------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income) ........................ (.05) (.12)
Distributions (from net realized gains) ....................... (.23) (.83)
------- -------
Total Distributions .......................................... (.28) (.95)
------- -------
Net Asset Value, End of Period ................................. $ 13.42 $ 11.66
======= =======
Total Return* .................................................. 17.50% 20.65%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ....................... $26,560 $ 2,578
Ratio of Expenses to Average Net Assets** ..................... 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets .......... .94% 1.02%
Ratio of Commissions paid to number of shares ................. 6.04% N/A
Portfolio Turnover Rate ....................................... 160.27% 121.62%
</TABLE>
GLOBAL SECTOR PORTFOLIO
-----------------------
PERIOD FROM
5/1/96 TO
12/31/96
------------
Net Asset Value, Beginning of Period ........................... $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ......................................... .06
Net Gains (Losses) on Securities (both realized and unrealized) .55
------
Total Income (Loss) From Investment Operations ............... .61
------
LESS DISTRIBUTIONS
Dividends (from net investment income) ........................ (.02)
Distributions (from net realized gains) ....................... (.04)
------
Total Distributions .......................................... (.06)
------
Net Asset Value, End of Period ................................. $10.55
======
Total Return*** ................................................ 6.08%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) ....................... $6,986
Ratio of Expenses to Average Net Assets**** ................... 2.37%
Ratio of Net Investment Income to Average Net Assets .......... .62%
Ratio of Commissions paid to number of shares ................. 3.13%
Portfolio Turnover Rate ....................................... 27.58%
** 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 AND 1996, FOR WHICH PERIOD THE ANNUALIZED RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 4.15% AND ______%,
RESPECTIVELY, ABSENT THE ADVISORY FEE WAIVER BY WESTERN RESERVE LIFE.
**** THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN 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-ACCOUNT 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 FOR THE PERIOD ENDED
12/31/96.
7
<PAGE>
VALUE EQUITY PORTFOLIO
----------------------
PERIOD FROM
5/1/96 TO
12/31/96
------------
Net Asset Value, Beginning of Period ........................... $ 10.00
Income From Investment Operations
Net Investment Income ....................................... .10
Net Gains (Losses) on Securities (both realized and unrealized) 1.23
-------
Total Income (Loss) From Investment Operations ............... 1.33
-------
Less Distributions
Dividends (from net investment income) ...................... (.04)
Distributions (from net realized gains) ....................... (.02)
-------
Total Distributions .......................................... (.06)
-------
Net Asset Value, End of Period ................................. $ 11.27
=======
Total Return* .................................................. 13.19%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ..................... $49,394
Ratio of Expenses to Average Net Assets** ..................... 1.00%
Ratio of Net Investment Income to Average Net Assets .......... .89%
Ratio of Commissions paid to number of shares ................. 6.96%
Portfolio Turnover Rate ....................................... 7.93%
* THE INCEPTION OF THIS PORTFOLIO WAS MAY 1, 1996. THE TOTAL RETURN 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 REFLECT THE CHARGES AND DEDUCTIONS UNDER THE APPLICABLE
POLICY OR ANNUITY CONTRACT; INCLUDING THESE CHARGES WOULD REDUCE TOTAL
RETURN FIGURES FOR ALL PERIODS SHOWN.
** THE RATIO IS ANNUALIZED AND NET OF ADVISORY FEE WAIVER FOR THE PERIOD ENDED
DECEMBER 31, 1996, FOR WHICH PERIOD THE ANNUALIZED RATIO OF EXPENSES TO
AVERAGE NET ASSETS WOULD HAVE BEEN ______% ABSENT THE ADVISORY FEE WAIVER
BY WESTERN RESERVE LIFE.
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.
8
<PAGE>
/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.
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,
9
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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; 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.
SUB-ADVISER: Meridian Investment Management Corporation (Prior to May 1, 1997,
INVESCO Global Asset Management Limited served as Co-Sub-Adviser to this
Portfolio.)
/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/STRATEGIC TOTAL RETURN PORTFOLIO
OBJECTIVE: Seeks to provide long-term growth of income and capital
appreciation.
INVESTMENT POLICY: The Strategic Total Return Portfolio (formerly Equity-Income
Portfolio) invests primarily in common stocks offering above average dividend
yields, income producing securities convertible into common stocks, and
fixed-income securities.
INVESTOR PROFILE: For the investor who wants the prospect of income growth
and capital growth. The investor should be comfortable with the price
fluctuations of a stock portfolio.
SUB-ADVISER: Luther King Capital Management Corporation
/diamond/SELECT EQUITY-INCOME PORTFOLIO
OBJECTIVE: Seeks total return by investing in securities that have defensive
characteristics.
INVESTMENT POLICY: The Select Equity-Income (formerly named the Utility
Portfolio) Portfolio invests primarily in a diversified portfolio of equity and
debt securities with an emphasis on sector investing.
INVESTOR PROFILE: For the investor who seeks high current income and moderate
capital appreciation and is willing to accept certain special risks
associated with sector investing.
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
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<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 disclose
other nonstandardized data, such as cumulative total returns, actual
year-by-year returns, or any combination thereof.
11
<PAGE>
/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.
/diamond/SUB-ADVISER PERFOMANCE
A Portfolio may disclose in advertisements, supplemental sales literature, and
reports to Policyholders or to prospective investors total returns of an
EXISTING SEC-REGISTERED fund that is managed by the Portfolio's Sub-Adviser and
that has investment objectives, policies, and strategies substantially similar
to those of such Portfolio (a "Similar Sub-Adviser Fund"). A Portfolio may also
disclose total returns representing a "composite" of the historical performance
of INVESTMENT ACCOUNTS OTHER THAN MUTUAL FUNDS that are managed by the
Portfolio's Sub-Adviser and that have investment objectives, policies, and
strategies substantially similar to those of the Portfolio ("Similar Sub-Adviser
Accounts"). Although the total returns presented are those of Similar
Sub-Adviser Funds or Similar Sub-Adviser Accounts that have substantially
similar investment objectives, policies, and strategies to the designated
Portfolio, and are managed by the same Sub-Adviser as the designated Portfolio.
YOU SHOULD NOT ASSUME THAT ANY PORTFOLIO WILL HAVE THE SAME FUTURE PERFORMANCE
AS SIMILAR SUB-ADVISER FUNDS OR SIMILAR SUB-ADVISER ACCOUNTS WHOSE TOTAL RETURNS
ARE SHOWN. For example, any Portfolio's future performance may be greater or
less than the historical performance of the corresponding Similar Sub-Adviser
Account or Similar Sub-Adviser Fund, due to, among other things, certain
inherent differences between a Portfolio and the Similar Sub-Adviser Account or
Similar Sub-Adviser Fund. Any material differences are described below:
SIMILAR SUB-ADVISER FUND PERFORMANCE
The table below sets forth certain Portfolios of the Fund and, for each
Portfolio's respective Similar Sub-Adviser Fund, the fund's inception date,
asset size, and the average annual total returns for the one, five and ten year
periods (or life of the Similar Sub-Adviser Fund, if shorter) ended December 31,
1996. These figures are based on the actual investment performance of the
Similar Sub-Adviser Funds. In [ALL] cases, the average annual total returns for
a Similar Sub-Adviser Fund reflect total investment advisory fees and other
expenses, EXCLUDING SALES LOAD, of each Similar Sub-Adviser Fund, that are
greater than those of the respective Portfolio of the Fund. IN SOME CASES, the
performance of the Similar Sub-Adviser Fund MAY REFLECT THE DEDUCTION OF SALES
LOADS, which reduces average annual total return.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------
SIMILAR 10 YEARS
SUB-ADVISER INCEPTION TOTAL OR SINCE
PORTFOLIO FUND DATE ASSETS 1 YEAR 5 YEARS INCEPTION
--------- ---------------- --------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Global Portfolio Janus Worldwide
Aggressive
Growth Portfolio Alger Capital
Appreciation
Emerging Van Kampen
Growth Portfolio American Capital
Emerging Growth
</TABLE>
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<PAGE>
SIMILAR SUB-ADVISER ACCOUNT PERFORMANCE
The following table sets forth, for each Portfolio for which composite Similar
Sub-Adviser Account performance has been calculated, composite Similar
Sub-Adviser Account information relating to the historical performance of
Similar Sub-Adviser Accounts (NON-MUTUAL FUNDS) managed by the Sub-Adviser,
since the date indicated.
The Similar Sub-Adviser Account composite performance information shown below
was calculated in accordance with recommended standards of Association for
Investment Management and Research ("AIMR*"), retroactively applied to all time
periods. All returns presented were calculated on a total return basis and
include all dividends and interest, accrued income and realized and unrealized
gains and losses. All returns reflect the deduction of investment advisory fees,
brokerage commissions and execution costs paid by the Similar Sub-Adviser
Accounts, without provision for federal or state income taxes. Custodial fees,
if any, were not included in the calculation. Each Similar Sub-Adviser Account
composite includes all actual similar investment accounts managed by the
Sub-Adviser.
SIMILAR SUB-ADVISER ACCOUNT INFORMATION
---------------------------------------
10 YEARS
OR SINCE
SUB-ADVISER 1 YEAR 5 YEARS INCEPTION
----------- ------ ------- ---------
Scottish Equitable
(Co-Sub-Adviser -
International Equity Portfolio)
Dean Investment Associates
(Sub-Adviser -Tactical Asset
Allocation Portfolio)
NWQ Investment Management
Company, Inc. (Sub-Adviser -
Value Equity Portfolio)
G.E. Investment Management
Incorportated (Sub-Adviser -
U.S. Equity Portfolio)
G.E. Investment Management
Incorporated (Co-Sub-Adviser -
International Equity Portfolio)
- -------------
* AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to: (i) promote full and fair
presentations by investment advisers of their performance results; and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
THE INVESTMENT RESULTS OF THE SUB-ADVISERS' COMPOSITE SIMILAR SUB-ADVISER
ACCOUNTS ARE UNAUDITED AND ARE NOT INTENDED TO PREDICT OR SUGGEST THE RETURNS
THAT MIGHT BE EXPERIENCED BY A PORTFOLIO, OR A POLICYHOLDER. INVESTORS SHOULD
ALSO BE AWARE THAT THE USE OF A METHODOLOGY DIFFERENT FROM THAT USED ABOVE TO
CALCULATE PERFORMANCE COULD RESULT IN DIFFERENT PERFORMANCE INFORMATION.
ALSO, NEITHER THE PERFORMANCE OF SIMILAR SUB-ADVISER FUNDS NOR THE PERFORMANCE
OF SIMILAR SUB-ADVISER ACCOUNTS REFLECT ANY OF THE CHARGES, FEES, AND EXPENSES
IMPOSED UNDER THE POLICIES AND ANNUITY CONTRACTS. SUCH PERFORMANCE WOULD IN EACH
CASE BE LOWER IF IT REFLECTED THESE CHARGES, FEES AND EXPENSES. SEE THE CONTRACT
FORM OR DISCLOSURE DOCUMENT FOR THE POLICY OR ANNUITY CONTRACT. (THE DISCLOSURE
DOCUMENTS FOR THE POLICY OR ANNUITY CONTRACT DESCRIBE SIMILAR SUB-ADVISER FUNDS
AND SIMILAR SUB-ADVISER ACCOUNTS AS "OTHER PORTFOLIOS.")
(See the SAI for more information about the Portfolios' performance.)
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<PAGE>
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.
PORTFOLIO 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% 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
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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.
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 and periodic rebalancing of portfolio assets managed by each
Sub-Adviser will be made with the objective of keeping equal the total 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).
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<PAGE>
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.
In selecting investments on behalf of the Portfolio, Scottish Equitable, seeks
initially to identify countries where economic growth conditions are favorable
(through analysis of gross domestic product growth rates, inflation, interest
rates and other economic factors), and where stock market valuations generally
do not fully reflect growth potential, Scottish Equitable then seeks to identify
within each of the individual markets, companies whose earnings are undervalued
(that is, where future earnings potential is not reflected in the present share
price). Scottish Equitable will utilize measures of value appropriate to local
market conditions, which may include low price earnings ratios, low price to
book value, low price to cash flow ratios, as well as considering such factors
as industry position and management quality.
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 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//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;
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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/
/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 purchased
through ADRs, EDRs and GDRs, as well as directly) 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
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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 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
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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 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 Standard & Poors Corporation ("S&P") or by
Moody's Investors Service, Inc. ("Moody's") or has received an equivalent rating
from an NRSRO or, if unrated, is
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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 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/
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/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") determines the allocation of the
Portfolio's assets among the asset categories described above, based on
proprietary quantitative research.
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. 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 Sub-Adviser expects 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.
Market sectors within the asset categories include the industry, country or bond
markets available for investment.
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, the Sub-Adviser
attempts to identify companies that have demonstrated or, in the Sub-Adviser'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 or S&P. However, the Portfolio may also invest up to 15% of its total
assets in debt securities rated below these four 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
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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/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
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.
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/diamond/STRATEGIC TOTAL RETURN PORTFOLIO
The Strategic Total Return Portfolio (prior to May 1, 1997, the Equity-Income
Portfolio) seeks to achieve its investment objective by investing primarily in
common stocks offering above-average dividend yields, income producing
securities convertible into common stocks, 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. It is anticipated that approximately 25% of the Portfolio's assets
will be invested in 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 cash flow generation,
earnings and dividend growth record and outlook, balance sheet quality, 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/SELECT EQUITY-INCOME PORTFOLIO
The Select Equity-Income Portfolio (prior to May 1, 1997, the Utility Portfolio)
seeks to achieve its investment objective by investing its assets in a
diversified portfolio of equity and debt securities with an emphasis on sector
investing. Industry sectors in which the Portfolio invests include, but are not
limited to, utilities, financial services, real estate investment trusts, health
care, natural resources and energy sectors. The Portfolio will not concentrate
its investments in any single industry.
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. Sectors which have had historical emphasis in defensive
characteristics are selected for investment.
The common stocks 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, it may invest in other securities such as
convertible securities, preferred stocks, corporate bonds, notes and warrants.
The Portfolio may invest 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 presently intends to limit its investment in foreign securities
not publicly traded on recognized exchanges 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.
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<PAGE>
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 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
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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 (EFFECTIVE MAY 1, 1997, THIS
PORTFOLIO IS NOT AVAILABLE FOR NEW SALES.)
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
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
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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 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
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<PAGE>
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.
All of the Portfolios qualify as diversified funds under the 1940 Act. The
Portfolios are subject to the following diversification requirements (which
are set forth in full in the SAI):
/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 Select Equity-Income 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
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"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 Select Equity-Income 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.
/diamond/LENDING
Each Portfolio may lend securities to broker-dealers and financial institutions
to realize additional income. As a fundamental policy, the Select Equity-Income
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.
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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 Strategic Total Return 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
Certain Portfolios 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," are not considered an investment in another investment
company for purposes of these limitations.) A Portfolio will indirectly bear its
proportionate share of any investment advisory fees and expenses paid by the
funds in which it invests, in addition to the investment advisory fee and
expenses paid by the Portfolio. However, if the Growth, Bond or Global Portfolio
invests in a Janus money market fund, Janus Capital will remit to such Portfolio
the fees it receives from the Janus money market fund to the extent such fees
are based on the Portfolio's assets.
/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 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
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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.
Any equity security also presents the risks inherent in the particular
industry of the issuer of the equity security. Certain of these sectors, and
the risks presented by such sectors, are described below.
/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.
/diamond/HEALTH CARE -Health care stocks are equity securities of companies
primarily engaged in the design, manufacture, or sale of products or services
used for, or in connection with, health care or medicine.
/diamond/ RISK FACTORS
Securities in the health care sector are subject to price fluctuations based
on industry changes, changes in a company's financial condition and on
overall market and economic conditions. Smaller companies are especially
sensitive to these factors.
/diamond/FINANCIAL SERVICES -Financial Services investing includes equity
securities of companies that provide financial services to consumers and
industry. A company is principally engaged in the industry if it derives more
than 15% of revenues or profits from brokerage or investment management
activities.
/diamond/RISK FACTORS
Companies in the financial services industry are subject to various risks
related to that industry, such as government regulation, changes in interest
rates, and exposure on loans, including loans to foreign borrowers. The
performance of equity securities of this industry may be affected by the
conditions that affect this industry.
/diamond/UTILITIES -Utility Stocks are 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.
/diamond/RISK FACTORS
Risks associated with the utility industry include difficulty in earning
adequate returns on investments 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.
/diamond/ENERGY -Energy stocks are equity securities of companies in the energy
service field, including those that provide services and equipment to the
conventional areas of oil, gas, electricity and coal, and newer sources of
energy such as nuclear, geothermal, oil shale and solar power.
/diamond/RISK FACTORS
Risks associated with the energy industry include difficulty in adequate
returns due to increased costs and delays due to government regulations,
building or construction delays, and environmental regulations.
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/diamond/NATURAL RESOURCES -Natural Resource stocks are equity securities of
domestic and foreign companies with substantial natural resource assets.
Natural resource assets are materials derived from natural sources which have
economic value. Examples of natural resource assets include precious metals
(E.G. gold, silver and platinum), ferrous and nonferrous metals (E.G. iron,
steel, aluminum and copper), strategic metals (E.G., uranium and titanium),
hydrocarbons (E.G., coal, oil and natural gas), timber land, undeveloped real
property and agricultural commodities.
/diamond/RISK FACTORS
During periods of economic or financial instability, the securities of such
companies are subject to extreme price fluctuations, reflecting the high
volatility of certain natural resources, such as precious metals, during
these periods. In addition the instability of prices of these natural
resources may result in volatile earnings of related companies, which in
turn, may affect adversely the financial condition of such companies.
/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.
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 include a spectrum of securities which can be exchanged
for or converted into common stock of the issuer or a related financial entity
(for
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example, a merged or acquired company or partner). Convertible securities may
include, but are not limited to: convertible bonds or debentures; convertible
preferred stock; units consisting of usable bonds and warrants; or securities
which cap or otherwise limit returns to the convertible security hold, such as
DECS -(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common
Stock when issued as a debt security.), LYONS -(Liquid Yield Option Notes, which
are corporate bonds that are purchased at prices below par with no coupons and
are convertible ino stock), PERCS -(Preferred Equity Redeemable Stock (an equity
issue that pays a high cash dividend, has a cap price and mandatory conversion
to common stock at maturity.). and PRIDES -(Preferred Redeemable Increased
Dividend Securities (which are essentially the same as DECS; the difference is
little more than who initially underwrites the issue.
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.
Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issurer's balance sheet, hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated.
/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.
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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 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 branches of foreign banks; (v) debt obligations issued or
guaranteed by one or more 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
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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.
/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
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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.
/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 and ADSs that are issued in sponsored and
unsponsored programs are generally similar but the issuers of unsponsored ADRs
and ADSs 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
and ADSs.
/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.
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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 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.
/diamond/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
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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.
/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.
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/diamond/REAL ESTATE INVESTMENT TRUSTS ("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 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
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<PAGE>
the market for lower quality securities. Unrated debt, 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.
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.
/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 a direct,
wholly-owned subsidiary of Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"), 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, 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
39
<PAGE>
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, 1996.
<TABLE>
<CAPTION>
ADVISORY ADVISORY
PORTFOLIO FEE PORTFOLIO FEE
--------- -------- --------- --------
<S> <C> <C> <C>
Growth 0.80% Emerging Growth 0.80%
Bond 0.50% Strategic Total Return** 0.80%
Global 0.80% Aggressive Growth 0.80%
Money Market 0.40% (prior to 5/1/96, Select Equity-Income*** 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 1996 because they had not
commenced operations as of December 31, 1996.
** Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
*** Prior to May 1, 1997, this Portfolio was named the Utility Portfolio
</FN>
</TABLE>
/diamond/ADVISORY FEE REIMBURSEMENT
The Investment Adviser has voluntarily undertaken, until at least April 30,
1998, 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 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, 1996.
40
<PAGE>
<TABLE>
<CAPTION>
EXPENSE ACTUAL
PORTFOLIO LIMIT EXPENSES REIMBURSEMENT
--------- ------- -------- -------------
<S> <C> <C> <C>
Growth 1.00% % NONE
Bond 0.70% % NONE
Global 1.00% % NONE
Money Market 0.70% % NONE
Short-to-Intermediate Government 1.00% % NONE
Balanced 1.00% % NONE
Emerging Growth 1.00% % NONE
Strategic Total Return+ 1.00% % NONE
Aggressive Growth 1.00% % NONE
Select Equity-Income++ 1.00% % NONE
Tactical Asset Allocation 1.00% % NONE
C.A.S.E. Growth 1.00% % 73,269
Value Equity* 1.00% % 13,672
International Equity** 1.50% *** NONE
U.S. Equity** 1.30% *** NONE
<FN>
- ----------
* This Portfolio commenced operations May 1, 1996.
** These Portfolios had not commenced operations as of December 31, 1996.
/dagger/Prior to May 1, 1997, this Portfolio was named the Equity-Income
Portfolio.
/double dagger/Prior to May 1, 1997, this Portfolio was named the Utility
Portfolio.
</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. Prior to ISI seeking reimbursement,
Policyowners will be notified in advance.
/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 affiliate
of WRL Management and Western Reserve, to furnish the Fund with administrative
services to assist the
41
<PAGE>
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/
/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 serves as Co-Portfolio Manager and began serving as
Portfolio Manager for the Bond Portfolio in 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).
In January 1997, Mr. Speaker settled an SEC administrative action involving two
personal trades made by him in January of 1993. Without admitting or denying the
allegations, Mr. Speaker agreed to civil money penalty, disgorgement, and
interest payments totaling $37,199 and to a 90-day suspension that began on or
about January 27, 1997.
SANDY R. RUFENACHT has served as a Co-Portfolio Manager for the Bond
Portfolio since January, 1997. Mr. Rufenacht joined Janus Capital in 1990 and
gained experience as a trader and research analyst before assuming management
responsibilities. He holds a Bachelor of Arts in Business from the University
of North Colorado. Mr. Rufenacht is also an Executive Vice President of Janus
Investment Fund and serves as portfolio manager or co-manager of other mutual
funds.
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/
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.
42
<PAGE>
/diamond//diamond//diamond//diamond//diamond/
AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI"), 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. AIMI is an indirect
wholly-owned subsidiary of AEGON.
/diamond/ PORTFOLIO MANAGERS:
CLIFFORD A. SHEETS, CFA, AND JARRELL D. FREY, CFA, 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
AIMI since 1990. Prior to joining AIMI, 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, 1995. Mr. Frey joined
AIMI in 1994. Prior to joining AIMI, 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 AIMI. 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. It is anticipated that on or about June, 1997,
Morgan Stanley Group Inc. will merge with Dean Witter, Discover & Co., a
financial services company.
/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 Strategic Total Return 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
Strategic Total Return 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 December 31, 1996, Alger Management had
approximately $7.1 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
43
<PAGE>
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 Select
Equity-Income 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 $110 billion.
/diamond/ PORTFOLIO MANAGERS:
LINDA A. DUESSEL serves as Portfolio Manager of the Select Equity-Income
Portfolio. Ms. Duessel has served as a Portfolio Manager of the Select
Equity-Income Portfolio since July, 1996. Ms. Duessel is a Chartered
Financial Analyst and also serves as co-portfolio manager for other 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, 1997 had $3.8 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/
44
<PAGE>
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 December 31, 1996, NWQ Investment had over $6.4 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, 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 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 ________ , had aggregate assets of approximately $ ____
million. Meridian provides investment advisory assistance, portfolio management
advice and quantitative investment research to the Investment Adviser for the
Global Sector Portfolio.
/diamond/PORTFOLIO MANAGER:
Meridian's Investment Committee determines the guidelines for asset, country,
industry and securities 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.
/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, 1996, Scottish Equitable plc had approximately $ ____
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.
45
<PAGE>
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 December
31, 1996, GEIM and GEIC together managed assets in excess of $56 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 is
specifically responsible for selecting the Portfolio Managers of the U.S.
Equity Portfolio, and is also responsible for monitoring the investment
strategies employed by the Portfolio Managers of the U.S. Equity Portfolio to
ensure that they are consistent with the Portfolio's investment objective and
strategies. 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. He has more
than 14 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
more than 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 36 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 15 years of investment experience and has held positions with GE
Investments since 1982. Mr. Reinhardt is currently a Senior Vice President of
GE Investments.
46
<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*
Strategic Total Return 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%
Select Equity-Income 0.50% of the first $30 million of
average daily net assets;
0.35% of the next $20 million in
average daily net assets,
and 0.25% of average daily net assets
in excess of $50 million
Value Equity 0.40%, less 50% of amount of excess expenses*
Global Sector 1.10%/triangle/
International Equity Scottish Equitable: 0.50% of assets managed by
Scottish Equitable, less 50% of amount of excess
expenses attributable to such assets*
GEIM: 0.50% of assets managed by GEIM, less
50% of amount of excess expenses attributable to
such assets/dagger/
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.
/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.
/triangle/ Prior to May 1, 1997, INVESCO Global Asset Management Limited served
as a co-sub-adviser to the Global Sector Portfolio; for periods prior
to that date, INVESCO received monthly compensation from the
Investment Adviser at the annual rate of 0.40% of first $100 million
average daily net assets of the Portfolio and 0.35% of assets in
excess of $100 million; and Meridian Investment Management
Corporation received monthly compensation from the Investment Adviser
at the annual rate of 0.30% of first $100 million of average daily
net assets of the Portfolio and 0.35% of assets in excess of $100
million.
</FN>
</TABLE>
/diamond//diamond//diamond//diamond/
47
<PAGE>
/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. The Sub-Adviser is authorized to pay higher commissions
to brokerage firms that provide it with investment and research information than
to firms which do not provide such services, if the Sub-Adviser determines that
such commissions are reasonable in relation to the overall services provided and
the Sub-Adviser receives best execution. The information received may be used by
the Sub-Adviser in managing the assets of other advisory and sub-advisory
accounts, as well as in the management of the assets of 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.
48
<PAGE>
/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 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. Shares may be offered to other
life insurance companies in the future. 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
49
<PAGE>
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.
/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.
DISTRIBUTIONS 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 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
50
<PAGE>
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.
51
<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 INVESTORS SERVICE, 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.
A-1
<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 52499
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
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.
<PAGE>
WRL SERIES FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
EMERGING GROWTH PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
GLOBAL PORTFOLIO
GROWTH PORTFOLIO
C.A.S.E. GROWTH
U.S. EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
GLOBAL SECTOR PORTFOLIO
TACTICAL ASSET ALLOCATION PORTFOLIO
STRATEGIC TOTAL RETURN PORTFOLIO
SELECT EQUITY-INCOME 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
JANUS CAPITAL CORPORATION
C.A.S.E. MANAGEMENT, INC.
NWQ INVESTMENT MANAGEMENT COMPANY, INC.
DEAN INVESTMENT ASSOCIATES
MERIDIAN INVESTMENT MANAGEMENT CORPORATION
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 May 1, 1997.
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TABLE OF CONTENTS
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PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
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<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
Strategic Total Return Portfolio 13 21
Select Equity-Income 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>
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT CROSS-REFERENCE
OF TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
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<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 Portfolio, Growth Portfolio,
C.A.S.E. Growth Portfolio, U.S. Equity Portfolio, Value Equity Portfolio, Global
Sector Portfolio,Tactical Asset Allocation Portfolio, Strategic Total Return
(formerly Equity-Income) Portfolio, Select Equity-Income (formerly 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 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."
(B) 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.
(C) 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.
(D) 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.
(E) 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.
(F) The Portfolio may not invest more than 15% of its net assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or any other securities as to which
the Board of Directors has made a determination as to liquidity, as permitted
under the 1940 Act.
(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 that the
Portfolio may borrow from banks for investment purposes so long as the
Portfolio maintains the required coverage.
/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).
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 may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the
2
<PAGE>
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.
(B) 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.
(C) 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.
(D) 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.
(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 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.
(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 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 as permitted by the
1940 Act.
(J) 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 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
3
<PAGE>
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.
(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.)
4
<PAGE>
(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 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
5
<PAGE>
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 (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 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 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 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.
(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.
/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.
6
<PAGE>
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 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
7
<PAGE>
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.
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
8
<PAGE>
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 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 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.
/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
9
<PAGE>
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.
/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).
10
<PAGE>
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, 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 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 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
11
<PAGE>
the determination, such securities would not be subject to the foregoing
limitation.
(H) 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 (G) 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 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 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.
(B) 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.
(C) 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.
(D) 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.
(E) The Portfolio may not invest directly in oil, gas, or other mineral
development or exploration programs or leases; however, the Portfolio
12
<PAGE>
may own debt or equity securities of companies engaged in those businesses.
(F) The Portfolio may not invest in companies for the purpose of exercising
control or management.
(G) The Portfolio may not issue senior securities, except as permitted by the
1940 Act.
(H) 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.
(I) 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/STRATEGIC TOTAL RETURN 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 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 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.
(B) 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.
(C) 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.
13
<PAGE>
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.
(D) 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.
(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 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.
(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 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 as permitted by the
1940 Act.
(J) 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/ SELECT 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 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
14
<PAGE>
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 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.
(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 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 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.
(G) 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.
(H) 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.
(I) 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
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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 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 to 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 the clearance
of transactions.
(C) 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.
(D) 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.
(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 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.
(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 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 as permitted by the
1940 Act.
(J) 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
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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 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 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.
(B) 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.
(C) 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.
(D) 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.
(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 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.
(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 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 as permitted by the
1940 Act.
(J) 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
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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 (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.
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(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. 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 Strategic Total Return 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
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<PAGE>
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 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
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<PAGE>
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 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.
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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.
DECS offer a substantial dividend advantage with the possibility of unlimited
upside potential if the price of the underlying common stock exceeds a certain
level. DECS convert to common stock at maturity. The amount received is
dependent on the price of the common at the time of maturity. DECS contain two
call options at different strike prices. The DECS participate with the common up
to the first call price. They are effectively capped at that point unless the
common rises above a second price point, at which time they participate with
unlimited upside potential.
PERCS offer a sutstantial dividend advantage, but capital appreciation potential
is limited to a predetermined level. PERCS are less risky and less volatile than
the underlying common stock because their superior income mitigates declines
when the common falls, while the cap price limits gains when the common rises.
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
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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 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
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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 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
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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 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
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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
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
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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 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
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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
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
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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. 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
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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.
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
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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 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
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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 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
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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
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
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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 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
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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 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.
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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% (the Money Market Portfolio may only invest up
to 10%) 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.
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, certain Portfolios 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
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. However, if the Growth, Bond or
Global Portfolio invests in a Janus money market fund, Janus Capital will remit
to such Portfolio the fees it receives from the Janus money market fund to the
extent such fees are based on the Portfolio's assets.
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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 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.
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Obligations of foreign branches of domestic banks and of United Kingdom branches
of foreign banks may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks than
are those of domestic banks or domestic branches of foreign banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of domestic banks and United Kingdom
branches of foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. Certificates of deposit issued by wholly-owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by governmental regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of $1 billion
may or may not be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
by that state. In addition, branches licensed by the Comptroller of the Currency
and branches licensed by certain states ("State Branches") may or may not be
required to: (i) pledge to the regulator, by depositing assets with a designated
bank within the state, an amount of its assets equal to 5% of its total
liabilities; and (ii) maintain assets within the state in an amount equal to a
specified percentage of the aggregate amount of liabilities of the foreign bank
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
/DIAMOND/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).
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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 - January, 1997), 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) (financial
services), Largo, Florida.
ALLAN HAMILTON (1, 2) TREASURER, PRINCIPAL FINANCIAL OFFICER (DOB 11/26/56).
Vice President and Controller (1987 - present), Treasurer (February 1997 -
present), Assistant Vice President and Assistant Controller (1983 - 1987),
Western Reserve Life Assurance Co. of Ohio; Vice President and Controller
(1988 to February 1991), Pioneer Western Corporation (financial services),
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.
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, 1996. The compensation table provides compensation amounts paid to
disinterested Directors of the Fund for the fiscal year ended December 31, 1996.
39
<PAGE>
DIRECTOR'S FEES PAID - YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
PORTFOLIO AMOUNT PAID
--------- -----------
Aggressive Growth $ 3,498
Emerging Growth 4,832
International Equity(1) N/A
Global 4,221
Growth 8,449
C.A.S.E. Growth 123
U.S. Equity(1) N/A
Value Equity 122
Global Sector 19
Tactical Asset Allocation 927
Strategic Total Return(2) 2,930
Select Equity-Income(3) 508
Balanced 547
Bond 1,216
Short-to-Intermediate Government 182
Money Market 330
- -------------
(1) Portfolio had not commenced operations as of December 31, 1996.
(2) Prior to May 1, 1997, this Portfolio was named the Equity-Income Portfolio.
(3) Prior to May 1, 1997, this Portfolio was named the Utility Portfolio.
COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS PAID TO DIRECTORS FROM
COMPENSATION FROM PART OF WRL SERIES FUND, INC. AND
NAME OF PERSON, POSITION WRL SERIES FUND, INC. FUND EXPENSES* IDEX SERIES FUND, INC.
- ------------------------ --------------------- -------------- -------------------------
<S> <C> <C> <C>
Peter R. Brown, Director $ $ $
Charles C. Harris, Director
Russell A. Kimball, Jr., Director
<FN>
- --------------
* The Plan became effective January 1, 1996.
</FN>
</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 March 1, 1997, 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.
40
<PAGE>
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 Western Reserve Life Assurance Co. of Ohio,
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 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, 1996, 1995
and 1994, the Investment Adviser was paid fees for its services to each
Portfolio in the following amounts (no information is included for the
International Equity Portfolio and the U.S. Equity Portfolio as these Portfolios
had not yet commenced operations as of December 31, 1996):
<TABLE>
<CAPTION>
ADVISORY FEES
-------------
YEAR ENDED DECEMBER 31
--------------------------------------------
PORTFOLIO 1996 1995 1994
- --------- ----------- ----------- -----------
<S> <C> <C> <C>
Aggressive Growth(1) $ 1,529,679 $ 849,097 $ 125,449
Emerging Growth 2,985,089 1,838,573 1,262,170
Global Sector(4) 26,495 N/A N/A
Global 3,468,535 2,075,054 1,600,706
Growth 11,137,321 7,847,750 6,850,340
C.A.S.E. Growth(2) 83,931 5,519 N/A
Value Equity(4) 111,557 N/A N/A
Tactical Asset Allocation(3) 1,308,435 433,844 N/A
Strategic Total Return(/dagger/) 2,462,304 1,746,022 1,180,759
Select Equity-Income(/double dagger/)(1) 231,441 128,859 33,553
Balanced(1) 315,419 195,339 67,043
Bond 474,926 409,862 407,667
Short-to-Intermediate Government 148,680 126,134 133,919
Money Market 436,658 422,357 351,798
----------- ----------- -----------
TOTAL $24,720,460 $16,078,410 $12,013,404
=========== =========== ===========
<FN>
- -------------
(1) Portfolio commenced operations March 1, 1994.
(2) Portfolio commenced operations May 1, 1995.
(3) Portfolio commenced operations January 3, 1995.
(4) Portfolio commenced operations May 1, 1996.
\DAGGER\Prior or to May 1, 1997, this Portfolio was named the Equity-Income
Portfolio.
\DOUBLE DAGGER\Prior to May 1, 1997, this Portfolio was named the Utility
Portfolio.
</FN>
</TABLE>
41
<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,
1998, 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, 1996, 1995, and 1994 (there are
no expenses included for the International Equity Portfolio and the U.S. Equity
Portfolio because these Portfolios had not yet commenced operations as of
December 31, 1996):
42
<PAGE>
PORTFOLIO EXPENSES PAID BY INVESTMENT ADVISER
---------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
PORTFOLIO 1996 1995 1994
- --------- ----------- ---------- -----------
<S> <C> <C> <C>
Aggressive Growth(2) -0-(1) $ -0-(1) $ 28,885
Emerging Growth -0-(1) -0-(1) -0-(1)
Global(3) -0-(1) -0-(1) -0-(1)
Growth -0-(1) -0-(1) -0-(1)
C.A.S.E. Growth(4) 73,269 23,832(4) N/A
Value Equity(6) 13,672 N/A N/A
Global Sector(6) -0-(1) N/A N/A
Tactical Asset Allocation(5) -0-(1) -0-(1) N/A
Strategic Total Return(/dagger/) -0-(1) -0-(1) -0-(1)
Select Equity-Income(/double dagger/)(2) -0-(1) 14,417 401,482
Balanced -0-(1) -0-(1) 28,629
Bond -0-(1) -0-(1) -0-(1)
Short-to-Intermediate Government -0-(1) -0-(1) -0-(1)
Money Market -0-(1) -0-(1) -0-(1)
<FN>
- ------------
(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 May 1, 1996.
/dagger/ Prior to May 1, 1997, this Portfolio was named the Equity-Income
Portfolio.
/double dagger/ Prior to May 1, 1997, this Portfolio was named the Utility
Portfolio.
</FN>
</TABLE>
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 and sales meetings designed to promote distribution of Fund shares; the
development of consumer-oriented sales materials describing
43
<PAGE>
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 of rendering investment advisory services since 1964 and
has approximately $7.1 billion under management.
44
<PAGE>
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. It is anticipated that on
or about June, 1997, Morgan Stanley Group Inc. will merge with Dean Witter,
Discover & Co., a financial services company.
MERIDIAN INVESTMENT MANAGEMENT CORPORATION ("MERIDIAN") serves as Sub-Adviser to
the Global Sector Portfolio. 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.
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 $50 billion as of January 31, 1997. 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 $6.4 billion in assets under management as of
January 31, 1996.
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 $ _____ billion of assets under management.
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Luther King") serves as Sub-Adviser
to the Strategic Total Return 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 December 31,
1996, the total assets managed by Luther King was approximately $5 billion.
FEDERATED INVESTMENT COUNSELING ("Federated") serves as the Sub-Adviser to the
Select Equity-Income 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.
45
<PAGE>
AEGON USA INVESTMENT MANAGEMENT, INC. ("AIMI") serves as Sub-Adviser to the
Short-to-Intermediate Government Portfolio and the Balanced Portfolio.
AIMI, 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. AIMI also serves as sub-adviser to the two bond portfolios of IDEX
Series Fund. AIMI also manages the general account investment portfolios of the
life insurance subsidiaries of AEGON and had in excess of $23.3 billion under
management as of January 1, 1997.
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, 1996 Scottish Equitable
plc had approximately $ _____ 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 Dec. 31, 1996, GEIM
and GEIC together managed assets in excess of $56 billion. GE Investments
provides investment management services to external organizations and to certain
of its affiliates.
46
<PAGE>
The method of computing each Sub-Adviser's fees is set forth in the Fund's
Prospectus. For the years ended December 31, 1996, 1995 and 1994 each
Sub-Adviser was paid fees for their services in the following amounts (no fees
are included for the International Equity Portfolio or the U.S. Equity Portfolio
as these Portfolios had not yet commenced operations as of December 31, 1996):
SUB-ADVISORY FEES
-----------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
SUB-ADVISER PORTFOLIO 1996 1995 1994
- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Alger Management Aggressive Growth (2) $ 764,840 $ 424,549 $ 62,724
Van Kampen Emerging Growth 1,492,545 919,287 630,629
Janus Bond 237,463 204,931 203,833
Growth 5,568,661 3,923,875 3,425,888
Global 1,734,268 1,037,527 801,005
C.A.S.E. Management C.A.S.E. Growth (4) 41,966 2,759 N/A
NWQ Value Equity(6) 55,778 N/A N/A
Meridian Global Sector(6)
Meridian/triangle/ 7,223 N/A N/A
INVESCO/triangle/ 9,631 N/A N/A
Dean Investment Tactical Asset Allocation (3) 654,218 216,922 N/A
Luther King Strategic Total Return (/dagger/) 1,231,152 873,011 590,528
Federated Select Equity-Income (/double dagger/)(2) 150,261 85,906 22,369
AIMI Short-to-Intermediate 74,340 63,067 66,959
Government
AIMI Balanced (2) 157,709 94,669 19,275
J.P. Morgan Money Market 211,178(5) 176,549(5)
JP Morgan/double triangle/ 111,216
Janus/double triangle/ 70,041
<FN>
- -------------
(2) Portfolio commenced operations March 1, 1994.
(3) Portfolio commenced operations January 3, 1995.
(4) Portfolio commenced operations May 1, 1995.
(5) Fees paid to Janus, the Portfolio's previous Sub-Adviser.
(6) Portfolio commenced operations May 1, 1996.
/DAGGER/Prior to May 1, 1997, this Portfolio was named the Equity-Income
Portfolio.
/DOUBLE DAGGER/Prior to May 1, 1997, this Portfolio was named the Utility
Portfolio.
/TRIANGLE/ Prior to May 1, 1997, INVESCO Global Asset Management Limited served
as a co-sub-adviser to the Global Sector Portfolio; for periods prior
to that date, INVESCO received monthly compensation from the
Investment Adviser at the annual rate of 0.40% of first $100 million
average daily net assets of the Portfolio and 0.35% of assets in
excess of $100 million; and Meridian Investment Management
Corporation received monthly compensation from the Investment Adviser
at the annual rate of 0.30% of first $100 million of average daily
net assets of the Portfolio and 0.35% of assets in excess of $100
million.
/DOUBLE TRIANGLE/JP Morgan became Sub-Adviser to the Money Market Portfolio
on May 1, 1996; prior to this date, Janus Capital
Corporation served as Sub-Adviser to the Portfolio.
</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, 1996, 1995 and 1994 (no information is included for the
International Equity Portfolio or the U.S. Equity Portfolio as these Portfolios
had not yet commenced operations as of December 31, 1996):
47
<PAGE>
PORTFOLIO TURNOVER RATES
------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
PORTFOLIO 1996 1995 1994
- --------- --------- --------- ---------
<S> <C> <C> <C>
Aggressive Growth(3) 101.28% 108.04% 89.73%
Emerging Growth 80.02% 124.13% 72.62%
Global 88.31% 130.60% 192.06%
Growth 45.21% 130.48% 107.33%
C.A.S.E. Growth(1) 160.27% 121.62% N/A
Value Equity(5) 7.93% N/A N/A
Global Sector(5) 27.58% N/A N/A
Tactical Asset Allocation(2) 98.97% 38.68% N/A
Strategic Total Return(/dagger)(3) 49.32% 52.59% 53.50%
Select Equity-Income(double dagger)(3 )68.53% 78.34% 36.13%
Balanced(3) 76.90% 98.55% 57.73%
Bond 187.72% 120.54% 131.73%
Short-to-Intermediate Government 58.15% 51.82% 93.70%
Money Market(4) N/A N/A N/A
<FN>
- ---------------
(1) Portfolio commenced operations May 1, 1995.
(2) Portfolio commenced operations January 3, 1995.
(3) Portfolio commenced operations March 1, 1994.
(4) 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.
(5) Portfolio commenced operations May 1, 1996.
/DAGGER/Prior to May 1, 1997, this Portfolio was named the Equity-Income
Portfolio.
/DOUBLE DAGGER/Prior to May 1, 1997, this Portfolio was named the Utility
Portfolio.
</FN>
</TABLE>
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, Select Equity-Income, 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 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 obtained for a
flat fee, to the Sub-Adviser, and pay spreads or commissions to such brokers or
dealers furnishing such
48
<PAGE>
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.
The Board of Directors of the Fund has authorized the Sub-Advisers to
consider sales of
49
<PAGE>
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; 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
----------------------------------
AGGREGATE COMMISSIONS
YEAR ENDED DECEMBER 31
-----------------------------------
PORTFOLIO 1996 1995 1994
- --------- ---- ---- ----
Aggressive
Growth(2) $ 240,067 $ 76,028
Emerging Growth 542,420 317,287
Global 712,827(3) 241,051
Growth 1,577,115 1,466,443
C.A.S.E. Growth(4) 8,662 N/A
Tactical Asset
Allocation(5) 208,950 N/A
Strategic
Total Return(+) 316,489 354,400
Select
Equity-Income(++)(2) 52,921 40,095
Balanced(2) 90,724 43,311
Global Sector
Portfolio(7)
Value Equity
Portfolio(7)
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AFFILIATED BROKERAGE COMMISSIONS
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------
PORTFOLIO 1996 % 1995 % 1994 %
- --------- ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Aggressive
Growth(2) (1) $240,067 100%(1) $75,128 98.82%(1)
Emerging Growth N/A N/A N/A N/A
Global N/A N/A N/A N/A
Growth N/A /less than/1% 2,796 /less than/1%
C.A.S.E. Growth(4) N/A N/A N/A N/A
Tactical Asset
Allocation(5) N/A N/A N/A N/A
Strategic
Total Return(/dagger/) N/A N/A N/A N/A
Select
Equity-Income(/double dagger/)(2) N/A N/A N/A N/A
Balanced(2) 1,040 1.15% 8,700 20.09%
Global Sector
Portfolio(7)
Value Equity
Portfolio(7)
<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, 1996, 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) This figure is higher than 1994 due to the relative increase in the amount
of total assets invested in foreign securities.
(4) Portfolio commenced operations May 1, 1995.
(5) Portfolio commenced operations January 3, 1995.
(6) 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 years ended December 31, 1996 and 1995 and for the
period March 1, 1994 to December 31, 1994 was _____ %, 9.63% and 38.06%,
respectively. (7) Portfolio commenced operations May 1, 1996.
/DAGGER/Prior to May 1, 1997, this Portfolio was known as Equity-Income
Portfolio.
/DOUBLE DAGGER/Prior to May 1, 1997, this Portfolio was known as Utility
Portfolio.
</FN>
</TABLE>
The Aggressive Growth Portfolio paid affiliated brokerage commissions to Alger,
Inc., the Growth Portfolio paid affiliated brokerage commissions to DST
Securites, 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, 1996, 1995, and 1994.
No information is included for the International Equity or U.S. Equity
Portfolios as they had not commenced operations as of December 31, 1996.
50
<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 Strategic Total
Return Portfolios commenced operations March 1, 1993; the Aggressive Growth,
Balanced and Select Equity-Income Portfolios commenced operations on March 1,
1994; the Tactical Asset Allocation Portfolio commenced operations onJanuary 3,
1995; the C.A.S.E. Growth Portfolio commenced operations on May 1, 1995; and the
Value Equity and Global Sector Portfolios commenced operations on May 1, 1996.
The rates of return shown below depict the actual investment experience of each
Portfolio for the periods shown. (The International Equity and U.S. Equity
Portfolios had not commenced operations as of December 31, 1996, so performance
information is not yet available for these Portfolios.)
51
<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, 1996.
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1996
------------------------------------------
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 1 YEAR
- --------------- --------- -------- ------- ------
<S> <C> <C> <C> <C>
Aggressive Growth(4) (1.26%) N/A N/A 10.45%
Emerging Growth(3) 24.71% N/A N/A 18.88%
International Equity(7) N/A N/A N/A N/A
Global(2) 18.67% N/A N/A 27.74%
Growth(1) 17.63% 10.90% 9.46% 17.96%
C.A.S.E. Growth(6) 20.65% N/A N/A 17.50%
U.S. Equity(7) N/A N/A N/A N/A
Value Equity(8) 13.19% N/A N/A N/A
Global Sector(8) 6.08% N/A N/A N/A
Tactical Asset Allocation(5) 20.09% N/A N/A 14.42%
Strategic Total Return /dagger/(3) 13.49% N/A N/A 15.00%
Select Equity-Income /double dagger/(4) (4.58%) N/A N/A 11.64%
Balanced(4) (5.73%) N/A N/A 10.72%
Bond(1) 8.48% (5.66%) 8.50% 0.14%
Short-to-Intermediate
Government(2) N/A N/A N/A 3.48%
Money Market(1) 4.98% 4.56% 3.57% 5.03%
Standard & Poor's Index
of 500 Common Stocks 14.68% % 13.36% %
IBC's Taxable Money Funds 5.55% N/A 4.03% 4.85%
<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, 1996.
(8) Portfolio commenced operations on May 1, 1996.
/DAGGER/Prior to May 1, 1997, this Portfolio was known as Equity-Income
Portfolio.
/DOUBLE DAGGER/Prior to May 1, 1997, this Portfolio was known as Utility
Portfolio.
</FN>
</TABLE>
52
<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 ERV = 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:
a-b
YIELD = 2[(---/plus/1)6/minus/1]
cd
Where: a = dividends and interest earned
during the period by the
Portfolio
expenses accrued for the period
b = (net of reimbursement)
the average daily number of
shares outstanding during the
period that were entitled to
c = receive dividends
the maximum offering price per
d = 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, 1996
was % and %, 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, 1996, was _____ % and was equivalent to a compound effective yield
of %. 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
53
<PAGE>
shares, but does not include 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
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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 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
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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:
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;
Strategic Total Return (formerly Equity-Income) Portfolio; Select Equity-Income
(formerly 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 the
International Equity Portfolio and the U.S. Equity Portfolio) of the Fund for
the year ended December 31, 1996, and the report of the Fund's independent
accountants are included in the 1996 Annual Report, and are incorporated herein
by reference to such report.
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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
auditing 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.
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APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information contained
in the Prospectus and should be read only in conjunction with the Prospectus.
Terms defined in the Prospectus and not defined herein have the same meanings as
those in the Prospectus.
1. CERTIFICATE OF DEPOSIT.* A certificate of deposit generally is a
short-term, interest bearing negotiable certificate 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
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* Short-term Securities.
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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
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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.
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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).
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PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
1. The audited Financial Statements of the Fund in the 1996
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, Strategic Total Return (formerly
Equity-Income), Select Equity-Income (formerly Utility),
Aggressive Growth, Tactical Asset Allocation, C.A.S.E. Growth,
Global Sector and Value Equity Portfolios. (Part B)
2. The Unaudited Financial Statements of the International Equity
Portfolio and U.S. Equity Portfolios will be included in a
future amendment.
3. Audited Per Share Income and Capital Changes are included in
the Prospectus for the Portfolios. (Part A)
4. Unaudited Per Share Income and Capital Changes for the
International Equity Portfolio and the U.S. Equity Portfolio
will be included in a future Amendment.
(b) Exhibits
1. (A) Articles of Incorporation of WRL Series Fund, Inc. (3)
(B) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(C) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(D) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(E) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(F) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(G) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (3)
(H) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (4)
(I) Articles Supplementary to Articles of Incorporation of WRL
Series Fund, Inc. (4)
2. Bylaws of WRL Series Fund, Inc. (3)
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. (4)
(ii) Form of Sub-Advisory Agreement on behalf of the Growth,
Bond and Global Portfolios of the Fund. (3)
(iii) Form of Sub-Advisory Agreement on behalf of the Money
Market Portfolio of the Fund. (3)
(iv) Form of Sub-Advisory Agreement on behalf of the
Balanced and the Short-to-Intermediate Government
Portfolios of the Fund. (3)
(v) Form of Sub-Advisory Agreement on behalf of the
Emerging Growth portfolio of the Fund. (3)
(vi) Form of Sub-Advisory Agreement on behalf of the
Equity-Income Portfolio of the Fund. (3)
(vii) Form of Sub-Advisory Agreement on behalf of the Utility
Portfolio of the Fund. (3)
(viii) Form of Sub-Advisory Agreement on behalf of the
Aggressive Growth Portfolio of the Fund. (3)
(ix) Form of Sub-Advisory Agreement on behalf of the
Tactical Asset Allocation Portfolio of the Fund. (3)
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(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. (3)
(xi) Form of Co-Sub-Advisory Agreements on behalf of the
International Equity Portfolio of the Fund. (3)
(xii) Form of Co-Sub-Advisory Agreements on behalf of the US
Sector, Global Sector and Foreign Sector Portfolios of
the Fund. (3)
(xiii) Form of Sub-Advisory Agreement on behalf of the Value
Equity Portfolio of the Fund. (3)
(xiv) Form of Sub-Advisory Agreement on behalf of the U.S.
Equity Portfolio of the Fund. (3)
6. Distribution Agreement. (4)
7. Directors' Deferred Compensation Plan. (2)
8. Custodian Agreement. (4)
9. Administrative Services and Transfer Agency Agreement. (4)
10. Opinion and consent of Thomas E. Pierpan, Esq. as to legality
of the securities being registered. (5)
11. Consent of Price Waterhouse LLP. (5)
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Plan of Distribution. (4)
16. Schedules for Computations of Performance Quotations. (5)
17. Financial Data Schedules. (5)
18. Powers of Attorney. (5)
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(1) Previously filed with Post-Effective Amendment No. 19 to Form N-1A
dated April 21, 1995 and incorporated herein by reference.
(2) Previously filed with Post-Effective Amendment No. 23 to Form N-1A
dated April 19, 1996 and incorporated herein by reference.
(3) Previously filed with Post-Effective Amendment No. 25 to Form N-1A
dated October 17, 1996 and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 26 to Form N-1A
dated December 26, 1996 and incorporated herein by reference.
(5) To be filed by amendment.
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, Strategic
Total Return (formerly, Equity-Income), Balanced, Aggressive Growth, Emerging
Growth, Short-to-Intermediate Government, Select Equity-Income (formerly,
Utility) and Tactical Asset Allocation Portfolio Common Stock are sold to Pooled
Account No. 27 established by AUSA Life Insurance Company, Inc.
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Item 26. NUMBER OF HOLDERS OF SECURITIES.
(2)
(1) NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF FEBRUARY 10, 1997
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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 ($.01 par value) 3
Strategic Total Return Portfolio
Common Stock ($.01 par value) 3
Balanced Portfolio
Common Stock ($.01 par value) 3
Select Equity-Income Portfolio
Common Stock ($.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) 2
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) 2
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
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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 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
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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).
D. SHORT-TO-INTERMEDIATE GOVERNMENT AND BALANCED PORTFOLIOS:
SUB-ADVISER - AEGON USA INVESTMENT MANAGEMENT, INC.
AEGON USA Investment Management, Inc. ("AIMI"), the Sub-Adviser to
the Short-to-Intermediate Government and Balanced Portfolios, is
an Iowa corporation which was incorporated on April 12, 1989. AIMI
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. AIMI
is a wholly-owned subsidiary of First AUSA Holding Company which
is a wholly-owned subsidiary of AEGON USA, Inc.
AIMI also serves as sub-adviser to IDEX Series Fund High Yield
Portfolio and Tax-Exempt Portfolio. Patrick E. Falconio is
President and Director of AIMI and AEGON USA Charitable
Foundation, Inc., Chairman of the Board and Director of AEGON USA
Managed Portfolios, Inc., AEGON USA Realty
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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 AIMI, 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 AIMI, 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 AIMI, 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
AIMI, 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 AIMI, and Vice President of Bankers
United, LIICA, Monumental Life and PFL Life; Ralph M. O'Brien is a
Senior Vice President of AIMI, 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 AIMI;
David R. Halfpap is Assistant Secretary and Vice President of
AEGON USA Managed Portfolios, Inc., and Vice President of AIMI,
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 AIMI, 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 AIMI; Jon D. Kettering is Vice President and
Treasurer of AIMI 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 AIMI, and
Portfolio Manager of AUSA Life, and International Life Investor
Insurance Company; Robert L. Hansen is Vice President of AIMI,
AUSA Life, Bankers United, First
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AUSA, LIICA, Monumental Life, PFL Life, and Western Reserve;
Frederick A. Sabetta is Vice President of AIMI, 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 AIMI; James E. Fine, Thomas
E. Myers, Bradley J. Beman and Mary T. Pech are each an Assistant
Vice President of AIMI.
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. It is anticipated that on or about June, 1997,
Morgan Stanley Group Inc. will merge with Dean Witter, Discover
Co., a financial services company.
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. STRATEGIC TOTAL RETURN PORTFOLIO (FORMERLY NAMED THE EQUITY-INCOME
PORTFOLIO): SUB-ADVISER - LUTHER KING CAPITAL MANAGEMENT
CORPORATION
Luther King Capital Management Corporation, the Sub-Adviser to the
Strategic Total Return 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. SELECT EQUITY-INCOME PORTFOLIO (FORMERLY NAMED THE UTILITY
PORTFOLIO): SUB-ADVISER - FEDERATED INVESTMENT COUNSELING
Federated Investment Counseling, the Sub-Adviser to the Select
Equity-Income Portfolio, is a registered investment adviser under
the Investment Advisers Act of 1940. It is a subsidiary of
Federated Investors.
The Sub-Adviser serves as investment adviser to a number of
investment companies and private accounts. Total assets under
management or administered by the Sub-Adviser and other
subsidiaries of Federated Investors is approximately $80 billion.
The Trustees of the Sub-Adviser, their position with the
Sub-Adviser, and, in parenthesis, their principal occupations are
as follows: John F. Donahue, Trustee (Chairman and Trustee,
Federated Investors, Federated Advisers, Federated Management, and
Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.); J. Christopher Donahue, Trustee (President and
Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director,
Federated Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd; Trustee, Federated Shareholder
Services Company and Federated Shareholder Services; Director,
Federated Services Company); Henry J. Gailliott, Chairman and
Trustee (Trustee, Federated Investors; Senior Vice
President-Economist, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp.,
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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.; and Castle Convertible
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, Spectra Fund
and The Alger Retirement Fund. 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, Spectra Fund
and The Alger Retirement Fund. Gregory S. Duch also serves as
Treasurer of ARI, The Alger Fund, The Alger American Fund, Spectra
Fund and The Alger Retirement Fund. Mary Marsden-Cochran also
serves as Secretary of ARI, The Alger Fund, Spectra Fund, The
Alger American Fund and The Alger Retirement Fund. The principal
business address of each of the companies listed above, other than
Alger, Inc., is 75 Maiden Lane, New York, NY 10038. The principal
business address of Alger, Inc. is 30 Montgomery Street, Jersey
City, NJ 07302.
I. TACTICAL ASSET ALLOCATION PORTFOLIO: SUB-ADVISER - DEAN INVESTMENT
ASSOCIATES
Dean Investment Associates ("Dean"), 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.
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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.
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.
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L. GLOBAL SECTOR, US SECTOR AND FOREIGN SECTOR PORTFOLIOS
("PORTFOLIOS"): SUB-ADVISER - MERIDIAN INVESTMENT MANAGEMENT
CORPORATION
Meridian Investment Management Corporation serves as Sub-Adviser
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.
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.
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; 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 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.
C-10
<PAGE>
<TABLE>
<CAPTION>
(b) Directors and Officers of Principal Underwriter:
(1) (2) (3)
<S> <C> <C>
NAME AND PRINCIPAL BUSINESS POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
ADDRESS UNDERWRITER REGISTRANT
- --------------------------- -------------------------- --------------------------
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
Thomas R. Moriarty* Senior Vice President N/A
Christopher G. Roetzer* Assistant Vice President N/A
Duncan Cameron* Assistant Vice President N/A
Cynthia L. Remley* Vice President, Counsel and N/A
Assistant Secretary
Terry L. Garvin* Vice President N/A
Gordon E. Hippner* Vice President N/A
Gerald P. Kirk* Vice President N/A
Stanley R. Orr* Vice President N/A
William G. Cummings* Vice President and Treasurer N/A
James Kiely* Assistant Secretary N/A
Kristy L. Dowd* Vice President - Project N/A
Development
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
<FN>
- ---------------
*201 Highland Avenue, Largo, Florida 33770
</FN>
</TABLE>
C-11
<PAGE>
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
commencement of operations of these portfolios.
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-12
<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. 27 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 25th day of
February, 1997.
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. 27 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 February 25, 1997
- -------------------------------------
Chairman of the Board and President
John R. Kenney
/s/ G. JOHN HURLEY February 25, 1997
- -------------------------------------
Executive Vice President and Director
G. John Hurley
/s/ PETER R. BROWN February 25, 1997
- -------------------------------------
Director - Peter R. Brown *
/s/ CHARLES C. HARRIS February 25, 1997
- -------------------------------------
Director - Charles C. Harris*
/s/ RUSSELL A. KIMBALL, JR. February 25, 1997
- -------------------------------------
Director - Russell A. Kimball, Jr. *
<PAGE>
/s/ ALLAN J. HAMILTON February 25, 1997
- -------------------------------------
Treasurer and Principal
Financial Officer
/s/ KENNETH P. BEIL February 25, 1997
- -------------------------------------
Vice President and
Principal Accounting Officer
Kenneth P. Beil
/s/ THOMAS E. PIERPAN February 25, 1997
- -------------------------------------
* Signed by Thomas E. Pierpan
as Attorney-in-fact
